Thursday, March 7, 2013

The Diplomat: What Fracking Means for Southeast Asia

The Diplomat: What Fracking Means for Southeast Asia
Despite the rhetoric, Southeast Asian governments have been slow to tap their oil reserves. Fracking could make progress even slower

Oil and gas have long held the promise of untold riches for Southeast Asian countries. Yet, success in the region has been mixed: Brunei has flourished and Malaysia has seen steady progress, but Burma, Cambodia, the Philippines, Vietnam and East Timor have struggled to exploit their reserves.

Negotiations with oil companies and powerful neighbors are already tough as it is. However, the advent of hydraulic fracturing (a.k.a. fracking) will make this process even more difficult, especially when it comes to developing reserves in the South China Sea, the Gulf of Thailand, the Timor Sea and the Andaman Sea.

The term "fracking" refers to the practice of making fractures in rocks and rock formations by injecting various fluids into cracks to force them to further open. The bigger fissures permit added oil and gas to gush out of the formation and into the wellbore, where it can then be extracted. This innovative technique for tapping reserves has revolutionized the oil and gas industry. To be sure, many harbor deep concerns for the damage it can cause to the environment. Nonetheless, its ability to extend the life of existing oil fields has changed the industry’s outlook.

The use of fracking is most suitable for mature energy producers with established markets, developed oil fields and infrastructure already in place. Countries such as the United States, Australia, Canada, and in Europe and Central Asia will benefit most from this innovative method. For example, disused oil refineries on the U.S. East Coast are being reopened to accommodate producers whose fields were once thought spent.

Alongside extending the life of existing oil fields, fracking has helped to substantially lower oil prices. According to a report by PricewaterhouseCoopers, fracking could keep oil prices up to 40 percent lower than the levels they were previously expected to reach by 2035.

This means crude could be valued at less than U.S. $90 per barrel, compared with the current price of about U.S. $100 a barrel and the peak oil price of U.S. $145 per barrel that producers were earning in 2008 amid dwindling supplies.

“There’s no doubt fracking offers a technical solution to countering rising hydrocarbon costs and helping end energy dependency on often volatile source countries,” Gavin Greenwood, a risk analyst with Hong Kong-based Allan & Associates, told The Diplomat.

For the last ten years, Cambodia and Thailand have failed to reach a production sharing agreement over reserves held in overlapping claims. Likewise, the future of agreements East Timor has forged with Australia is uncertain.

Meanwhile, an agreement on production sharing in the South China Sea is as elusive as the much vaunted Code of Conduct for dispute resolution. China, the Philippines, Vietnam, Malaysia, Brunei and Taiwan all have competing claims.

Gunboat diplomacy has dominated regional politics in the South China Sea and is particularly disheartening for the Philippines and Vietnam. Their claims surrounding the hotly contested Paracel and Spratly islands are particularly convincing. These island chains are believed to contain vast reserves of natural resources, including oil.

Conservatively, Cambodia has an estimated 400 million barrels within its jurisdiction. Prime Minister Hun Sen, who loathes criticism of his government’s handling of the issue, has promised Khmers that oil would flow and standards of living would rise by 2012. To date, however, nothing has been produced. The Diplomat

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