PETRONAS Needs to Tell More To Dispel Suspicion

PETRONAS Needs to Tell More To Dispel Suspicion


A QUESTION OF BUSINESS

By P. GUNASEGARAM

More relevant info from the national oil company will help dispel suspicion.

THE question of whether the national oil corporation, Petronas, is giving away too much to local oil field services company in the exploitation of marginal oil and gas fields can only be answered if Petronas reveals much more than what it already has.

On our part, we can only raise some of the burning questions surrounding the emergence, for the first time, of other Malaysian companies besides Petronas, effectively as joint venture partners in the mining of oil and gas in the country.

The new arrangement that Petronas has come up with for marginal oil fields, those which have less than 30 million barrels of oil equivalent (BOE), is called a risk service contract or RSC against the previous production sharing contract (PSC).

First, the PSC. After Petronas was set up to own and manage all the country’s oil and gas resources on behalf of the Government in 1974, it negotiated with the oil majors who eventually became Petronas’ contractors under PSCs.

Under these, a certain proportion of oil produced was deducted as costs of exploration and exploitation once oil was found and the remainder was shared between Petronas and the oil majors on an agreed proportion depending on oil prices. That proportion is at least 80% in favour of Petronas, going up to 90% or higher as the oil price rose.

Conceptually, this is a scheme which is easy to understand and has since been emulated by countries around the world in their dealings with the oil companies. Basically, the oil companies do the exploration. If they hit oil, they get to recover their costs and the remainder of the oil is shared on an agreed proportion.

Petronas bears hardly any risk as the owner of the concession, basically merely sharing profits with someone who has the expertise and the capital to extract the oil.

It is different with the marginal oil fields. Here, no exploration is needed but oil majors are not interested in recovering this oil because it is not economical enough for them although there are specialised companies which engage in this activity. What is reasonably certain is there is oil. The question is how to extract it.

For reasons it has not fully explained, Petronas is now putting the emphasis on local operations instead of building upon its overseas operations which account for 45% of total revenue and some 37% of total production. Petronas does not say how much profit comes from overseas though.

As part of this new emphasis to concentrate on the domestic sector, it has embarked on a programme to develop marginal fields involving some 106 fields and 580 million BOEs. It has also stated its intention of getting foreign oil companies to partner with local oil field services companies to extract oil (and gas) from the marginal fields.

It says that this is to help develop local expertise so that they become sort of oil explorers and extractors in their own right and are able to compete in the international market place for contracts. Some 15 local companies are reported to be involved in oil field services currently.

However, it is difficult to see how any of the local companies will become internationally competitive even with this leg up. That they became successful in the first place as oil field service providers was because of Petronas’ insistence that the oil majors used local companies. Even if their services were more expensive, Petronas, as the owner of the concession eventually bore this cost.

However, extraction is a different business altogether and even if we call the relevant fields marginal ones, there is still a lot of money to be made and the amount increases as oil prices rise. There is a lot of expertise involved and those who extract marginal oil are not going to be sharing their expertise readily with local partners they are forced to take.

At 580 million BOE, and using an oil price of US$80 per barrel, the oil is worth nearly RM140bil! Thus, it is important to ensure that Petronas does not lose out in this and extracts the best deal for itself.

The method it is employing is the RSC but it does not give sufficient details about the RSC to independently determine whether it is a fair arrangement. It says that the model strikes a balance in “sharing of risks with fair returns” for development and production of discovered marginal fields.

It adds that it shares risks as the project owners while contractors receive a “reasonable return with limited upside” while it says key performance indicators or KPIs will be in place with incentives or penalties triggered depending on performance.

However, there is no disclosure of what is a reasonable rate of return for the project or the KPI, or the kind of risk that contractors undertake because they are paid a service fee. Can the contractors share in the upside with no evidence of downside sharing? How much of a free ride are our local oil service companies getting in such a deal?

Let’s look at the first such contract. Petronas has awarded this to Petrofac Energy Developments Sdn Bhd, Kencana Energy Sdn Bhd and Sapura Energy Ventures Sdn Bhd for the development and production of the Berantai field, offshore Peninsular Malaysia.

Under the terms of the contract Petrofac with a 50% equity interest will be the operator of the field. The two local partners, Kencana and Sapura, will own the remaining 50% interest on an equal basis.

“The RSC model strikes a balance in sharing of risks with fair returns for development and production of already discovered fields. In this arrangement, Petronas remains the project owner while contractors are the service provider. Upfront capital investment will be contributed by the contractors who will receive payment commencing from first production and throughout the duration of the contract,” Petronas said.

