The first type of oil and gas agreement applied in Vietnam was the concession system, in which an oil company is permitted by the host country to explore and produce petroleum on a certain area on the condition that it must pay to the State of this country compulsory taxes with a fixed rate. At the early stage of oil exploration in offshore southern Vietnam, the former Saigon Administration allowed oil companies including Pecten, Mobil, Esso and Marathon to conduct petroleum activities through concession agreements.
            After the establishment of PetroVietnam in 1975, in recognition of the advantage of the production-sharing system, it has been chosen as a basic frame for petroleum contracts. The Production-Sharing Contracts (PSCs) are very similar to Business Co-operation Contracts (BCCs) as an investment form. The benefits of the PSC system, in comparison with the concession system, in the environment of Vietnam, is the flexibility that enables the oil company to enter into an agreement with the Government on a wide range of issues, especially on the financial matters, which will lead to an "open" mechanism applicable for many regions with various geographical and economic conditions on the principle of ensuring the right of investors during the period of the project.
            Since the first PSC signed with oil companies Deminex (block 15), Agip (blocks 04, 12) and Bow Valley (blocks 28, 29) during the period 1978-79, the form of a PSC in Vietnam has continuously progressed with its main objectives being to encourage foreign investors, to ensure equity between the revenue of the State and the profit of the company, while strengthening the role of State management in the operation of oil and gas activities. The Law of Foreign Investment in Vietnam (1987), the Petroleum Law (1993) and a system of specialized legal documents and regulations have played an important role in attracting foreign investment into the oil and gas industry, thus pushing up the tempo of exploration and increasing the output of hydrocarbon production. The Vietnamese PSCs comprise a number of terms that were developed from similar systems to increase conformity with flexible policies of the Government of Vietnam and still maintaining its suitability to common international practices.

          Recently, the Government of Vietnam has developed a new investment form similar to the Joint Venture Contracts that apply to the petroleum industry called the Joint Operating Agreement (JOA). The JOA by nature is an extended type of conventional PSC, which has been applied for most prospective projects since 1998 on the basis that foreign parties shall bear all the costs and take risks during the exploration phase. The cooperation is represented by the Joint Operating Company (JOC), a Vietnamese legal entity which merely acts as an agent on behalf of the contracting parties. The major differences are that PetroVietnam has higher participating interest than in a PSC, normally of 30-50% and the right to assign its own staff to the JOC from the beginning.

            The effects of the amendments to the Petroleum Law since June 2000 have brought new incentives for foreign investment in the industry. The table below summarizes the basic terms of a petroleum contract, with regards to the new modifications.
  Contractual Duration:
Oil Projects Not in excess of 25 years with 5 years for exploration
Gas and Incentive Projects Not in excess of 30 years with 7 years for exploration
Contractual Area: Not more than 2 blocks or 4 blocks in special cases
Participation of PetroVietnam: Negotiable (10-20% in a PSC or 30-50% in a JOC)
Work Program and Budget: Firm and optional, including:
- Periods of each exploration phase
- Work commitments (seismic, drilling, etc.)
- Relative financial commitments
Tax Regime:
           Royalty Tax 4-25%, tax deductible, subject to rate of production output as below:
Crude Oil
Incentive Projects
Other Projects
Up to 20,000 bopd
Over 20,000 - 50,000 bopd
Over 50,000 - 75,000 bopd
Over 75,000 - 100,000 bopd
Over 100,000 - 150,000 bopd
Over 150,000 bopd
Natural Gas    
Up to 5 mmcmd
Over 5 mmcmd - 10 mmcmd
Over 10 mmcmd
Enterprise Income Tax 32% for incentive projects; 50% for others
Remittance Tax 3-7%
Value Added Tax (VAT) 0-10%
Export Tax 4% for Oil, non applicable for Gas, tax deductible
Maximum Cost Recovery: Up to 70% for incentive projects; up to 50% for others
Profit Sharing: Incremental tranches with agreed ratio among the Parties
Financial Contribution Negotiable (non-recoverable costs) as seen generally in international petroleum industry common practice


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