Revised Petroleum Law Offers Improved Extraction Incentives

In the wake of rising energy prices, Vietnam has revised its Law on Petroleum to simplify resource extraction in the burgeoning Southeast Asian nation. Here’s an overview for foreign firms looking to invest in the sector.

On November 14, 2022, the 15th National Assembly of the Socialist Republic of Vietnam voted to approve the new Law on Petroleum 2022. This is the first time that the Law on Petroleum has been comprehensively revised since it first came into force in July 1993.

This new law should open Vietnam’s petroleum sector to greater investment and development as the country moves to shore up its energy security.

Why was the Law on Petroleum revised?

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Vietnam imported nearly 10 million tons of crude oil in the first 10 months of 2022, representing a 20.3 percent increase in volume and a 60.5 percent increase in value compared to the same period in 2021.

Additionally, the country imported over 7.1 million tons of petroleum, worth US$7.34 billion, representing a 22.8 percent and 123.8 percent increase over the same period.

Vietnam imports more than 20 percent of its finished petroleum products and relies on significant crude oil imports (approximately 50 percent) as the raw material for petroleum production in the Dung Quat and Nghi Son oil refineries. This reliance on imported crude oil exposes Vietnam to the volatility of the world market, according to Do Thang Hai, Deputy Minister of Industry and Trade.

The current supply crisis and escalating global oil prices have further intensified risks for the domestic petroleum industry. Gasoline prices experienced rapid increases following the outbreak of the Russia-Ukraine conflict, with a rise of 60 to 70 percent from February to June 2022.

These challenges emphasized the need for Vietnam to further develop the domestic petroleum industry and subsequently led to the revision of the Law on Petroleum.

Who does it apply to?

Agencies, organizations, and individuals involved in the petroleum industry and petroleum-related activities within Vietnam’s territory. This includes both domestic and foreign enterprises and their investors.

Who is responsible?

The Ministry of Industry and Trade (MoIT) is responsible for oil and gas exploration and associated activities. Therefore, the implementation of the Law on Petroleum 2022 will ultimately be overseen by the MoIT. MoIT’s responsibilities will include:

Legislative authority

• Promulgating legal documents, strategies, and development plans pertaining to the oil and gas industry.
• Establishing and guiding cost norms, and economic and technical standards for oil and gas exploration and activities.

Monitoring and reporting

• Monitoring, analyzing, and reporting on the progress and outcomes of oil and gas prospecting, exploration, and exploitation, for domestic as well as export consumption.

Implementation and oversight

• Guiding, disseminating, and overseeing the implementation of petroleum-related legislation.
• Inspecting, investigating, and addressing violations, as well as handling complaints regarding oil and gas exploration and activities.

Coordination and oversight

• Taking primary responsibility for coordinating with ministries and ministerial-level agencies to inspect and supervise the Vietnam Oil and Gas Group (PVN).

Petroleum contracts

Key terms

Basic petroleum investigation: This refers to activities involving researching, surveying, and investigating the geological formations, material composition, and conditions as the basis for petroleum exploration activities.

Special investment incentives: For projects that Vietnam sees as a priority investment incentives may be given including tax breaks and extended contracts.

Contract terms

Vietnam, Indonesia, Malaysia, and the Philippines have adopted petroleum product-sharing contracts (PSC) as their contractual framework. But these countries have introduced alternative contract types alongside PSC contracts in some specific instances.

In Vietnam, amendments have been made to PSC contracts to provide more flexibility and clarity. This includes provisions for contractors to propose additional projects to increase reserves, to enhance their recovery coefficient, and to optimize their oil and gas exploitation.

Contract length

PSC contracts will normally have a term of 30 years, of which the exploration phase is up to five years. For projects eligible for special investment incentives, the term can be up to 35 years, with an exploration phase of up to 10 years. Contracts may be extended up to five years (including the exploration phase) on a case-by-case basis.

Improved tax incentives

New tax incentives include:

• A corporate income tax rate of 32 percent (previously 50 percent); and
• A crude oil export tax rate of 10 percent (previously 6 to 25 percent).

On the other hand, petroleum contracts falling under the special investment incentives policy receive even more favorable conditions, including:

• A corporate income tax rate of 25 percent; and
• A crude oil export tax rate of 5 percent.

Access rights and sharing obligations

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The Law on Petroleum 2022 includes provisions regarding the access and sharing of existing infrastructure within the oil and gas industry. Contractors have the right to access and use the existing infrastructure of oil and gas works in their operations.

By the same token, contractors are obligated to share the use of oil and gas works and existing infrastructure with third parties. This is provided that it does not impede their projects and aligns with Vietnamese law and international best practices in the oil and gas industry.

Contractor selection

According to the new law, organizations and individuals participating in the tender process for a petroleum contract must satisfy the following conditions:

• They must be a recognized legal entity; and
• They must have sufficient financial and technical capacity and experience in petroleum operations; if they cannot satisfy this condition, they can form a joint venture with another organization to participate in the tender process.

The new Law on Petroleum also reduces the criteria for contractors to participate in the tender process. Notably, it has removed the condition specified in Decree 95 that requires contractors or individuals to have performed at least two petroleum contracts previously.

Moreover, the amended law sets out three situations in which contractors can be selected by direct appointment, avoiding the tender process altogether. These are:

• When the project is related to national defense and security;
• When there is only one interested bidder; or
• When a contractor wishes to extend or expand their existing contract.

Prioritizing PVN

PVN holds certain rights in oil and gas contracts, including the right to have priority in the purchase of extraction rights. This is the same when an exiting contractor wishes to withdraw from their contract or transfer their extraction rights.

Foreign ownership in Vietnam’s petroleum sector

PVN is the only company permitted to explore and extract oil and gas in Vietnam. Though not stated in the Law on Petroleum 2022, foreign firms can be involved in upstream extraction but must sign a contract with PVN per the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

When does the law come into force?

The effective date of this law is July 1, 2023. After that, the Law on Petroleum, dated July 6, 1993, with revisions and supplements outlined in Law No. 19/2000/QH10, Law No. 10/2008/QH12, and Law No. 35/2018/QH14, will be null and void.

Further guidance on the implementation of this law is expected in the near future.

For support entering Vietnam’s energy market, contact the team at Dezan Shira and Associates via email: vietnam@dezshira.com

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