The struggle between Thailand and Cambodia over oil and gas resources

While international attention is focused on the ongoing diplomatic tit for tat between Cambodia and Thailand over Preah Vihear, overlooked is the status of the disputed maritime boundary between the two countries in the Gulf of Thailand.

The disputed area, also known as the Overlapping Claims Area (‘OCA’), has been a point of contention in the relationship between the two countries and the settlement of the dispute would be a boon to not only diplomatic relations, but also to further energy exploration and production in South-East Asia.

Thailand-Cambodia overlapping claims area.                         Source: Department of Minerals and Fuels, Thailand  

As can be seen in the map, the OCA is 27,000 sq km offshore area estimated to contain up to 11 trillion cubic feet of natural gas and undetermined quantities of condensate and oil. The OCA area is bounded by the Cambodia claim of 1972 (western boundary) and the Thai claims of 1973 (eastern boundary line), as well as the 1991 Cambodian-Vietnam maritime border (southern boundary). As Thailand’s energy needs increase and the Cambodia’s nascent oil and gas industry matures, there is increasing pressure from many quarters to see the dispute between Thailand and Cambodia settled.

 

Progress towards a resolution of the dispute

While a 2001 MOU between Thailand and Cambodia outlined an agreed framework to settle the maritime dispute, progress has been slow as political tensions between Cambodia and Thailand have remained fragile since 2003 when the Thai embassy and Thai owned businesses were attacked in Cambodia. Subsequent tensions over the disputed border demarcation near the Preah Vihear temple have also meant that substantive talks remain elusive.

While there were periods where relations thawed and talks to resolve the OCA dispute were held, the Thai cabinet at the end of 2009 voted to scrap the 2001 MOU. This has added further uncertainty as to how talks may proceed in future.

 

Preah Vihear temple a stumbling block to settling the OCA dispute….

In 1962 following a lengthy dispute, a majority of the International Court of Justice (ICJ) in The Hague awarded the Prae Vihear temple to Cambodia. While Thailand eventually respected the court’s decision, anger remains over the loss of sovereignty, and Thailand vigorously claims rights over 4.6sq km of land surrounding the temple itself, which is located in the far north of Cambodia.

Constitutionally, all issues regarding territorial sovereignty must be passed by the Thai parliament, where there is significant opposition to any relinquishment of territorial claim, regardless of political alignments. The temple dispute and topic of sovereignty are highly charged issues in the Thai political discourse. Even creating the impression of forfeiting sovereignty can be politically fraught.

In 2008, Thai foreign minister Noppadon Pattama was forced to resign after a court ruled he had violated the constitution after the government supported Cambodia’s moves to have Preah Vihear World Heritage listed. In the ensuing scandal the entire cabinet was threatened with possible impeachment.

A number of diplomatic and military sources in Thailand who have suggested that discussions on the maritime border issue cannot truly begin until some compromises have been reached on the temple issue.

Any talk of settling the maritime disputes generally leads to accusations of ‘selling out’, especially from the Thai side, where compromises on the Preah Vihear issue are seen as a trade-off for additional economic benefit from the Cambodian’s in the OCA.

 

Revenue sharing

The issue of revenue sharing was a key problem identified by both Thai and Cambodian sources.

Both countries have presented competing proposals in earlier talks. Cambodia proposes dividing the disputed area in a checkerboard fashion, creating at least 14 different blocks. Revenues and management of the blocks would be shared equally on a 50/50 basis.

The main Thai counter-proposal is that the disputed area be divided into three strips running north-south, with the revenue from the central area to be shared equally on a 50/50 basis. The share from the outer areas would be weighted in favour of the country adjacent to that area, approximately 80/20 to Thailand on the western side of the OCA and 80/20 to Cambodia on the eastern side of the OCA.

 

Is the Thai proposal unfair?

In the absence of firm data on reserves in the OCA (exploration not being allowed given the ongoing dispute), experts have indicated that it makes intuitive sense that most of the exploitable reserves are located towards the Thai side of the OCA. This is because the Pattani basin, the geological formation which contains most of the offshore oil and gas reserves in undisputed Thai waters, extends into the OCA. Conversely, geological formations on the Cambodian side of the border have made drilling there challenging and uneconomic in some instances.