“The new arrangement facilitates direct participation of Malaysian companies in the country’s upstream oil and gas activities, in line with Petronas’ efforts to leverage on their existing capacity while fast-tracking their capability in development and production in a structured manner,” it added.

There was nothing more material than that from Petronas’ official statement.

In separate announcements, Sapura Crest and Kencana Petroleum, because they are listed companies, announced that the total development costs would be US$800mil which meant each of them had to raise US$200mil. That is a huge amount for these relatively small companies which are still among the larger oil players in the country.

While they are scrambling to raise the funds for this, it is by no means certain that they will acquire expertise in extracting oil from marginal fields as their partners will be committing commercial suicide if they just passed this knowledge on to them.

The question is, are Kencana and Sapura, and the others who follow them, merely equity partners who provide some amount of oil field services? If that is so, why could not Petronas itself have become an equity partner? After all it has the funds and more capability and capacity than all the oil field companies put together.

Petronas has to remain cognisant that it is the guardian and keeper of the nation’s oil and gas wealth and it needs to guard that position jealously against both foreign as well as local companies so that maximum benefit is obtained by the Malaysian public from its oil and gas wealth.

Any other agenda is secondary to that. The only way to have done this without raising any controversy is for Petronas to have set up a subsidiary to undertake production from marginal oil fields, in the same way that it set up Petronas Carigali for its exploration activities.

Then this subsidiary can enter into joint ventures with the various world-renowned names who are engaged in exploiting oil from marginal wells and after many years, it would have gained enough expertise and size to venture out into the world much the way that Petronas itself has for oil exploration.

The RSC with its explicit agenda of promoting local companies will do just that probably at the cost of Petronas itself because international companies can be expected to extract concessions for the profits they forego to local companies, who will be too small and too diverse to ever become a force internationally.

If Petronas still insists that this arrangement is best, than it has to reveal all. As a national oil corporation, the more transparent it becomes, the more the public will see its workings and the less suspicions it will have. Let’s see if the numbers are forthcoming.

Managing Editor P Gunasegaram believes that one major oil company – Petronas – is enough for Malaysia.

Saturday February 26, 2011

Petrofac explains key performance indicators

IN an e-mail response to StarBizWeek, London-listed Petrofac Ltd group of companies elaborates on the key performance indicators (KPIs) used under the risk-service contract (RSC) for the Berantai marginal oil field development.

Petrofac says that the Berantai partners' investment and services will be repaid and remunerated from the production revenues by way of a fixed entitlement, subject to ongoing variation based on KPIs.

“The level of the entitlement will be based on certain agreed KPIs as at first gas and finally determined at project completion. The signing of this first RSC where such risks are significantly mitigated for the contractor, thereby enabling delivery of a lower cost solution, is an important achievement for Petronas and the Malaysian oil and gas industry.”

The partners will begin recovery of their investment from first gas and remuneration from project completion within a year from first gas.

“The partners' entitlement is to be satisfied by an agreed share of the field's production revenue and the remuneration element will be determined according to the delivery against four KPIs up to project completion and one ongoing KPI based on performance.”

As at project completion, the remuneration will be determined based on actual capital expenditure spent against control budget, timing of first gas, actual project completion date and sustained gas delivery measured at a point after project completion.

“These KPIs will result in an aggregate positive or negative variation to the expected base case return. Thereafter, our performance against an agreed operational efficiency factor will either enhance or reduce our annual financial entitlement.”

The company says the first RSC to be signed in Malaysia marks a major milestone for all parties involved and its skills include subsurface, drilling, engineering, project delivery, operations and overall our commercial and asset management expertise.

“Our intention is to repeat this commercial model within and outside of Malaysia for other development opportunities. The Berantai field, in addition to the recent award of the Sepat early production system, will enable us to grow our offshore engineering capability in the Far East, leveraging our existing knowledge on the Cendor field and furthering our relationship with Petronas.”

Petrofac says Malaysia is a very interesting market for it due to the country's many undeveloped fields, which require relatively low-cost/fast-track solutions in order to be developed.

“These represent important reserves for Malaysia and we see an opportunity to unlock their reserve potential using low-cost, innovative development solutions. Together with Petronas, we have enjoyed the benefits of the successful Cendor field development, where we executed an unconventional fast-track oil field development in 16 months, and continue to operate the field to the highest standards.”