Asia Ascending

This article appears in the January 2008 issue of Oilweek magazine.

Royal Dutch Shell traces its origins to Sumatra, and now Canadian companies are on the hunt for similar growth opportunities in Southeast Asia

By Peter McKenzie-Brown One hundred and twenty five years ago a Dutch planter, A. J. Zijlker, took cover from a tropical storm while travelling on the island of Sumatra. Sheltering in a tobacco shed, he saw a watchman light a fire from wet twigs using a bamboo torch. He asked what was fuelling the torch and the next day was taken to a small pond covered with a dark liquid. Soon after, Zijlker drilled the Telega Tila oil well near that pool. From his precarious derrick, Royal Dutch Shell's global empire eventually grew. This and other such ventures launched the petroleum industry in Southeast Asia and linked its resources to the energy markets of the world. As a result, Indonesia became a large-scale producer. The other regions of Southeast Asia, however, did not – at least not in the early days. Two world wars, the often bloody collapse of colonialism, political instability and the rise of autocratic government, endemic corruption – all these helped keep the petroleum industry out of the region. On the Southeast Asian mainland things were worse than in the archipelago. Not until after the Indochinese war did the area develop the stability needed for large-scale exploration and development programs.

Pan Orient: Fast forward to the present, and the Calgary offices of Pan Orient Energy. Everywhere you look there are Southeast Asian artefacts. The company’s offices are adorned with paintings of Buddha, a wooden sculpture of one of the ferocious demon-guardians that embellish Thai temples and many other fine pieces of traditional religious art. And so it should be.

One of few Canadian companies willing to risk operating in Southeast Asia, Pan Orient has achieved considerable success in Thailand. According to Pan Orient’s president, Jeff Chisholm, Southeast Asia is an ideal place to do business. The “real story” about the region, he says, is that smaller companies coming even into the heavily explored parts of Southeast Asia can succeed. “When the region was drilled in the ‘70s and ‘80s, the development threshold was a field of 50-100 million barrels” because prices were so much lower. Today, “we can make a lot of money on a 10-million-barrel field.”

 Although Pan Orient hasn’t done enough drilling to be able to calculate total reserves at its new onshore discovery in central Thailand, the first four wells tested between 1,200 and 1,900 barrels per day from multiple zones, and the company plans to complete another six wells. Chisholm, who has spent most of his career as an explorationist in South and Southeast Asia, is sanguine about drilling in the region.

Are there major political risks? He doesn’t think so. “The Asian economies are growing fast, so the governments need to keep the economy going. That means they need more (domestic) oil production.” Also, they learned from the 1997 currency crisis that they need to “keep their markets open, impose better financial controls and reduce corruption.”

In the region, only Indonesia has recently made changes to its fiscal regime. The country made its industry more attractive to foreign investors because the vast archipelago – formally a member of OPEC – has become an oil importer. Still poor, the government desperately wants to produce more oil. Chisholm says Thailand, with its open-bid system, is the most straightforward country to get into. The country has land auctions every two years. The government opens up areas of “deemed prospectivity,” and asks for bids.

To participate, you submit two envelopes to the Department of Natural Resources. The first describes your company’s credentials and financial information. If you get past that hurdle, departmental experts open the second envelope and review your proposed work program. To be awarded the contract, you must pass both tests, but it can take time.

 In the case of Pan Orient, the company worked with the elected government of Thaksin Shinawatra for more than a year to resolve some regulatory matters, with no success. The delays ended quickly after a military government took over in a bloodless coup, however. Chisholm offers this as evidence of the virtual irrelevance of political issues for explorers operating in Southeast Asia.

What about Burma (Myanmar)? “Burma’s about the only place you need to stay out of,” he says. “If the UN tells us it’s a bad place, we’ll take their word for it.” End of story, almost. As two Canadian companies discovered to their cost, you can pay public relations penalties for failing to heed Chisholm’s advice. Oracle Energy Group and CHC Helicopter Corporation both announced plans to conduct petroleum-related work in Myanmar, and both soon found themselves demonized on the Internet.

