A new game for the billionaire boys club

By Lawrence Yong

In the second part of our series on risk service contracts or RSCs, we track the history of the handful of players chosen by Petronas to exploit Malaysia’s marginal oil fields. We look at the rise of UK-listed Petrofac which won the bulk of the early jobs, follow SapuraCrest and Kencana Petroleum as they grow from small oil service companies to a merged global giant in under 10 years and count how many billionaires are involved in this very lucrative game.

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As global oil prices boomed in 2005, Petronas endeavoured to pump more Malaysian oil and gas into the market. While a slate of deepwater and enhanced oil recovery (EOR) projects were kicked off, this required five-10 years in lead time before production. Marginal oilfields, on the other hand, could start pumping in two years but only with the right expertise.

UK-listed Petrofac was one of the earliest employed to relook at the so-called abandoned shallow water mines. In 2004, Petrofac acquired a 40 percent interest in the Cendor field — previously dubbed Block PM304, located under 70m of water offshore Trengganu — from Amerada Hess.

Under past production-sharing contracts (PSC), some 10 wells were drilled on the PM304 structure surveyed over 30 years ago by ExxonMobil Corp, before Hess took over in 2001. Hess estimated that Cendor held resources of 12 million barrels of oil and labelled it too risky and uneconomical.

As the new operator, Petrofac brought production onstream in record time. Petrofac submitted the field development plan in five months and 16 months later, struck first oil in September 2006.

In 2010, Petrofac was again tasked with fast-tracking oil from Sepat, another marginal field, at the cost of US$280 million (RM840 million). Petrofac became a turnkey contractor and took no ownership role of the 65m-deep field, also offshore Trengganu.

But some industry insiders said that Petronas had at this point shunned proposals from local oil companies who were also interested in the marginal oilfields. “Contractors unlocked the oil but they couldn’t monetize it because oil flow was too low to be commercial without Petronas’ backing,” an industry source said.

Even at optimistic flows of 10,000-15,000 barrels per day, marginal oil would require six months to fill an average-sized two million barrels supertanker, the common vessel carrying oil to top bidders in China, Japan or South Korea. Even building facilities for this would be expensive.

Marginal oil producers had very little marketing power when it came to selling oil until new solutions were thrown up. From 2011, the Najib government stepped in with tax cuts, capital expenditure breaks and export duty waivers while Petronas offered the Risk Service Contract (RSC), which took on all production and price risks. This may be why RSCs can seem favourable to contractors, almost guaranteeing them a 15-20 percent internal rate of return, analysts said.

If marginal fields strike gas, it may be easier to sell into Petronas’ gas supply system. This may also be why the first three marginal fields in recent development were for offshore Terengganu, perhaps looking for new gas supply sources. Petronas was after all subsidising the price for Malaysia’s gas users to the tune of RM15-RM20 billion a year as national electricity prices were ticking upwards.

Who is Petrofac?

Formed in 1991, Petrofac international was started by two Arab engineers –  Ayman Asfari and Maroun Semaan. It had only US$1 million in seed capital but expanded rapidly after winning several jobs in Syria, Oman, Azerbaijan and Algeria and hiring a slate of oil engineers from India. Having started with just an office in Sharjah, UAE, Petrofac now has 31 offices worldwide and more than 17,200 employees. In 2011, Petrofac hired BP’s former head of exploration and production, Andy Inglis and its orderbook grew by 9 percent to US$11.8 billion in 2012. Petrofac’s founder Ayman Asfari had a US$1.9 billion net worth in 2012, according to Forbes.

Earlier this month, Petronas reaffirmed that Cendor held over 200 million barrels, a growth of more than 16 times from when it was discovered.

Among the local companies which backed Petrofac on Cendor, which produced oil using a FPSO was Petronas’ subsidiary Malaysia Marine and Heavy Engineering (MMHE) and SapuraCrest Petroleum. At Sepat, Petrofac was assisted by Bumi Armada, which supplied the mobile offshore production unit (MOPU) and floating storage offloading (FSO) unit, and pre-merger Kencana, which added the processing equipment to the FSO unit, analysts noted.

A pre-merger SapuraCrest Petroleum and Kencana Petroleum would later be chosen as Petrofac’s next partners when it won the first RSC from Petronas in January 2011, to develop the Berantai gas field, in the vicinity of Cendor. The first RSC, worth US$800 million (RM2.4 billion) set the benchmark by striking first gas in less than two years.

The companies, each with a 25 percent stake, signed a deal to develop and operate Berantai jointly with Petrofac, which holds 50 percent equity for a period of eight years. About a year later, in May 2012, SapuraCrest and Kencana merged to become SapuraKencana and fast-forward another year, SapuraKencana Petroleum is now fighting to be the fifth biggest integrated oil and gas services provider in the world, after taking over Seadrill’s tender rig business in a RM8.6 billion deal.

Who are Sapura and Kencana?

