Petronas sets the stage

By Jose Barrock

Petronas spending is the main catalyst for the oil and gas sector as billions of ringgit are poured into upstream exploration and downstream processing. Almost all companies in the sector benefit but some more than others.

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If there is one sector that has stood out in 2013 in Malaysia — it is the oil and gas sector. And this is largely due to state-controlled oil major Petroliam Nasional (Petronas).

Until end-October this year Malaysian oil and gas companies had bagged a total of RM24.5 billion worth of jobs, out of which about 64.3% were domestic jobs, data compiled by BIMB Securities indicates.

If annualised this works out to about RM29.4 billion in contracts a year or about RM2.45 billion in jobs awarded every month.

But the reality of the situation is that the market is expecting an award of an additional RM8 to 10 billion in jobs under the Pan Malaysia Transport and Installation contracts anytime now, which means the award figures may be much higher.

Petronas’ RM300 billion capex

To backtrack, in June 2011, Petronas announced that it would be increasing its capital expenditure or capex to RM300 billion for the next five years, which works out to RM60 billion a year — significantly higher than the circa RM35 billion the oil major invested in 2010 and 2011 — which explains the excitement now.

In its annual report for 2012, Petronas said, “We have committed to group capital expenditure spending of around RM300 billion for the next five years, and poor performance would put the company’s cash position and financial standing at risk.”

Petronas for its year ended December 2012, posted net profits of RM49.4 billion on the back of RM291 billion in revenue. In contrast to a year ago, the oil major’s net profits were down 17.2% or from RM59.7 billion.

Nevertheless the effects of the higher capex by Petronas was evident this year.

CIMB Investment Bank’s oil and gas analyst Norziana Mohd Inon said of 2013, “It was a really good year for oil and gas stocks, there was very active news flow, (as) there were so many jobs awarded.”

Some of the larger jobs really changed the landscape of the sector. In May, Petronas and its production sharing contract (PSC) partners awarded some RM10 billion worth of hook-up, construction and commissioning (HUCC) jobs, under the Pan Malaysia umbrella.

While the HUCC players such as Dayang Enterprise Holdings, Petra Energy and SapuraKencana Petroleum directly benefited, the spillover effect positively impacted the industry as well — with the need for other aspects of the spectrum, such as a marine spread and minor fabrication works — kicking in as well.

“Some of these contracts for minor fabrication could be quite large and lucrative as a result of the need for exotic materials that require speciality welding. I’m talking about materials such as titanium… so yes a wide spectrum of the industry benefited from the HUCC jobs,” an industry player said.

Barely six months had passed after the RM10 billion HUCC jobs were awarded and the market scuttlebutt started churning again, this time news of an equally large (RM8 billion to RM10 billion) award in contracts under the umbrella of the Pan Malaysian Transport and Installation (TNI) jobs.

Market talk has it that of the five TNI packages up for grabs, SapuraKencana has secured three, while Puncak Niaga Holdings has won one package, and another is being split between Barakah Offshore Petroleum and Target Energy Sdn Bhd.

The impact of these jobs is likely to be far reaching as well.

Other than the Pan Malaysian jobs, expectations were also high on jobs relating to the exploration of marginal oil fields being awarded this year, but this somehow came to naught.

Marginal oil fields and risk service contracts

Marginal oil fields are basically small fields with reserves of less than 30 million barrels of recoverable oil or oil equivalent. Reports have it that Malaysia has some 106 marginal oil fields containing some 580 million barrels of oil. Petronas has identified between 25 and 27 fields that it plans to develop via risk service contracts (RSCs).

The RSC model strikes a balance between sharing risks with returns for the development and production of discovered marginal fields. Basically Petronas is the project owner, while the contractor is the service provider.

Basically the model is that upfront investments are borne by the contractors, who will be compensated with reimbursement of agreed costs, either after the pre-development phase, or following successful development, where the agreed costs will be reimbursed via the revenue stream and a remuneration fee will be paid for services rendered.

The remuneration fee is based on oil and gas production, as well as key performance indicators being met. Payment to contractors commences upon first production and will be paid throughout the duration of the contract of 15 years.

Among the enticements for RSCs are tax incentives, a reduced tax rate for marginal oilfield development, from 38% to 25%, news reports say.

Since the first award of the Berantai cluster of oil fields in January 2011, which went to Petrofac Ltd and SapuraKencana Petroleum, there have been two awards. The Balai cluster was awarded in August the same year to ROC Oil Company Ltd, Dialog Group and Petronas Carigali Sdn Bhd, while the Kapal, Banang and Meranti cluster was given to Coastal Energy Co, along with Petra Energy.

