By Lawrence Yong
In the third part of a series of articles on Petronas’ plans to develop the marginal oil and gas fields in Malaysia through risk service contracts (RSC), we look at the second and third RSC contracts previously handed out to Australia’s Roc Oil Co and Dialog Group as well as Toronto/ UK-listed Coastal Energy and Petra Energy; and try to find winning qualities among companies that Petronas picks for these seemingly lucrative contracts. Apart from perhaps having owners with deep pockets, it is hard to see what these companies share and why they have been placed together.
To drill or not to drill and if so, how many holes? This is probably one of the most pricey and difficult decisions in the business of oil exploration and one reason why accountants and geologists sometimes fight. But under Petronas pay-for-performance-driven risk service contracts (RSC), both can become strange bedfellows. It is hard to fathom how Petronas chooses the partners for its RSC contracts to develop marginal oil and gas fields.
In August 2011, Sarawak’s Balai marginal cluster was awarded as Malaysia’s second RSC contract to a consortium of companies – Australia’s Roc Oil Co (ROC) (48 percent), Dialog (32 percent) and Petronas Carigali (20 percent). The contractor group scored a 15-year Petronas contract worth up to US$950 million (RM2.85 billion) and would explore four marginal shelves – Balai, Bentara, Spaoh and West Acis fields – all about 60 metres underwater.
To do the job, they decided to form a new entity called BC Petroleum Sdn Bhd comprising three directors from ROC, two from Dialog Group and one from Petronas Carigali. Among all the RSC groups so far, Balai’s partners probably give the most regular updates, issuing an announcement for each hole it has drilled, since work began in September 2011.
As one industry source bluntly put it, “ROC is basically a company with a bunch of accountants”.
Andrew Love
As if confirming this, Roc Oil’s website banner declares “we are an oil and gas company with assets across four continents and a 180 strong workforce”. Founded in 1997 as an acquisitions vehicle, ASX-listed ROC is headed by Andrew Love, a fellow of the Institute of Chartered Accountants in Australia who had previously worked for chartered accountants Ferrier Hodgson.The company has a market cap of about Australian $330 million. Besides Petronas, ROC has also won projects from the national oil companies of China and Indonesia.
Perhaps this makes them good partners for Dialog Group, headed by oil veteran Ngau Boon Keat. The almost safe-bet of the Balai RSC would be Dialog’s first upstream venture.
BC Petroleum has made it clear that it is actively chasing more Malaysian marginal field opportunities. In anticipation of more contracts, it has hired 50 people for the Kuala Lumpur office in its first year, an analyst from a local research house noted. “Our cooperation is more permanent in nature,” one source close to Dialog said. “We must prove that we can get the work done. If we can execute well, the jobs will come.”
Dialog offers another view of RSC as simply being work-driven contracts. Some RSCs cover how many wells are to be drilled, by when and how much exactly they should cost and set a timetable for this. Developers will have to pay upfront according to their equity share but get compensated as soon as they strike oil or gas. The developers will then earn a fee to cover the service and infrastructure that they provide to extract the oil with “fair returns” factored in. In addition, the developers will be rewarded with a “performance bonus”, capped at a certain level. At the end of the tenure, the field ownership reverts to Petronas.
With such a calculated risk, BC Petroleum could estimate that they needed US$200-US$250 million (RM600-RM750 million) for the pre-development drilling of Balai and they went to the bank for money. In a rare deal, the banks agreed to finance the business of drilling holes in the ocean floor.
“Together, the Malaysian partners, have secured US$162 million in financing for work on the pre-development phase. The loan is jointly provided by CIMB, Sumitomo Mitsui Banking and Standard Chartered,” ROC said. BC has already spent some of the money on an Early Production Vessel (EPV) unit from Singapore’s Keppel Shipyard.
Ngau Boon Keat
The most high profile person in the Balai RSC venture is probably billionaire and philanthropist Ngau Boon Keat, who was one of the “young turks of Petronas” – a pioneer band who renegotiated Petronas’ benchmark production sharing contract (PSC) in the 1970s, driving a hard bargain to claw back some of Malaysia’s oil wealth from Shell and ExxonMobil, who had been exploring for more than 65 years in Malaysia at that point. It is often cited as the chief reason for Petronas’ current success.
Ngau, a mechanical engineer by training, worked in Mobil Singapore for a few years before joining Petronas from 1975-1980. He co-founded Dialog in 1984, turning the company into a specialist service provider for mainly downstream refineries across Asia.
Besides Balai RSC, the Bursa-listed Dialog is also a favourite among stock pickers post GE13 as it has two other catalytic projects on its books. In November 2012, Dialog and US-based Halliburton formed a 50:50 joint venture, Halliburton Bayan Petroleum, which will provide services required by Petronas to enhance oil recovery (EOR) from Bayan. The estimated value for the EOR project is US$1.2 billion for a term of 24 years.
The other big project is a plan to erect storage and export facilities next to the Petronas-backed RM60 billion refinery and petrochemical integrated development (RAPID) project in Pengerang. Under the RM5 billion plan, Dialog, Netherlands Vopak and the Johor state government would reclaim 500 acres of land to construct five million cubic metres oil and gas storage tanks. The first phase is due to be completed this year.