The Burma Campaign UK, a human rights organization opposed to the brutality of that country’s military regime, has posted the particulars of each company on its “Dirty List” of businesses that have signed contracts with the generals. There are numerous petroleum basins in Southeast Asia, many of them world-class. According to the United States Geological Service, 15 per cent of the world’s undiscovered oil and gas resources are in Southeast Asia. That prediction is an expert guess from an expert source, but proof can only come from the ultimate lie-detector, the drill bit. Another way to illustrate the region’s potential is to look at recent changes in production. 

The charts show oil (top chart) and gas production from the four largest Southeast Asian producers: Indonesia, Malaysia, Thailand and Vietnam. As they illustrate, growth in gas production since the early 70s has been rapid – indeed, this region has the world’s fastest-growing natural gas markets. In addition, growth in oil production outside the aging fields of Indonesia has also exhibited considerable strength. Most of the other countries of the region – Brunei, the Philippines, Papua New Guinea and blackballed Burma – also have exploration potential and expanding, lower-cost production.

Talisman: Though only a handful of Canadian companies are active in Southeast Asia, their experience has been positive. As we have seen, Thailand has been the key to success for Jeff Chisholm’s Pan Asian Energy. Two of Canada’s heavyweight producers – Talisman Energy and Husky Energy – also have interests in the region. Talisman is the larger and more experienced of the two.

According to vice president Jonathan Wright, the region has world-class production basins, low-cost operations and, because of the terms of the production sharing contracts his company has signed with the resource owners, rapid return of capital. For its part, the company has large and growing exploration acreage in the region, and existing production. The company got its foot in the door in the early 1990s when Talisman took over Bow Valley Energy, which had concessions in Indonesia.

The jewel in the company’s Indonesian crown is the Corridor property on the island of Sumatra, where the company has a huge gas field still being drilled, and still not fully understood. According to Wright, the reservoir is unusual in that it is not in sedimentary rock. “It is a basement granite structure. The reservoir is extremely porous and permeable, but the porosity exists mainly in fractures in the granite.” Some of those fractures are kilometres in length. With its 2001 takeover of a Swedish company, Lundin Oil, Talisman added properties in a border area between Malaysia and Vietnam to which both countries had previously laid claim.

The two countries reached an accord by agreeing to share production and called it the PM3 Commercial Arrangement Area, and Talisman is now partnering with national oil companies Petro-Vietnam and Petronas. Production is underway, and the three partners are investing more than $1 billion to expand production via the Northern Fields Project. They expect to nearly double production from its present daily rates – 40,000 barrels of oil and 175 million cubic feet of gas. Talisman’s share is 41 per cent. Southeast Asia already accounts for nearly 25 percent of Talisman’s total production. This is an especially impressive achievement when you consider that the company’s reserves have grown steadily and greatly since 1992, when the company became an independent entity. (Up to that time, it had been the Canadian subsidiary of BP.)

Talisman’s main production Southeast Asian production comes from Malaysia and Indonesia. The company has already announced exploration successes in Vietnam, however, and expects that country to be another good growth area. The company’s regional headquarters is in Kuala Lumpur, where Jonathan Wright hangs his hat. Few people are more enthusiastic about the region’s high potential than Wright. “Costs are rising here,” he says, “but they are still low compared to the rest of the world. And Vietnam and Malaysia are among the lowest-cost areas” per barrel for offshore exploration. “There are good hunting grounds here, but you have to be selective.”

In Malaysia the shallow basins have already been explored, “so you have to go (into) deeper (waters) or tie back smaller fields.” By contrast, Vietnam has not been as heavily explored, and the opportunities there are considerable. In one of its concessions, Talisman has been the beneficiary of two new-field discoveries. The first, which Talisman operated, may have 70-100 million barrels in place. The second is an industry discovery with perhaps 200-300 million barrels in place.

