Oil and Gas in Vietnam: an Introduction

Important laws and regulations in the oil and gas industry

The oil and gas industry continues to be a top-priority sector for Vietnam's economic growth and energy security, given the country's substantial reserves in this domain. The legal system, among other areas, must continuously support the growth of the oil and gas industry. The Vietnam government has recently issued and amended a number of laws pertaining to the functioning of the oil and gas sector, including:

• Public Investment Law 2019, formulated to regulate the classification, approval, management and inspection of oil and gas projects; and
• Investment Law 2020, Enterprise Law 2020 and Tax Laws, containing regulations concerning the operational aspects of oil and gas projects.

Of paramount significance, Vietnam's Petroleum Law 2022 received official approval on 14 November 2022 and was enacted on 1 July 2023 (the “Amended Law”). This novel law exhibits heightened flexibility, harmonisation and alignment with international practices, as well as the prevailing realities of the oil and gas industry within the country. Notably, Decree No 45/2023/ND-CP, dated 1 July 2023, complements the Petroleum Law by providing comprehensive guidance and introducing a new Model of Petroleum Production Sharing Contract (PSC).

Petroleum Law 2022 and its value

The Amended Law is expected to propel advancements within the oil and gas industry and attract potential investors.

Firstly, the Amended Law has extended the petroleum contract from the previous 25-year duration prescribed under the Petroleum Law of 1993 to a new period of 30 years. For petroleum blocks that are eligible for investment incentives and special investment incentives, the maximum term of a petroleum contract has been extended to 35 years. The main objective of these modifications is to offer potential investors and existing stakeholders an extended and more stable investment horizon.

The Amended Law has incorporated three mechanisms to address expiring petroleum contracts. Accordingly, within six months before the contract's expiration, Vietnam Oil and Gas Group (“PetroVietnam”) may submit a report to the Ministry of Industry and Trade (MOIT) seeking approval for one of the following options:

• ceasing the exploitation of the oil/gas field;
• executing a new petroleum contract with adjusted terms and conditions, allowing the contractor to continue the exploitation with profitability – in this case, the contractor is also entitled to assets that were previously installed and invested in under the preceding contract; or
• entrusting PetroVietnam with the task of recovering the remaining reserves of the oil/gas field.

Secondly, to further incentivise investment in the oil and gas industry, the Amended Law now provides substantial tax incentives for investments in oil and gas blocks situated in deep waters, offshore waters or areas with challenging geographical conditions. Under normal circumstances, the corporate income tax rates for the exploration and extraction of oil and other rare resources in Vietnam vary from 32% to 50%, and the crude oil export tax ranges from 6% to 25%. However, if an oil and gas block meets the criteria for receiving special investment incentives, an investor in such a block may enjoy favourable tax treatment, including a reduced corporate income tax rate of 25%, a lower crude oil export tax rate of 5% and a maximum cost recovery rate of 80% of oil production.

Thirdly, the Amended Law has supplemented provisions concerning the legal framework for fundamental petroleum inspection activities, including exploration, usage of state capital and fundamental investigations of petroleum. This change streamlines the law, without the necessity for further explanation through additional decrees or circulars.

Fourthly, the Amended Law has changed to enhance the approval procedures for the implementation of petroleum activities. This significant update is aimed at resolving the issue of having multiple disparate laws in the execution of a project. In particular, under the Amended Law, upon obtaining the Prime Minister's approval of the terms of a PSC, no further approval of investment policies under the Investment Law is required. Similarly, a contractor may present an outline field development plan to the MOIT for approval, which will replace the construction investment pre-feasibility study reports stipulated under the Construction Law.

Fifthly, the Amended Law has introduced a policy allowing contractors to access and use existing infrastructure within the petroleum industry through contracts or agreements with the respective owners or entities managing such infrastructure. This provision aims to optimise the utilisation of pre-existing facilities, thereby reducing capital and investment costs.

