By Lawrence Yong
The awarding of another 10 risk service contracts (RSCs) for marginal fields will keep the fever burning in the oil and gas sector as opportunities for local players open up. In this series of articles, KiniBiz takes a look at the rationale for this, the early players, those who might benefit in future and how the industry dynamics will change. In the first article we look at the origins of RSCs and the reasons why Petronas opened the back door to Malaysia’s oil resources to relatively unknown and inexperienced companies.
With national elections over, one of the more exciting things in the oil and gas sector will be the 10 risk service contracts (RSCs) in addition to the earlier three from Petronas as part of a plan to develop marginal oil fields in Malaysia. Previous reports said there were about 108 marginal oil fields scattered offshore in the shallow waters off Terengganu, Sabah and Sarawak. Over a quarter of them are up for grabs.
This is an essential phase in Malaysia’s plan to go further and probe deeper for oil in order to avoid losing its status as one of Asia’s few net oil exporters.
Each RSC award could be worth RM1-RM2 billion and Petronas has only given out three since the first roll-out in 2010. It’s an exciting development as RSCs would lower the barrier to entry for oil and gas players in Malaysia, boosting the fortunes of a few dozen hopefuls and transforming them into key upstream players. As Petronas still has a chunk of its allocated RM300 billion capital expenditure for 2011-2015 to spend, analysts expect many contracts to be awarded soon.
“We hear that Petronas has invited about 40 foreign international oil companies to come and bid for RSCs,” said one industry source, who declined to be identified.
“They will open up the data room for them to look at seismic studies and then the companies will submit a proposal with technical details of how they plan to extract the oil. Petronas will then invite them for a private negotiation to do a deal, and to consider further if there are two or three bids for the same field.”
The hype has begun. Early this month, Petronas said that the Cendor field, operated under a production sharing contract (PSC) by U.K.-listed Petrofac, may hold reserves up to 16 times higher than first expected, after just seven years of drilling.
The field which had previously been abandoned for 30 years, is heading into its third production phase. Cendor’s other stakeholders include Petronas Carigali, Kuwait’s Kufpec and PetroVietnam.
“The efforts undertaken have successfully transformed Cendor from a field deemed marginal to one of the biggest oilfields in Malaysia,” Petronas said in a statement issued on May 2. Output may be hiked to 30,000 barrels per day (bpd) by year end.
Petrofac also has a 50 percent stake in the US$800 million (RM2.4 billion) Berantai gas field, operated jointly with recently merged and expanded SapuraKencana Petroleum (SAKP), the first RSC for a marginal field. SAKP recently said that Berantai may also produce 15 percent above target after drilling 13 of the planned 18 wells. They started producing gas in October last year, analysts said.
A second and third set of marginal oilfields – the Balai cluster as well as the Kapal, Banang and Meranti (KBM) cluster are in the pre-development stage. Company sources said that both are on track and they hope to see production commence in six to 12 months.
The Balai RSC was won by BC Petroleum, a consortium made up of Australia’s Roc, Dialog Group and Carigali in 2011. KBM RSC was the only award last year, to U.S. Coastal Energy with local partner Petra Energy.
“Pre-development work on the Balai Cluster has also given an early indication of an increase in resource estimates,” Petronas said.
When the idea was first raised, a Petronas survey said that 108 fields with 508 million barrels of oil equivalent (boe) may be recovered. A marginal field is usually defined as one which carries less than 30 million boe. Compared to Malaysia’s current total oil and gas reserves of 32.6 billion boe, it’s a small fraction.
So small in fact, that Malaysia’s stable of major oil producers Shell, ExxonMobil, Hess and Murphy Oil have all turned it down. Even Petronas’ own upstream arm Carigali had bigger jobs to do. Compared to the US$8 billion (RM24 billion) that Petronas recently pumped into Australia, Canada and Brazil, mostly for unconventional gas business, developing about 27 marginal oilfields may draw just RM13.3 billion in investments, according to the Economic Transformation Programme notes.
The oil majors meanwhile are pumping some RM20-RM25 billion into deepwater and enhanced oil recovery which promises more bang for the buck. The money would go to improve the oil recovery ratio in Malaysia from 26 percent currently to 40 percent over the next 5-10 years. This will bring it closer to North Sea recovery rates, for example, of 42-45 percent. A recovery ratio of 26 percent means that for every 100 barrels of oil in the ground, only 26 barrels are brought up, while 74 barrels stay buried.