Unfortunately for Talisman, only a small portion of the field lies on the block it shares with its partners. “In our opinion (the contract area now being explored by Talisman) is the best block recently awarded in Vietnam,” says Wright. “It has basement granite as well as (more traditional sedimentary reservoir) potential. With luck, our Southeast Asia production could eventually rival our production from the North Sea.” Talisman is also pursuing exploration properties in Papua New Guinea, where it has already acquired natural gas acreage; in Thailand; and in the South China Sea offshore southern China. Technically the latter is not Southeast Asia but, says Wright, “geology knows no boundaries.”

Operations: Husky Energy must agree. The company has successfully secured exploration holdings off the coast of China, but the operator is a Chinese company, not Husky. The company has also negotiated a production sharing contract in the Madura Strait offshore Indonesia. Its contract area contains two prospects which, the company says, offer significant exploration promise.

The only large Canadian company besides Talisman now present in Southeast Asia, Husky describes its entry as part of a strategy to discover and develop conventional oil and gas outside North America. Do Canadian companies operate elsewhere in the world to the same high standards expected of them in Canada? According to Talisman’s Wright, the answer is a slightly qualified “Yes”. “Our environmental standards are the same (across the company) because we are one company,” he says. However, “the rules are different in different countries. We have to follow local regulations.” In Alberta virtually no natural gas can be flared. In the North Sea and Southeast Asia offshore, however, flaring is “permitted within certain limits, as there are sometimes no economically viable alternatives.”

With that qualification, Wright says, “our health, safety and environment umbrella is similar around the world. Our effluent standards for discharged water are the same in the North Sea and offshore Vietnam.” Is operating in Southeast Asia difficult from either a technical or a cultural perspective? Both Pan Orient’s Jeff Chisholm and Talisman’s Jonathan Wright say it isn’t so. According to Chisholm, “one key to successful operations is to incorporate as many locals into the work as you can.” Adds Wright, “you have to turn yourself to the national culture and setting. Beyond that, exploration challenges are similar around the world.”

Both Pan Orient and Talisman have demonstrated that developing a production base in Southeast Asia makes business sense. The pity is that other Canadian explorers haven’t yet taken that path.

Fiscal Issues in the Region
Southeast Asia is a region of vast diversity. Its countries host more than a thousand distinct languages and even more ethnic groups; a jumble of local customs, traditions and beliefs; and half a dozen major religions. The nations of this region have numerous forms of social organization, and they are ruled by governments ranging from monarchy through an assortment of democracies and socialist republics to Burma’s wicked military regime. For all their variety, these countries have one thing in common. In each case, the central government claims ownership of petroleum resources. Also, they have similar royalty regimes. Foreign companies gain the right to operate by signing technical assistance contracts (TAC) and production sharing contracts (PSC).

Technical Assistance: Technical assistance contracts are for marginal discovered fields that need technical help. One Canadian company that has secured such a contract is Vital Resources Corp. Vital’s technical assistance contract covers two properties – the Ramok and Senabing oilfields. The fields were discovered in the early 1900s but abandoned for decades until production was restored earlier this decade. According to the company’s Mike Whitehead, the TAC includes provisions that its costs will be paid out first from future production.

After payout, the company will receive 30 per cent of gross production. What is the potential for these fields? At present, they produce barely 100 barrels per day. If Vital is successful with its proposed $6 million enhanced oil recovery scheme, production could ramp up to as much as 2,500 barrels per day. For a micro-cap start-up like Vital, this contract could be the company-maker.

Production Sharing: Production sharing contracts are for areas that are prospective, but where there are no producing fields. While the specifics differ from country to country, the basic deal is the same. The country provides the contract area (prior to the 1970s, known as a “concession”) and may choose to put up some of the capital in return for an equity position in any discovery. The operator, however, develops the play and provides its own share of capital and the expertise needed to find and develop any hydrocarbons present.

Royalties vary, depending on whether capital investment has been recovered. Before the project has paid out, the royalty is based on “cost oil”, and it is small. Until the investors have received full payout, the company pays a royalty of, say, 10 per cent to the host government. This enables the investor to quickly recover the cost of successful drilling programs. After payout, production is known as “profit oil”, and the royalty increases. In the case of Pan Orient Energy, the company will pay the Thai government a production royalty of 15 per cent of profit oil, in cash. The company will also pay a 50 per cent tax on net income.

