Energy Transition for Vietnam's Oil and Gas Industry

10:15:13 AM | 11/2/2022

Vietnam's oil and gas industry is currently facing risks in the context of the energy transition that requires long-term visionary policies and strategies of the Government. Meanwhile, it is hard to call for and attract investment funds for oil and gas search and exploration.

Energy transition trend

Mr. Pham Van Long, representative of the Research Group for "Energy transition trends and policy implications for Vietnam's oil and gas industry", said the energy transition trend in the world is driven by environmental motivation and socioeconomic motivation. Vietnam is also not out of that trend when it has joined other countries to limit global warming and bring emissions to net zero by 2050 as pledged at the COP26 Conference. In order to fulfill its commitments, in the long term, Vietnam will have to come up with many strategies to limit carbon dioxide emissions, the most important of which is to shift energy from fossil fuels to recyclable energy.

The energy transition trend is associated with rapid economic growth, urbanization and industrialization in the past 30 years in Vietnam, which relies heavily on coal and oil energy sources that have produced a huge amount of greenhouse gas (GHG) emissions, one of the main causes of climate change. According to estimates by the World Bank, Vietnam lost US$10 billion in 2020, equivalent to 3.2% of its GDP due to climate change effects.

According to statistics, economic development and CO2 emissions from fuels in Vietnam changed markedly over time. Specifically, fossil energy played a role in ensuring energy security for economic development in 1990-2020. In 1990, coal and oil accounted for 95% (20 million metric tons of CO2eq) of total emissions of all fuels. In 2020, coal and oil accounted for only 73% but increased more than 9 times (to 185 million tons of CO2eq) of total emissions.

In 2021, Vietnam ranked 61st out of 115 countries by readiness for the energy transition in the World Economic Forum's Energy Transition Index with a score of 54/100 points, an increase of 8 places and 3 points from 2020. Vietnam was one of the first countries to submit an update of its Nationally Determined Contribution (NDC) to the UNFCCC in 2020 on commitments to greenhouse gas emissions reduction. Energy sectors such as the electricity and transport sector tend to witness most changes in response to Vietnam's commitments to GHG emission reduction. The oil and gas industry, key fuels for these above industries, is also facing opportunities and challenges amid the global energy transition.

Energy transition in the oil and gas industry

The Oil and Gas Law was first promulgated in 1993. The Government had full authority over oil and gas activities. The law was amended and supplemented in 2000 and 2008, with regulations only restricted to upstream operations, limited to field prospecting, exploration, development and production. Midstream (oil and gas transportation, storage and distribution) and downstream (processing, refining and petrochemical) stages are governed by other laws.

According to studies, the draft Law on Oil and Gas (amended) that was put forward for comments did not mention the context of energy transition while the oil and gas industry is directly affected. The new law only regulates upstream activities, not midstream and downstream activities. This will cause conflicts and overlaps in managing the oil and gas value chain. 

In addition, the current law only refers to the settlement of disputes between PVN and partner contractors, not the dispute settlement mechanism between the state of Vietnam and international investors.

The Ministry of Industry and Trade also proposed amending the law regarding tariffs and cost recovery rates to attract foreign investment because signed oil and gas contracts recently declined. The proposed maximum cost recovery of up to 80% is applied to oil and gas blocks that are granted special investment incentives. For projects with special incentives, investors can apply a corporate income tax reduction from 25% to a maximum of 50%. Tax incentives are not a factor to enhance investment appeals.

Before this reality, according to experts, it is necessary to include regulations on midstream and downstream oil and gas activities in the draft law. Tax incentives are not key to strengthening investment magnetism. A better business environment is decisive to the investment choices of foreign investors.

In addition, it is necessary to supplement and legalize dispute settlement mechanisms between the state of Vietnam and international investors to create a foundation for quick dispute settlement and avoidance of prolonged disputes that may cause damage to the state budget. It is essential to study and supplement regulations on prospecting, exploration and exploitation of unconventional oil and gas. Unconventional oil and gas have relatively different distribution and chemical characteristics from conventional ones. Thus, prospecting, exploration and extraction methods are also different, requiring specific regulations and instructions.

On the other hand, Vietnam needs to boost the production of potential gas fields instead of maintaining current output as presently proposed in Power Plan VIII because gas power is still an important factor to gradually replace coal-fired power and support the transition from fossil energy to renewable energy.

According to Dr. Nguyen Hong Minh, former deputy director of the Vietnam Petroleum Institute (VPI), five oil and gas areas must make transition, including Renewable energy, CO2 landfill, energy efficiency for the oil and gas value chain, business investment, and hydrogen production. 

Quynh Chi (Vietnam Business Forum)