Building a gas pipeline - the Vietnamese way

The Vietnamese had discovered a large gas field – Bach Ho- in the southern waters some 200 miles from Saigon and were very keen to develop it as soon as possible to help their faltering economy. But they were having difficulty in negotiating a contract with the international oil company, British Petroleum, the operator of the field. It had been three years since the gas discovery and the two parties could not even agree on the basics of the problem. It was always one step forward and two back.

The World Bank deputized me to go and assist the Vietnamese government in these negotiations and to help get the project off the ground. Before I set out on this assignment, I was told half facetiously by my colleagues with greater experience of Vietnam that " there was a right way, and there was a wrong way and then there is the Vietnamese way". I should have heeded that advice.

My earliest efforts to help the government were directed at organizing seminars and training courses on gas reservoir assessment and management and contract negotiations. I was also able to dragoon my colleagues into delivering lectures and leading discussions. Over the next few years, the younger professional staff in Petrovietnam would often come to me for advice and I would give them papers and discuss how they could proceed in their negotiations of the gas contracts.

It was a complicated problem since most of the gas from the Nam Con Son field some two hundred miles offshore HCMC was best used for power generation, since the only other use was for the more costly process for the manufacture of fertilizers. The integrated value chain of gas field development, offshore pipeline, power generation plant and then distribution of electricity required that a number of problems be solved at the same time. BP would not invest $1 billion in the development of the offshore gas field until they were assured of an economically viable price for the gas. The new offshore pipeline consortium wanted to ensure that there was adequate annual throughput of gas with an economical transport charge. The power generation plant owner wanted guarantees that the gas price would be such that after its conversion to electricity, the electricity price would cover his costs and provide a profit.

The real problem arose in determining the electricity price. Since there was only one national utility, Electricity of Vietnam (EVN), the price was determined by the government on an annual basis. But all the upstream parties needed assurances about the level and gradual increase of the electricity price over the next twenty years. As it was, the current price of electricity was too low and would not cover the costs of developing the gas field and pipelines. To further complicate the issue, the government had decided that the investments in the power plant were too rich for their tastes and wanted to invite the private sector to come in on a “build- operate- transfer” BOT type contract. They looked to the Bank to provide the guarantees to cover the risks and to help them mobilize the $500 million needed for the power plant. Furthermore, there was no central agency to negotiate these contracts: the gas contracts were the responsibility of Petrovietnam, while the power plant was handed over to the ministry of industry rather than to EVN to develop.

Resolving these issues held another piquant note for me. I remembered that this was the same field that Vietnam had allocated to ONGC some years ago. Actually, negotiations for this block had started in 1982 when I had invited a team from Petrovietnam to see what we had achieved in Bombay High. In these meetings, they had urged ONGC to come to Vietnam and I had countered that they should give us two blocks, one in the Bach Ho block and the other in deeper waters or the Nam Con Son block. Apparently, these inter governmental negotiations had carried on for some years until ONGC had been given the NCS block in 1987. ONGC had drilled the first well in 1989, but it turned out to be dry. The second well had encountered a blow out and ONGC, then led by S.L. Khosla, a civil servant with financial background, had decided to cut their losses and to sell 25% of the block to a combination of BP and Statoil of Norway. They also handed over the operating authority to BP. BP had gone back to the same field and their new discovery was in a block that was still majority owned by ONGC.

It was to take a good five years before we could untangle this mess. I had started by focusing on the weakest link – the electricity price – since this was an area of public policy and the Bank had leverage. It had lent almost $400 million to the power sector on the condition that the electricity pricing had to be remunerative for EVN. At every opportunity, I stressed upon the Ministers and the Deputy Prime Minister, the need to comply with their obligations in their existing contracts with the Bank, but also to issue a statement of intent regarding the underlying principles of pricing. In fact, at the negotiation of the next $220 million power project loan from the Bank, I curtailed the meeting until the Vietnamese side produced a written statement from the Prime Minister’s office in regard to their policy on electricity pricing. With this in hand, we could now ensure that there were adequate margins for all the upstream players.

We had encouraged the government to float an open tender for the power plant under a BOT type contract. In this type of contract, the private sector provided the funds to build the power plant, operated it for a period of twenty years and then transferred it to the government. This was just a few months after the Asian crash of 1997. Everyone was sure that there would be no bidders; after all, big hitters like Indonesia and Thailand were canceling their existing plans. My view was that these cancellations in neighboring countries could only benefit Vietnam, as it would remain the only game in town for the equipment suppliers. True enough, as many as seven international bidders submitted their bids and their prices were within 10% of each other, and these at one of the lowest levels in the region.