The result of this situation is that the Thai proposal for revenue sharing favours the Thai’s, given the balance of the reserves that can be economically drilled sit on the Thai side of the OCA.

 

Thailand is still the main winner under the Cambodian proposal

The Cambodian proposal for a 50/50 revenue split, though rejected by Thailand, would nevertheless see Thailand gain the largest share of the overall economic benefits. Based on both interviews undertaken by CLC Asia and publicly available reports, it appears given the level of sophistication of Thai based oil producers, Thai based companies (e.g. PTTEP) and assorted contractors would need to undertake the bulk of the work in the OCA, and thus derive a majority of the benefits.

Thailand would also gain a new source of gas for power generation lessening the reliance on Burmese supplies. Thailand would also gain more through displacement of imported oil, which comprises a substantial percentage of its daily consumption.

As such, the potential for compromise will largely rest on Thailand’s ability to agree to a revenue sharing agreement which recognises the inherent external benefits that will accrue to Thailand.

 

What will bring both sides to finally settle this dispute?

We think there are three key factors which need to be addressed before a resolution is possible.

A change of philosophy to marine border demarcation

A Thai navy expert familiar with the issue of the maritime border also suggested a ‘good starting’ point for movement on the issue of the OCA is that if Cambodia accepts the fact that the line which Cambodia has drawn through Kut Island (a Thai resort island ceded by France in 1904 ) does not have any legal basis. From the Thai perspective, Cambodia may have to draw another line by using the median line principal, to delimit the territorial sea and continental shelf between the two countries.

This would be a start from where both countries can begin to look at delimiting the border in the top portion of the OCA (see map), which both countries have stated they must delimit, before any movement on a JDA can be achieved.

A more mature Cambodian oil and gas industry

The other key element of ‘compromise’ will be the natural development of the Cambodian exploration and production sector, as well as refining industries. A more developed Cambodian sector which can compete with Thailand’s mature oil and gas industry has been identified by long time Cambodian advisors as the only real way for Cambodia to strengthening its bargaining position against Thailand regarding the OCA. This would allow Cambodian based industry to more fully capture the economic benefits from the development of fields in the OCA.

While there has been much promise in the past about Cambodian reserves, drilling by Chevron in Cambodian waters has proven much more difficult with production forecasts much less than the optimistic figures which were published earlier this decade by multilaterals such as the IMF. The IMF has predicted approximately 400 to 700 million barrels of reserves, whereas a key advisor to the Cambodian government expects that proven reserves of around 50 million barrels are more realistic, with a recovery rate of 6 % to potentially 14%.

A more mature Cambodian oil and gas sector will come slowly however. Though there has been much hyped speculation surrounding the potential of the industry in Cambodian waters, the reality is that development of reserves is more difficult than expected. While Chevron is expecting to pump oil from its first well in December 2012, the development of an industry comparable to Thailand’s is quite a way off.

Increased gas demand by Thailand

It is quite well known that Thailand is heavily reliant on gas for power production. The majority of this gas will need to be imported in future as its reserves in the Gulf of Thailand and from Burma dwindle. The Cambodian’s see this situation as one of the key factors in bringing Thailand to the negotiating table.

However, in addition to their goal of a more mature O&G industry, the Cambodian position for negotiating a settlement to the OCA is one that is increasingly aware that there is no rush to push Thailand, given that there are higher benefits from Cambodia waiting for Thailand to ‘need’ Cambodia more, and increased economic upside from a more mature Cambodian industry.

 

Could the concept of a Joint Development Area be contemplated by authorities of both countries? 

The concept of a Joint Development Area (JDA) seems to be the only realistic solution to both countries overlapping claims in the Gulf of Thailand.

The concept of a JDA, according to a Thai academic familiar with border disputes, is the best – if not only – solution to the political difficulties in Thailand surrounding the potential loss of sovereignty. This is because the concept of the JDA does not necessarily mean that Thailand or Cambodia have to formally relinquish claims over territory. Rather the JDA can operate while ongoing issues surrounding demarcation can be discussed separately.

 

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