With the implementation of the new Petroleum Law, the Vietnamese government anticipates attracting more investors to foster the sustainable growth of the oil and gas industry in Vietnam.

Power Development Plan VIII

Development goals

On 15 May 2023, the Prime Minister of Vietnam issued Decision No 500/QD-TTg, approving the National Power Development Plan for the 2021–2030 period with a vision to 2050 (“PDP VIII”). This plan holds immense significance in ensuring national energy security, meeting socio-economic development needs, and supporting the country's industrialisation and modernisation.

PDP VIII aims to develop power sources and transmission grids with voltage levels of 220 kV or higher, focusing on renewable energy and new energy projects in Vietnam from 2021 to 2030, with a vision to 2050. It also encompasses initiatives to establish connections between the power grid and neighbouring countries.

The specific objective of PDP VIII is to ensure sufficient power supply for domestic demand and to support socio-economic development goals, targeting an average GDP growth of approximately 7% per year from 2021 to 2030 and 6.5–7.5% per year from 2031 to 2050. As part of this plan, it is projected that 50% of office buildings and 50% of residential houses will rely on self-produced and self-consuming rooftop solar power by 2030.

In addition, PDP VIII places significant emphasis on the development of renewable energy resources for electricity generation. By 2030, it aims to achieve a renewable energy rate ranging from 30.9% to 39.2%, with an estimated electricity export capacity of 5,000–10,000 MW. Furthermore, the plan envisions the establishment of two inter-regional renewable energy industry and service centres by 2030.

Highlights of PDP VIII

PDP VII represents an energy transition. While PDP VII (Decision No 1208/QD-TTg, dated 21 July 2011, approved by the Prime Minister) initially prioritised coal-fired and gas-fired power, PDP VIII establishes a new development focus by placing a premium on renewable energy sources.

This new orientation represents a transformative milestone in Vietnam's journey towards embracing new and renewable energy sources, including wind and solar, biomass, hydrogen and especially LNG projects. This enables the nation to harness its abundant domestic energy resources and achieve self-sufficiency in electricity generation. PDP VIII also serves as the bedrock for Vietnam to fulfil its commitments to reduce greenhouse gas (GHG) emissions in the future.

Specifically, PDP VIII targets an estimated renewable energy power capacity of 48% of the total capacity, amounting to 150,489 MW by 2030, and 65.8–71% of the total capacity, ranging from 490,529–573,129 MW by 2050. In parallel, the scale of coal-fired power is expected to reduce from 20% of the total capacity of 150,489 MW in 2030 to zero by 2050.

Beyond the promotion of renewable energy, PDP VIII prioritises the development of a transmission grid. This includes establishing 500 kV and 220 kV transmission grids to optimise power plant capacity, enhance power supply reliability and minimise power loss. Moreover, PDP VIII seeks to establish connections between the transmission grid and the Mekong sub-region and ASEAN countries at 500 kV and 220 kV voltage levels. Investment capital for transmission grid development is projected to reach approximately USD14.9 billion for the 2021–2030 period and USD34.8–38.6 billion for 2031–2050. Such substantial investments will bolster Vietnam's system interconnectivity, facilitate electricity exchange and harness the natural resources of neighbouring countries.

Although implementing PDP VIII may pose challenges, Vietnam may have a historic opportunity to leverage its renewable energy potential. This may lead to the nation becoming an energy exporter and aligning with global trends in economic and energy transformation.

Oil and gas trends during energy transition

The 26th Meeting of the Conference of Parties was held in Scotland in November 2021 under the UK presidency, and gathered 197 world leaders and more than 40,000 registered participants. During this event, the Vietnamese government made a strong commitment to reduce GHG emissions and achieve “net zero” by 2050.

In addition, Vietnam is actively involved in the “Energy Transition Mechanism” facilitated by the Asian Development Bank. The programme aims to support the acquisition and decommissioning of coal-fired power plants while promoting the adoption of reliable and cost-effective clean energy sources. This underscores Vietnam's intent to shift away from fossil fuels, including oil, gas and coal-based energy, towards clean energy in the future (see www.adb.org).