Now began the tedious process of selecting the winner and negotiating the power contracts. Once these were in place, the interrupted negotiations on the gas contracts could be resumed with some assurance of success. It was, after all, a $2 billion project for a country whose total GDP was no more than $20 billion. Finally, six years after the gas discovery, the gas contracts were signed, and construction work began on the offshore platforms and pipelines.

 The power plant negotiations still needed to be concluded with EdF, the French national utility that had won the contract. Since the Ministry of Industry had never negotiated a contract of this magnitude nor of this type, the process was tortuous and slow. The Bank could not help the government because under our charter these negotiations had to be done directly by the government.  So I mobilized funds from different sources to hire lawyers and experts to assist them. But the level of distrust between the government and the private sector was so great that every concession was viewed with extreme suspicion. And there were many an occasion when both sides were ready to give up.

Survival and ingenuity among the Vietnamese were evident everywhere you looked. The government had decided to build a road around the Truc Bach Lake in front of our apartment building. The road would be built and when it encountered a house that presented an obstruction, it would simply skip to the other side of the house and continue the construction. After about nine months, we were presented with the bizarre sight of a road that ringed the lake, but was interspersed with houses that blocked any smooth movement. It turned out that instead of waiting for the consent of all the house owners, the government had simply decided to go ahead till the house owners realized the futility of holding on and settled for the best deal they could negotiate. Although work had commenced with great aplomb, it became apparent to me that three completely different methods of construction were being used. This was the Vietnamese method of determining the most cost effective approach by actual trial and error. Watching the construction of this road was good education for me on how the Vietnamese often approached problems –“step by step” or “crossing the river by feeling the stones.” The government seemed to be using the same principle in their attempts to bring the gas discovery to the shore.

I urged the Vietnamese to look to the future and take some risks in their negotiations. There is a Vietnamese legend that there is a sacred turtle that lives in Hoan Kiem Lake in Hanoi, which emerges in times of danger to the Vietnamese people. Legend had it that when all seemed lost, the turtle had emerged with a sword in its mouth, which King Lien had used to defeat his enemies. I used the turtle as my metaphor for the problems in the country.

“You are,” I would say, “very similar to the sacred turtle that you worship. Like a turtle, you are persistent and never give up even in the face of the direst circumstances. The turtle has a thick skin enabling him to absorb outside influence without disturbing the core of its being. You, too, listen to advice and much criticism from all over, but still manage to retain your own point of view. The turtle,” I would further point out, “is the only animal that cannot go backwards. But, remember,” I would continue, “it can go around and around in circles.” There would inevitably be lots of chuckles of laughter at this as this was translated for the audience. “Anyway, remember,” I would end, “that the turtle only advances when it sticks its neck out .”

The turtle story was to become my signature speech and often the Vietnamese from the audience would stroll over to me after the talk and shake their heads in agreement. Some of them would counter with the Vietnamese proverb about crossing the river by “feeling the stones” and “moving step by step”. “If the river is deep,” I would rebut, “all you will achieve is to drown step by step. Sometimes you have to take a leap.”

During this time, Petrovietnam, BP, Edf negotiators would often visit me informally as well as the Ministry officials, each with their own version of the issues that were bedeviling their negotiations. Each threatened to pull out of the project on an almost monthly basis. Finally, we were able to put all the pieces in place and the power plant project was signed as well. Gas flowed from the Nam Con Son (NCS) gas field in December 2003. This marked a significant achievement – Vietnam had managed to attract $500 million of private investment while the rest of the Asian countries were still in crisis, and it had also successfully negotiated a gas contract with an international major. Clearly, the government was serious in its desire to attract private investment that it said it desperately needed. The NCS project was proof of the government’s determination and willingness to make the necessary compromises to get there.

Many years later, when I was saying farewell to Vietnam, Dr. Hiep, the Senior Vice President of Petrovietnam, arrived with an embroidery painting as a present from his institution. The picture was of an old village schoolmaster.

“That is how Petrovietnam saw you,” he said.

“ You have been our  teacher and taught us so much over the past ten years and for which we you so much.”

Needless to say, that painting remains one of my prized possessions to this day.