In January this year Petronas was expected to award a RSC for the Tembikai and Cenang fields to Scomi Group and its partner, Cue Energy Resources Ltd, but did not do so. This happened despite a competitive bidding exercise in 2012.

In May this year, reports had it that Petronas had invited bids to develop 10 marginal oil fields under risk service contract (RSC) terms, of the coast of Sabah, Sarawak and Peninsular Malaysia, but no award has been made as yet.

It is not clear when this award will be made.

This award was the third RSC licensing round in three years, and had drawn interest from small to medium-sized oil and gas independents and foreign oilfield services contractors.

RSC awards next year?

While certain quarters have speculated that Scomi could bag the contract early next year, this could be premature.

It is also noteworthy that in July this year Petronas set up its own unit Vestigo Petroleum Sdn Bhd — (from Petronas’ press release) — “to focus on development and production activities from small, marginal and mature fields in Malaysia and abroad.”

Then in August this year, Vestigo teaming up with SapuraKencana Petroleum were reported to have bid for the Bubu RSC, and were the frontrunners to bag the contract.

It remains to be seen if the remaining RSCs all feature Vestigo as a partner.

Another important event is the recent proposed takeover of Coastal Energy by Spain based Compañía Española de Petróleos, S.A.U. or Cepsa, partnering Strategic Resources (Global), a private investment holding group, linked to well-connected young businessman Low Taek Jho also known as Jho Low.

Cepsa and Strategic Resources are offering C$19 a share for Coastal Energy’s shares or forking out C$2.3 billion or US$2.2 billion.

Jho Low is known to have close ties with the current premier Najib Tun Razak and his family, and advised the premier on many deals involving 1Malaysia Development, a strategic development company, wholly-owned by the Government of Malaysia.

With its expertise and well-connected owners Coastal Energy could be a company to look for as well.

The coming year

In a nutshell, oil and gas companies thrived this year.

Possibly looking to capitalise on the good run, diversified UMW Holdings floated it oil and gas arm, UMW Oil & Gas Corp in early November this year, while Barakah Offshore Petroleum took over the listing status of beleaguered Vastalux Energy, also in early November.

Judging by the general sentiment, the next year could be another cracker for the sector.

“Petronas’ capex program, should keep the excitement going… we are still at the early stage of Petronas’ capex cycle,” CIMB’s Norziana said.

Petronas does not generally disclose its capex program ahead of time, but chances are it could match this years spending.

Over and above the Petronas jobs there are other contracts which may trickle in and add to the excitement surrounding the sector.

In October this year the Nosong Central Processing Platform (CPP) opened up a front end engineering and design (FEED) contract. The three main contenders include France’s Technip partnering Petronas’ Malaysia Marine and Heavy Engineering Holdings, McDermott which is in bed with TH Heavy Engineering, and a partnership of RNZ-SapuraKencana.

Once the FEED portion is sorted out the jobs will morph into engineering procurement, construction, installation and commissioning or EPCIC contracts, likely for a wellhead platform and two pipelines, analysts say, and slated for award by the tail end 2013 or early 2014.

The Baronia CPP and jacket which is part of the huge Baram Delta Oil Field will likely be equipped with gas processing and other such facilities.

According to Alliance Research, the formal tender document for Baronia is expected to be issued by March next year at the latest, leading to the potential award of the EPCIC (engineering, procurement, construction, installation and commissioning) contract in early 2015 and is likely to be an international tender.

Up north in Thailand meanwhile, PTT Exploration and Production or PTTEP is offering an EPCIC contract for up to 11 wellhead platforms for the Arthit field and is likely to call an international tender next year.

In a report Alliance Research said, “It signals that FY14 is going to be another robust year for the local and regional O&G industry, with contract flow focused on EPCC (engineering, procurement, construction and commissioning) and EPCIC type contracts,” Alliance Research said.

Other than the above, Alliance Research’s list of contracts includes West Sepat CPP, Bergading CPP in the North Malay Basin, Ubon CPP in the Malaysia-Thai joint development area, Shell enhanced oil recovery (EOR) in Sabah, Exxon-Mobil EOR, Bertam field by Lundin, and floating production storage and offloading or  FPSO vessel, and projects like Layang by JX Nippon.

Other reports have it that Shell has shortlisted a group of companies, including SapuraKencana for the development of the Bonga Southwest-Aparo project off Nigeria, valued at between US$1billion and US$1.5 billion.

Thus, by the looks of it, 2014 could be another bustling year for oil and gas.

Tomorrow: A game changer in the Pan Malaysian jobs