The Size of the Prize: In terms of economics, how does petroleum production in Southeast Asia compare to production in Canada? It’s hard to put the two side by side, but Talisman Energy vice president Jonathan Wright provides a ballpark estimate. “In Malaysia, the industry take (revenue share after expenses, royalties, and taxes) is 17 to 20 per cent (depending on the mix of oil and gas production). In Canada it averages about 25 per cent.” The gap between the two countries probably narrowed with Alberta’s recent royalty changes. Furthermore, he says, “The size of the prize is much greater here in Southeast Asia. Multi-hundred million barrel fields are still being found, in deeper horizons.” No such fields are likely to exist in Western Canada anymore.

The Tragedy of Cambodia

The last century has been uniquely unkind to Cambodia, whose recent history has little of redeeming value. It began with French conquest, and the French were among Europe’s worst colonial masters. Then came partial conquest by Thailand and Japanese occupation during world war two. Fifteen years of corrupt rulers followed.

Then the country found itself caught up in the Indochinese War, with military rulers. When the US lost the war, Pol Pot and the murderous, genocidal Khmer Rouge took over. Apart from the killing and death, their policies destroyed the very foundations of civil society. They emptied the cities; they killed or forced into exile their educated citizenry, burned books and stopped formal education; they banned religion; they weakened the family; in total, they killed a fifth of the population. They ruled by terror.

Then, thankfully, the Vietnamese invaded and occupied the country. Since their departure (brokered by the UN and international diplomacy), the country has remained an economic basket case governed by another string of uneducated and uninspired men. The present leader, Hun Sen, was a bigwig with the Khmer Rouge before (to his credit) shifting allegiances and helping organize the Vietnamese conquest. The recent coronation of a western-educated king may be a ray of hope, however faint.

So it is to the ancient past, not the present, that you need to look for inspiration in Cambodia. Siem Reap is fantastic. This is the part of the country that hosts Angkor Wat and dozens of other huge and magnificent temples. Most were Hindu, but many were Buddhist. Constructed in the jungle, they were later reclaimed by the jungle, too. Angkor is unquestionably one of the wonders of the world. I began reading about Angkor Wat as a boy, and have read much about it since, but I was still quite amazed. Each of the many temples we saw was a marvel in its own right, but Angkor is unquestionably one of the wonders of the world.

We began our adventure by flying to Bangkok, then caught a bus to a Thai border town. We crossed into this tragic country at Poiphet, and there we rented a car. The Lonely Planet describes Cambodian roads as the worst in Asia and among the worst in the world. This is no exaggeration. It took us six hours to make about 150 kilometres in a Toyota Camry.

We eventually arrived in Siem Reap, in the region that hosts Angkor Wat and dozens of other huge and magnificent temples. Most are Hindu, some are Buddhist. They were constructed in the jungle, and later reclaimed by the jungle, too.

Archaeological studies of Angkor Wat have suggested some remarkable things. For example, it is the only temple in the area that you enter from the west – by tradition, the direction of death. Why? After more than a century of debate, in 1977 archaeologist Eleanor Mannika may have cracked the code. Using a traditional Khmer unit of measure, she calculated that the distances to key places in the temple correlated precisely with the years in the Hindu notion of the four ages of time, the yugas of the universe.

As historian David Chandler explains, these distances may be, in effect, “a kind of pun that can be read in terms of time and space….(Walking into the temple) from the west, which is the direction of death, the visitor moves backward into time, approaching the moment when the Indians proposed that time began.” By this interpretation, the central tower, which once housed a now-vanished a statue of Shiva, represented the beginning of time - the golden age of the Krita Yuga. As you depart this sanctum and leave the temple, you are walking toward the Kali Yuga - the present era - at the end of which the universe will be destroyed.

