Developments in Petroleum Projects and Policy - International Law Office

Restructuring the Energy Sector
Secured Lending Law
Cross-Border Pipeline Projects

Since the first natural gas was brought ashore from the Gulf of Thailand in 1981, a significant natural gas market has developed for both power and heavy industry. Although it has been common to finance petroleum projects in Thailand without government guarantees, foreign financial institutions will be interested in the following discussion of recent developments involving the Petroleum Authority of Thailand (PTT).

Restructuring the Energy Sector

Following the delinking of the baht to the US dollar in July 1997, there was a large drop in demand for natural gas and energy. This led to large reductions in the gas pipeline investment budget of the PTT, which currently owns and operates all natural gas pipelines in the country. However, the government is pursuing its strategy adopted in 1996 for restructuring PTT and liberalizing the petroleum market. Action the government has taken in this regard include the following:

• In September 1998 the cabinet approved a plan for privatizing and restructuring state enterprises, including policies to liberalize competition, create fairness, and increase efficiency in supplying energy to consumers. With regard to the energy sector, the transmission, distribution and trade in energy will be liberalized, and Third Party Access will be introduced on the gas pipeline system.
  
  
• In October 1998 the National Energy & Petroleum Organization (NEPO) released its plan for long-term restructuring of the natural gas supply industry in Thailand. The cabinet approved this plan in February 1999. NEPO's report "Privatization and Liberalization of the Energy Sector in Thailand" (March 29 1999) may be found on the NEPO web site at www.nepo.go.th.
  
  
• In 1999 parliament approved the Corporatization Bill which provides a process for the 'corporatization' of state enterprises, that is, conversion from statutory corporations to limited companies. The PTT and the Electricity Generating Authority of Thailand (EGAT) are two of the state enterprises that will be corporatized. First, they will be owned by the Ministry of Finance and then later they will be privatized. The timetable for corporatization has not been established. Furthermore, the bill was referred to the Constitutional Court and reports on November 1 1999 indicate that the court may find it unconstitutional.
  
  
• The World Bank and the IMF approved the government's plans for privatization as a condition to the IMF's US$17 billion programme of financial assistance. The government issues quarterly letters of intent to the IMF, including summaries of current government policies on privatization. The eighth letter of intent was issued on September 21 1999 and mentions a proposed Secured Lending Law to facilitate new credit flows.

These developments pose new issues for the financing of oil and gas sector projects as the credit worthiness of the PTT and EGAT will be uncertain following corporatization. Currently, the PTT Act and the EGAT Act include provisions providing for funding of deficits by the state. However, these provisions may no longer have effect following the corporatization of the PTT and EGAT - eliminating the political risk cover they provide. To deal with this uncertainty, the government may provide that the conditions of corporatization should be reviewed by the World Bank and interested international financial institutions.

Secured Lending Law

Under current law, forms of security are limited to mortgages of land and buildings, mortgages of registered machinery, pledges of moveable property and other rights (eg, promissory notes), and sales with right of redemption. There is no equivalent of a 'floating charge' on inventories or work-in-progress, or 'charge' on a bank account.

In the fifth letter of intent to the IMF dated August 25 1998, the government mentioned a second phase of secured lending and related reforms, and specifically new forms of non-possessory security interests (which would cover assets such as inventory, raw materials, accounts receiveable, equipment and commercial vehicles).

Although no timeframe has been announced by the government for enacting the new legislation (currently referred to as the Secured Lending Law), it is being given priority by the Ministry of Justice. The adoption of such legislaiton would facilitate the taking of legal security over assets of borrowers, and supersede the current practice of using general pledges which are often subject to attack as fictitious.

Cross-Border Pipeline Projects

Yadana pipeline delivery delays
The Yadana pipeline was completed in mid-1998, linking the Yadana field (TOTAL, Unocal, PTTEP and MOGE) in offshore Myanmar to the Ratchaburi Power Plant in Thailand. In 1999 a pipeline to link the Yetagun field (Premier) in offshore Myanmar to the Yadana pipeline at the Thai border was constructed.

The delivery of gas through the Yadana pipeline has been nominal. This is because there have been significant delays in the construction of the Ratchaburi Power Plant by EGAT. As a result of these delays the PTT, the buyer under the gas sales agreement, has been late in making payments. In August 1999 the government gave the PTT permission to make the first payment to the TOTAL-led consortium.

Petronas/PTT joint venture
In September 1999 the cabinet approved the construction of a pipeline to transport natural gas from the Malaysia-Thailand Joint Development Area (JDA) to southern Thailand and northern Malaysia. The PTT and Petronas will jointly own the project and will purchase gas produced in the JDA on a 50:50 basis. The project includes a gas separation plant to be built in southern Thailand. The sponsors will be seeking project financing.

For further information on this topic please contact Albert T Chandler at Chandler & Thong-ek by telephone (+662 266 6485) or by fax (+662 266 6483) or by e-mail (chandler@ctlo.com).
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