An analyst noted that 60 percent of Petronas’ major producing fields in the country have an average age of 19-28 years. Malaysia’s marginal oilfields in comparison are not expected to last beyond 7-8 years.
With such a low priority in Petronas overall investment portfolio, it is unlikely that the RSCs will be Petronas’ last bid to shore up the local oil and gas industry.
It’s sad but true. Despite a few up and coming players, most of Malaysia’s oil and gas industry are still stuck playing the role of Petronas’ back operations, working at their beck and call. There are over 30 companies providing offshore oil and gas services but many are unable to jostle for jobs outside of Malaysia even after nearly three decades. In comparison, Norway, whose oil industry was actively developed at about the same time as Malaysia, now has over a dozen globally well-known oil service companies.
This is where the RSCs could prove useful, even if it’s controversial. The tuition potential and the political favour that it bestows makes RSCs sought after. One source said that the RSCs’ key strategy is that it attracts skilled oil experts to work in Malaysia, to replace a brain drain of Malaysian engineers who have been siphoned away by Middle East oil producers. Malaysians are sought after in Muslim-majority countries in the Middle East and Central Asia for their ability to adapt to the local culture.
“The RSCs are basically calls to put together an expert team for a short-term project. The five guys you need are a geologist, seismic survey engineer, production manager, reservoir engineer and drill manager … and they don’t come cheap because they are in short supply,” an industry source said.
Petronas previously estimated that oil prices at US$50-US$60 a barrel would make the oil worth extracting under a RSC. But they better move fast as oil prices have mostly averaged above that for the past five to six years. It is anybody’s guess how much longer the prices will stay up. Under an RSC, Petronas takes on all production and oil price risks.
The question of who gets an RSC is also controversial.The Petronas system, instituted since 1974 may also be tested to its limit, sources said. The Petroleum Management Unit which awards the RSC contracts, is under the Petronas board of directors and all are accountable to the Prime Minister.
“You can’t be the policeman and the casino operator at the same time,” said one industry source.
Even before the elections, Petronas president and CEO Shamsul Azhar Abbas had to fend off Malay businessmen from the Malay Economic Action Council (MTEM) who accused Petronas of failing in its mandate to help bumiputera businesses. In his response, Shamsul said that few were qualified to take on an RSC job. MTEM brought their complaints higher to Petronas’ advisor Dr Mahathir Mohamad.
Mokhzani Mahathir
The irony of course is that Mahathir’s own son – Mokhzani Mahathir – has been a main benefactor of Petronas’ spending boom. His investment in Kencana Petroleum since 2001 has paid off handsomely as the company last year merged with SapuraCrest Petroleum to become Malaysia’s top oil and gas integrated service provider. SapuraKencana Petroleum now carries a market cap of RM16 billion. When Mokhzani first listed Kencana Petroleum in 2006, it had a market cap of less than RM200 million.
Do RSCs distort the market and create jealousy? Are they an indirect endorsement of companies that Petronas favours?
RSCs do appear to have sprinkled some companies with gold dust, making it easier for them to raise capital and expand rapidly to take on even more Petronas jobs. It has turned dwarves into giants.
And so, many more companies are now lining up for an RSC despite the upfront investments of RM500 million or more needed to participate. The Malaysian Oil and Gas Services Council (MOGSC) has seen its membership soar exponentially ever since Shamsul unofficially endorsed the organisation as the professional body of choice for Petronas jobs.
According to the Performance Management & Delivery Unit (Pemandu), the oil, gas & energy sector is targeted to more than double the sector’s total gross national income (GNI) contribution from RM110 billion in 2009 to RM241 billion by 2020. The government is prepared to forego RM8.1 billion in revenue from the tax cut, export duty waiver and other tax measures to back marginal oilfields development.
That’s big money and on this plan hangs Prime Minister Najib Abdul Razak’s and the ruling Barisan Nasional’s political future as they must now carry out a promise to share the nation’s wealth after winning what is probably the most money-driven elections in the nation’s history.
Can they do it fairly and in an open manner or will Petronas, a Fortune 500 top global company be drawn into murky business?
Tomorrow: The early RSCs and the rise of SapuraKencana
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