From Siem Reap we took the "ferry" (a wooden boat equipped with a diesel engine from a pick-up truck) to Battambang, Cambodia's second city. The trip along the Tonle Sap ("Great Lake") and up the river was fascinating. It took about six hours - one more than it should have - because the boat's steering system gave up on us half way. The very inventive crew made a fix that took us to our destination, however, and the view of both bird and village life along the way was quite amazing.

We thought we were pretty inured to the sight of poverty after Thailand, but we were shocked by what we saw in Cambodia. The country’s many recent tragedies have set the people’s living standards back to those of the 1920s.

Cambodians are trying to put their past behind them and look to the future, yet their children know little and are not being told about the atrocities committed in their country. The country is taking no serious effort to bring those responsible to book. In our view, the country is crying out for a process of truth and reconciliation. On a positive note, in one village we saw quite a fine school, and there is a medical ferry that delivers care to the people who live in villages along the river.

Except for the temples and the ferry trip, my most vivid memory is a visit to a food stall in the town of Sisiphon. The most prominent offerings included a grilled snake; skewered, roasted bats; and a variety of similarly prepared creepy-crawly cuisine. Various insects, land crabs, small skewered frogs and toads and other ghastly things were among the specials of the day. We bought bottled water and moved on.

Battambang is a desperately poor city filled with wonderful people. Few spoke English, but we found our Thai quite helpful. (Thai and Cambodian are quite different languages, but we could usually find someone who spoke Thai - just as you might fairly easily find someone who speaks Russian in Slovakia.).

We ended our trip by hiring a driver to take us back to Poiphet, thence home to Thailand. By this route the roads were much better, and the 85-kilometre trip only took three hours. Our driver had effective English, and during the trip told us quite vividly how the Khmer Rouge killed almost everyone in his family. Only a sister survived, and the two of them didn't reconnect (through UN efforts) until 15 years later. His commentary was riveting, and emotional. As he talked, I looked out the car window at the throngs in the villages and noticed how few old people (even our age) were there.

Most Cambodians who would have been my contemporaries are gone. Did they die during the Khmer Rouge madness, or from the effects of poverty in the years since? Both, I think.

Language Triumphant, Language in Decline

By Peter McKenzie-Brown

For two centuries – since the defeat of Napoleon – the globe has been dominated by English-speaking nations.

The first of these great powers was Britain, which used sea-power and the economic muscle of its Industrial Revolution to create an empire that planted English in all the populated continents. America rose as Britain’s rival, and decisively replaced her as the world’s global power after the Second World War – especially after the collapse of the Soviet Union.

In both instances, these countries held diplomatic sway over most nations, and economic dominance over large percentages of the global economy. Both countries were leaders in science, technology and medicine, and they were great trading nations.

The result? Although it is the native language of perhaps half a billion people – a large number, but still only eight percent of the world’s population – English dominates the planet.

It is the primary language of world trade, business and management. It is the language of global travel, tourism and hospitality. It is the international language of science and medicine. It is the language of diplomacy and international cooperation. It is the language of global banking and Third World development. It is the dominant language in all forms of international media and publishing. Although many languages can now reach around the world cheaply over the Internet and satellite broadcasting, it is English that consistently reaches the biggest global audiences. English is the language of sports and glamour: both the Olympics and the Miss Universe pageant use English as the official language. It is the ecumenical language of the World Council of Churches.

And it is the language of academia. According to The Economist,

The top universities are citizens of an international academic marketplace with one global academic currency, one global labour force and, increasingly, one global language, English. They are also increasingly citizens of a global economy, sending their best graduates to work for multinational companies. The creation of global universities was spearheaded by the Americans; now everybody else is trying to get in on the act.

Not since the Tower of Babel has a single language had so powerful a presence. According to some forecasts, within just a few decades more Chinese will be able to speak English than in the rest of the world combined. Already, more people speak English as a second language in India than in all of Britain, where the language began. Indeed, in countries like India and Singapore, English is the language used for administration, broadcasting and education.

In the European Union, English is spoken by more people as a foreign language than by the combined populations of many of the region's smaller countries. The young in particular use this foreign language with unnerving fluency.

