Foreign Direct Investment and Regulation: A Case Study of Thailand's Upstream Oil and Gas Industry

The oil and gas industry is divided into two sectors: the upstream sector in which exploration and production of crude oil and natural gas take place, and the downstream sector in which the crude oil and natural gas are processed in refineries and petrochemical plants. Oil and gas development projects are characterised by large capital investments which include a clear determination of the risks and rewards of each investment opportunity. It is necessary for developing countries to provide an investor-friendly environment towards provisions of numerous incentives to foreign investors, especially international oil companies (IOCs), to increase direct investment flows. The establishment of a stable and secure environment is a fundamental way that host governments can play a vital role in reducing risk and promoting opportunity through the implementation of suitable regulatory terms and conditions for exploration and production (E&P) work, as well as sufficient economic incentives to attract foreign investment capital. In general, IOCs will diversify risks and prioritise their portfolios to invest in the potential markets that can provide them the highest commercial return. Evidence from Thailand indicates that IOCs require a favourable investment climate to maintain active development of upstream oil and gas resources. Due to the high-risk nature of Thailand's geological setting, IOCs need to have managerial and operational flexibilities when investing in and executing work programmes without mandatory government intervention. The Thai Government needs to consider whether regulation and incentives are written in ways that help facilitate new foreign investments. Apart from legal certainty, Thailand's upstream investment climate can also be strengthened by enhancing the working relationship between the government and the IOCs.