Nonetheless, the energy transition must be implemented gradually and with careful strategies to ensure national energy security. As per 2023's statistics, in Q1/2023 gas turbines accounted for only 11.6% of total electricity production, while coal-fired power constituted 45.3%. Pursuant to PDP VIII, the government aims to achieve 25% of electricity production from gas turbines (including domestic natural gas and LNG projects) and 20% from coal-fired power by 2030 (see www.nangluongvietnam.ng).

To achieve these objectives, Vietnam is directing investments into the gas sector, involving three key components:

• constructing gas power plants such as Dung Quat I, Dung Quat II, Dung Quat III, Mien Trung I, Mien Trung II, O Mon I, O Mon II, O Mon III and O Mon IV;
• maintaining the current supply of domestic gas through the continuation of the Gas Sales and Purchase Agreement (GSPA); and
• securing gas supply for the coming decade through the newly discovered Ca Voi Xanh and Ken Bau gas fields.

In the longer-term perspective of 2050, the government envisions a substantial reduction in electricity production from gas turbines, targeting it to be as low as 1.6% (approximately 7,900 MW). As a result, the Ca Voi Xanh and Ken Bau gas projects are likely to represent the last major gas ventures.

LNG trends

Vietnam is expected to encounter an impending gas shortage, particularly in the South-East region, where the gas reserves in Block 06.1, Block 11.2, and Block 15.1b&c are all decreasing rapidly (see www.nangluongvietnam.vn).

To address the LNG demand in the upcoming years and align with the objectives set forth in PDP VIII, several significant LNG projects have been formed and approved. Notable projects include the Bac Lieu LNG-to-Power Complex, Thi Vai LNG Terminal, Nhon Trach 3 & 4 Power Plants, Hai Linh LNG Terminal, Ca Na LNG Power Complex, Son My 1 and Son My 2 Power Plants, and the Long Son LNG Power Complex.

As a new and less experienced buyer in the LNG market, Vietnam can be expected to be highly careful with its importation strategy. Currently, Vietnamese LNG importers are primarily seeking to purchase LNG from established trading hubs such as Singapore, Australia and Qatar, with Singapore serving as the LNG trading hub for South-East Asia.

Considering the current state of LNG receiving and processing infrastructure still under construction, Vietnam is reluctant to commit to mid-term or long-term contracts with fixed LNG quantities for each year. The LNG demand in the near future is likely to be for testing purposes, and Vietnamese LNG importers – being new players in the market – wish to avoid the risks associated with long-term contracts, such as disputes over LNG prices, force majeure events, under-delivery (shortfall) or non-compliance with committed LNG quantities.

In this context, a more suitable approach for Vietnam in the short term is to utilise the LNG Master Sales and Purchase Agreement (MSPA). With this type of contract, the parties are not bound until they mutually agree on a one-time purchase of a specific quantity of LNG, confirmed through a purchase order or a confirmation notice.

For instance, PV Gas (the primary LNG importer for Nhon Trach 3 and Nhon Trach 4 power plants) has signed at least eight MSPAs and is actively negotiating several more, enabling it to have a wide range of choices concerning the origin and price of LNG, delivery terms, dispute resolution methods, etc (see www.pvgas.com.vn). In the long run, possibly after 2035, when domestic gas supply weakens while LNG-to-power projects are fully operational, Vietnamese LNG importers may consider shifting towards mid-term and long-term contracts to ensure a more stable and reliable source of LNG supply.

Recent disputes in oil and gas

The Amended Lawis expected to enhance the effectiveness of government management in overseeing petroleum-related activities. However, due to the perpetual uncertainty and potential volatility inherent in the oil and gas industry, disputes may arise over current and future projects. These disputes are mostly highly factual and technical in nature, with potential areas of contention in petroleum projects including the following.