SapuraCrest Petroleum has mostly been credited to business graduate Shahril Shamsuddin who drove his father’s ailing technology-driven company into the oil and gas sector from 1997. This showed incredible foresight as oil prices hovered around US$15 at the time as the industry hit a cyclical low after the Organisation of Petroleum Exporting Countries (OPEC) cartel temporarily competed rather than cooperated to export oil.

But the business really took off when in 2003, Sapura bought an established player Crest Petroleum from the troubled Renong group. Backed by Petronas and PSC contract holders — Shell and ExxonMobil — Sapura grew to dominate deep sea pipelaying jobs and transportation of facilities, including rigs to offshore fields. It also started venturing overseas soon after.

In 2011, the company bought Clough’s marine construction and offshore engineering business and expanded operations in Australia, the UK and US.

Interestingly, around 2007, John Fredriksen – owner of Seadrill started taking an interest in SapuraCrest Petroleum. Fredriksen,  a powerful shipping tycoon, was once listed as the richest Norwegian before dropping Norwegian citizenship for a Cypriot passport.

Through Seadrill’s backing, Sapura has been able to penetrate other markets such as Brazil, which now accounts for about a third of its orderbook, almost as much as Malaysia.

As SapuraKencana Petroleum has shown that it can grow to match its teacher Petrofac, some analysts question the rationale for Petronas giving foreign companies priority.

Around the same time as Sapura was growing on Petronas-backed jobs in 2003, Mokhzani Mahathir — the middle son of Malaysia’s longest serving prime minister and Petronas’  advisor —  was looking for something to do after selling off stakes in two failed businesses — precision toolmaker Tongkah Holdings and healthcare group Pantai Holdings. The trained petroleum engineer bought into Hin Loon Engineering, one of the shipyards licensed to work for Petronas. This was around 2001 when oil prices were at US$20 a barrel.

Hin Loon Engineering was incorporated in 1982, before joining the Kencana Petroleum Bhd group in 2005 and changing its name to Kencana HL. Coincidentally, between 2000 and 2005 when Mokhzani invested heavily in Kencana HL, the fortunes of the company started to boom as the jobs rolled in. Chong Hin Loon was listed as the 44th richest Malaysian by Forbes, thanks to his minority stake in fast-rising SapuraKencana Petroleum.

In 2000, Kencana HL began operations in the Lumut Fabrication Yard. By early 2005, the Yard had expanded from an initial size of approximately 11 acres to a total yard area of approximately 53 acres, industry sources said. The yard now spans about 270 acres, making Kencana HL one of the fastest growing fabricators among the six licensed by Petronas.

In 2006, Mokhzani then sold Kencana Petroleum shares to the public to raise RM82 million for working capital and repay debts. He retained a 54 percent stake.

In 2010, less than 10 years after his foray into oil and gas, Kencana Petroleum was offered a 25 percent stake in Berantai, the first RSC. Mokhzani had just officially quit politics when he left UMNO after 22 years in 2008.

Less than six months after winning the first RSC, SapuraCrest Petroleum and Kencana Petroleum proposed a merger, one of the reasons being that Shahril and Mokhzani were long-time friends. Analysts applauded the deal which they said was the perfect fit between a top transportation and installation company with a top marine fabricator. The merger was completed in May last year.

“The company is almost at its full capacity, hence we are not expecting any more projects to contribute substantial earnings  for FY13,” one analyst from a broker research noted in May last year. SapuraKencana Petroleum (SAKP) had an orderbook of RM13.6 billion then. The analyst has since been proven wrong.

SAPK’s orderbook rose a third to RM18.2 billion through the acquisition of Seadrill’s tender rigs just six months later. With new pipe-laying barges leasing contracts from Brazil’s Petrobras on the horizon, analysts expect SAKP may have RM25 billion in jobs from 2015. It is one of the top stock picks among equity analysts post GE13.

For most oil and gas industry stalwarts, exploiting Malaysia’s marginal oil fields may seem like a sideline business. It is almost a fringe sector, drawing interest from only niche companies.

But it is a little surprising how many billionaires are among the early RSC winners. SapuraKencana’s Shahril Shamsuddin and Mokhzani Mahathir, Dialog’s Ngau Boon Keat and Petrofac’s founder Ayman Asfari are just four who have gained substantial wealth from oil contracts. Add to that list Oscar S. Wyatt Jr, who owns Coastal Energy (the winner of a third RSC) and Ananda Krishnan, whose oil and gas vehicle Bumi Armada, was favoured to win a RSC before he sold it. Ananda is Malaysia’s second richest man.

One could perhaps conclude that RSC is certainly not the game for small investors. Either that or one could take the sceptical view that the rich are just simply getting richer, all thanks to Petronas buying back every last drop of Malaysia’s oil and gas.

With RSC details lacking in most cases, how can we even know if Petronas is paying a fair price, and not transferring more of the nation’s hydrocarbon wealth to the coffers of the richest?

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Tomorrow: The second and third RSCs – Dialog and Petra Energy with their foreign partners

Yesterday: Marginal fields fuel oil fever