“Having secured the Pengerang and Balai projects, Dialog is by far the biggest winner of (Najib’s) Economic Transformation Programme,” an analyst with a local investment bank said.
Meanwhile, ROC also shares a past with Petronas in Africa. ROC held a 4 percent stake in the Banda field, offshore Mauritania, which Petronas bought from Australia’s Woodside Petroleum in 2007. Gas was discovered in this field.
For almost a year, after awarding the first two RSC marginal oilfields in 2011, Petronas went silent.
In 2012, only one RSC contract went out. The RSC went to Cayman Islands-incorporated Coastal Energy, a company founded in 2004, which only other experience in Asia is in acquiring several small oil and gas fields in Thailand.
The third RSC was awarded in July 2012 to Coastal Energy, which signed a small-field RSC with Petronas for the development of the Kapal, Banang and Meranti (KBM) cluster of small fields located offshore Terengganu. The contract value has not been officially disclosed.
Sources have said that the contract requires the drilling of 17 wells: 10 wells at Kapal, four at Banang and three at Meranti. Some reports said that Coastal expected to spend US$320 million (RM 960 million) over three years. Two months later, in September, Petra Energy inked an agreement with Coastal to subscribe to a 30 percent stake in the KBM RSC.
Who is Coastal Energy?
On Tuesday, the Toronto Stock Exchange (TSX) and the London AIM-listed company said that its offshore production totalled 20,460 barrels a day, a slight decrease from 21,031 barrels a day a year ago. According to filings to exchanges, for the first quarter of 2013, the company’s net profit stood at US$52 million (RM156 million).
According to financial statements, Coastal has chalked up spendings of US$6.4 million (RM19.2 million) on its KBM RSC. The company said that its total capital expenditure for Q1 2013 rose a third to US$92.84 million, mostly for Thailand and partly for the conversion of jack-up rigs into mobile production units (MOPU), which may be for the RSC.
The Company plans to reach its target of first oil from the Kapal field in Malaysia in Q3 2013, it said. The KBM Cluster fields are located within 20 kilometers of each other at a depth of 60 meters.
Oscar Wyatt
But the next two facts are probably more interesting. Texas oilman and octogenarian billionaire Oscar S. Wyatt Jr owns about 26 percent of Coastal Energy, according to Bloomberg data. The legendary oil trader Wyatt has lived a colourful life and is synonymous with oil politics and payoff scandals in the U.S. In 2007, after fighting various legal battles for years over bad business deals, Oscar pled guilty in a U.S. federal court to illegally sending payments to Iraq under the Oil-for-Food programme, paying millions to extract Iraqi oil and supporting Saddam Hussein’s reign.
Last November, news reports said that Indonesia’s state oil Pertamina has emerged as an interested buyer of Coastal Energy at a price of US$2.6 billion although no deals have been confirmed.
Petra Energy, the local partner of the KBM RSC has an equally fascinating set of backers. They include East Malaysian businessman Bustari Yusoff who controls 27.5 percent equity interest, IGB Corp Bhd-controlled Wah Seong Corp Bhd with 26.9 percent, and Mohamed Nizam Abdul Razak, the brother of Malaysia’s prime minister Najib Abdul Razak, owning a 9.09 percent stake.
Originally part of bigger Petra Perdana Bhd, the company split from its parent after a dispute among shareholders. Bustari Yusoff bought a chunk of the company in 2009, after which Petra’s fortunes sank, and in 2012, Wah Seong Corp. bought another chunk, just before it took on the KBM RSC.
Bustari Yusoff is well-known businessman in Sarawak. He mostly holds private businesses but was an independent non-executive director of Robert Kuok’s PPB Oil Palms Berhad from 1997 until 2002. Kuok is Malaysia’s richest man according to Forbes.
Backed by the RSC award and an expected award from the RM8-RM10 billion Pan Malaysia hookup and commissioning (HUCC) jobs, Bursa-listed Petra Energy’s shares have rallied sharply. Since mid-March, the company’s stock has gained about RM1, or more than 80 percent, to trade within the RM2.20 band.
Petra Energy has an orderbook of about RM400 million but is expected to win over RM2.5 billion of HUCC jobs. To boost its financial position, Petra Energy in April this year concluded a rights issue, which could have raised as much as RM123 million, backing its RSC venture.
By early 2013, when Petronas awarded a fourth RSC for the Tembikai and Chenang cluster and quickly cancelled it, the ETP had started to raise eyebrows among analysts. The fourth RSC supposedly went to Cue Energy and Scomi Group – a company whose substantial shareholders included Kamalludin Badawi, the son of Malaysia’s fifth prime minister.
It is notable that after Petrofac, which won the first RSC through a track record, marginal oil contracts mostly went to companies with a very short oil exploration history, many just launching their maiden ventures in Malaysia. How does Petronas choose RSC developers for its marginal fields? Are they companies with a desperate need for oil assets, backed by owners with deep pockets or just old affiliates of Petronas? All three would appear to be true.
Next : The next set of players bidding for an RSC
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