Alone among the world’s major languages, English is spoken by more people as a second or foreign language than by people who learned the language as their native tongue. According to one outstanding account of the growth of English from local dialect to global behemoth, we are now living in an English-speaking world. English is the first truly global language.

As an international language, English has a few regional rivals. These include Arabic in the House of Islam; Spanish and Portuguese in Latin America; Russian in much of Eurasia; and Chinese dialects in overseas Chinese communities. Except in Canada and a few former colonies, French long ago lost its claim to be the lingua franca. English has no equals.

The language has become the basis of a teaching and learning phenomenon that prospers in almost every country. Within English-speaking countries like Britain, Canada, Australia and the United States, huge numbers of new migrants must be taught English as a second language. Among prospering countries in the developing world, English is generally part of the public school curriculum, and language schools flourish.

As an international learning phenomenon, nothing comes close to the study of English. At any given moment, untold millions are studying the language. Some do so to integrate into British, Canadian, American, Australian or New Zealand life. Others hope to get a higher-paying job in a tourist resort in Phuket, say. And still others want only to benefit from the increasing mobility this language offers to travellers bound for Southeast Asia or virtually any other international destination.

Languages at Risk: At the other end of the spectrum from English are the world’s tribal languages. Most of these tongues - more than six thousand in number - are in steep decline. The process has been well documented. First, decreasing numbers of children learn the language. It becomes endangered when the youngest speakers are young adults. A language is seriously endangered when the youngest speakers have reached or passed middle age. And it is moribund when only a few moribund speakers are left. Then comes extinction.

Using Thailand as an example, one language, Phalok, is already moribund. Four other obscure languages – Bisu, Mlabri, Myu and Lavua – are in earlier stages of decline.

Every year the deaths of old people reduce the already small numbers of speakers of many marginal languages. Meanwhile, these tongues carry on in the fringes of most societies, with few advocates for their preservation. Obscure texts by linguists may preserve their grammar and vocabulary, but there is no likelihood that these languages will repeat Hebrew’s achievement, and rise alive from the tombs of dead languages.

Is this important? The followers of Chomsky would say "no", since the underlying idea behind universal grammar is that everybody speaks the same language. Most field linguists, however, believe that linguistic diversity represents a common good for mankind. According to the 2001 edition,

every language reflects a unique world-view and culture complex mirroring the manner in which a speech community has resolved its problems in dealing with the world, and has formulated its thinking, philosophy and understanding of the world around it.

The Status of Thai: Between these two extremes is the Thai language, which epitomises the development of national languages during the years since English began to take over the world. Thailand’s present dynasty was founded in the years after 1767, when Burma destroyed and looted the kingdom of Ayuthaya and its vassals.

As a resurgent Siam conquered Burmese armies and extended its domain, the new Chakri dynasty of kings found themselves heir to a much larger land, but one comprised of many peoples speaking many tongues. In Thailand’s far south, the people were Muslim, and the dominant language Malay. And in the mountains that dominate the landscape of northern Thailand, the rich fabric of hill tribes was woven with languages spoken in few other places in the world.

For most people living in valleys and on the plains the root language was Thai. However, there were so many variants that linguists have identified Thai dialects with six and even seven tones. Besides these tonal differences, dialects varied dramatically from region to region – and still do.

Speakers in Thailand’s northeast (Isaan) speak a language more like Lao (a Tai language spoken in Laos) than to central Thai. Along the Thai/Cambodian border, large numbers speak Khmer – another language still. In the new kingdom, even the scripts were different – the country’s north, for example, had a script that was widely used until the second half of the twentieth century.

From this Babel of tongues, Thailand has progressively developed the Thai language into an important national language: perhaps among the 20 most widely spoken languages on the planet. Through the tools of education, mass media and government influence and suasion, central Thai has developed into the national language.

At some level, it is spoken by most of the kingdom’s 63 million inhabitants, and only one script is now in common use. Thai is not much spoken outside the country, except to a small extent in adjacent countries – most of them (Myanmar, Laos, Cambodia) failed states.