Vietnam’s Revised Law on Petroleum: A New Era for Foreign Investment in Energy

In response to escalating energy prices, Vietnam has made a significant move toward enhancing its petroleum industry by revising the Law on Petroleum. This legislation aims to streamline resource extraction and pave the way for increased foreign investment. Here’s a closer look at what this means for potential investors.

Overview of the Revised Law on Petroleum

On November 14, 2022, Vietnam’s National Assembly approved the Law on Petroleum 2022, marking the first comprehensive revision since its inception in July 1993. This updated legislation is pivotal for foreign firms eyeing opportunities in Vietnam’s growing energy sector.

Reasons for the Revision

Vietnam’s dependence on imported crude oil, which reached nearly 10 million tons in the first ten months of 2022, highlights the critical need for domestic production. The country saw a 20.3% increase in volume and a staggering 60.5% increase in value of crude oil imports compared to the previous year. Additionally, a reliance on imported petroleum products—over 20% of finished products—exposes Vietnam to global market volatility. The ongoing global supply crisis has only exacerbated this vulnerability.

The rising gasoline prices, particularly after the Russia-Ukraine conflict, underscored the urgency for Vietnam to fortify its energy security, prompting the legislative revision.

Applicability of the New Law

The revised law applies to all entities involved in petroleum activities within Vietnam, encompassing both domestic and foreign enterprises and their investors. This broad scope ensures that various stakeholders in the petroleum sector are considered.

Responsibilities of the Ministry of Industry and Trade

The Ministry of Industry and Trade (MoIT) plays a crucial role in overseeing the implementation of the law. Its responsibilities include:

• Legislative Authority: Promulgating legal documents, strategies, and plans related to the oil and gas industry.
• Monitoring and Reporting: Keeping track of oil and gas exploration and exploitation activities.
• Implementation and Oversight: Guiding and enforcing compliance with the law.
• Coordination: Collaborating with various ministries to supervise the Vietnam Oil and Gas Group (PVN).

Key Aspects of Petroleum Contracts

Basic Petroleum Investigation

Under the new law, basic petroleum investigation entails essential activities like researching and evaluating geological formations to support exploration efforts.

Special Investment Incentives

Priority projects may receive enhanced investment incentives, including tax breaks and extended contract durations. The new provisions aim to attract investments by making it financially viable for companies to engage in petroleum operations.

Flexibility in Contracts

Amendments have made the Petroleum Product-Sharing Contracts (PSCs) more adaptable. Contractors can propose projects for increasing reserves, enhancing recovery rates, and optimizing exploitation activities.

Contract Length

PSC contracts typically last 30 years, with exploration phases of up to five years. For projects eligible for special investment incentives, the maximum term can extend up to 35 years, with exploration phases extending to ten years.

Improved Tax Incentives

The new law introduces favorable tax rates:

• Corporate Income Tax: Reduced from 50% to 32%.
• Crude Oil Export Tax: Decreased from a range of 6% to 25% to a flat 10%.

For projects with special investment incentives, even better conditions apply:

• Corporate Income Tax: 25%.
• Crude Oil Export Tax: 5%.

Access Rights and Sharing Obligations

The updated law includes provisions for contractors regarding the access and sharing of existing infrastructure. Contractors can now access existing oil and gas works for their operations but must also share usage with third parties in compliance with Vietnamese laws and industry standards.

Contractor Selection Process

The criteria for contractor selection have been relaxed. Organizations must:

• Be recognized legal entities.
• Demonstrate adequate financial and technical capacity.

Notably, the prior requirement for contractors to have executed at least two petroleum contracts has been removed. The law also outlines specific situations allowing for direct appointment of contractors, bypassing the tender process entirely.

Special Rights of PVN

The Vietnam Oil and Gas Group (PVN) maintains priority rights in contracts. PVN can prioritize the purchase of extraction rights when an existing contractor withdraws or transfers these rights. This stipulation ensures PVN remains a central player in Vietnam’s energy sector.

Foreign Ownership in Vietnam’s Petroleum Sector

Though PVN is the sole entity authorized to explore and extract oil and gas within Vietnam, the law allows foreign firms to engage in upstream activities through contractual agreements with PVN. This is in line with commitments under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Effective Date and Implementation Guidance

The Law on Petroleum 2022 is set to come into force on July 1, 2023, at which point previous iterations will be rendered obsolete. Further guidance on the law’s implementation is anticipated, providing clarity for investors and stakeholders.

For any inquiries or assistance regarding entry into Vietnam’s energy market, reaching out to advisory services or legal experts is highly recommended to navigate this evolving landscape effectively.