• Disputes over government tax incentives: given the lengthy duration of petroleum contracts, the interpretation of tax authorities may differ at times from the government's intention to provide investment incentives to contractors. The complex tax regimes in the oil and gas sector may lead to disputes concerning tax declarations, such as:
1. conflicts between tax authorities and the contractor about the declaration of tax, tax exemption under contract, and incentives from the government; and
2. the contractors complaining or initiating an administrative lawsuit against the tax authorities.
• Disputes in GSPAs: conflicts may arise between sellers and buyers in GSPAs, such as in situations where gas reserves deplete earlier than forecast, and the seller is unable to meet the agreed-upon gas quantity. In addition, discrepancies in gas quantity measurements can lead to invoicing disputes where the buyer refuses to pay.

In terms of disputes over delays, oil and gas projects can be delayed for various reasons, including the following.

• External factors force the contractor to perform additional work beyond the agreed scope. In such circumstances, the contractor may propose extra work only if the project owner agrees to pay for it. In some cases, project owners may rely on the contract's predetermined “lump sum” price to decline such proposals.
• Legal regulations on investment in public projects are still overlapping and conflicting because of the multiple legal frameworks governing petroleum projects. This leads to a delay in project approval because of the complicated process.
• Changes in laws or national policies affect the parties' plans and intentions. For instance, a series of new laws, decrees and resolutions have been introduced since 2009 to restrict government guarantees on energy projects, especially concerning the Law of Public Debt Management. Consequently, the lack of government guarantee may hinder the financing of certain projects. Special projects may need to seek individual approvals from the Prime Minister on a case-by-case basis.
• Challenges arise from treaty provisions mandating that disputes between parties shall, by default, be resolved in Vietnamese arbitration or Vietnamese courts. Foreign investors may perceive this requirement as a legal risk to their investments, necessitating additional time and resources for negotiation.

The oil and gas industry may occasionally encounter force majeure disputes, particularly in the export/import sectors, which are vulnerable to weather conditions. Parties may attempt to use a force majeure event, such as bad weather conditions, to excuse themselves from contractual obligations during a dispute. However, proving force majeure events can be challenging. Parties often fail to meet the necessary requirements and timing to establish a force majeure event adequately. In some cases, force majeure may be misunderstood or misused, leading to unnecessary disagreements between parties.

Moreover, the involvement of Russian or other sanctioned entities representing investors or contractors in the oil and gas industry or energy projects in Vietnam has given rise to sanction-related matters. These disputes can be extensive and costly for all parties involved.

Promising opportunities for investors

Vietnam's comprehensive transition plan presents significant opportunities for investors seeking to engage in the establishment and operation of renewable energy projects throughout the country. This shift towards clean energy necessitates substantial investments in infrastructure development, including wind and solar farms, transmission lines, energy storage facilities and smart grids. To capitalise on these prospects, investors can actively participate in funding and supporting infrastructure projects.

Furthermore, the commencement of the first LNG shipment at PV Gas LNG Port (Thi Vai Terminal) on 10 July 2023 provides a compelling opportunity for investors in the LNG energy sector. The first LNG project involves constructing LNG import terminals, storage facilities and associated infrastructure, signalling Vietnam's commitment to developing a robust LNG supply chain. Considering the global emphasis on reducing GHG emissions, LNG is regarded as a clean and promising alternative energy source for the foreseeable future.

Therefore, collaboration with local entities, such as energy companies, government agencies and research institutions, can provide investors with access to local knowledge, networks and regulatory support. However, investors should be aware of legal issues, and should consider the advantages and disadvantages of participating in Vietnam's energy market and be prepared for potential conflicts among various Vietnamese legal frameworks. As Vietnam follows a civil law system, its laws are supplemented by a multitude of decrees, circulars, guidelines, decisions and other legal instruments that may lead to inconsistencies and confusion when applied in practice. Therefore, engaging with legal professionals is highly encouraged to effectively navigate the Vietnamese market from a legal perspective and ensure the successful implementation of investment ventures.