RISK SERVICE CONTRACTS (RSCs) were expected to boost the share prices of oil and gas players when Petroliam Nasional Bhd (Petronas) first started the development of  marginal oilfields. For some reason, companies wanted to be associated with RSC.

But that isn’t the case now after the meltdown in crude oil prices. Few companies would want to be involved in marginal oilfield development, which won’t be viable at current price levels.

At a media briefing on Petronas’ quarterly earnings last Friday, executive vice-president and CEO of upstream Datuk Wee Yiaw Hin commented that all the RSCs are “constantly under review” He pointed out that the viability of RSC projects is based on an average crude oil price of US$80 per barrel.

Last week, there were reports that Petronas may postpone the second phase of the development of the Balai Cluster — a RSC awarded to a consortium consisting of Dialog Bhd (32%), Roc Oil Malaysia (Holdings) Sdn Bhd (48%) and Petronas Carigali Sdn Bhd (20%) in 2011.

This has sparked speculation as to whether other RSCs would be affected. Petronas has so far awarded five of them.

Nonetheless, according to industry players, Petronas has not given any indication that it would shelve the other RSCs.

“As far as I know, all the other RSCs are still proceeding as planned. Most of the structures are already in place and there has also been no indication that Petronas may halt production,” says an industry executive.

Market talk is that the shelving of the Balai Cluster could be because the production level isn’t up to expectation. Soft crude prices offer a good reason to halt drilling.

Dialog’s officials were unable to shed light on the matter at the time of writing.

In terms of production, it is learnt that the Kapal, Banang and Meranti (KBM) fields have been the top performers to date. The field is under the RSC awarded to Coastal Energy KBM Sdn Bhd, a joint venture between Coastal Energy Co (70%) and Petra Energy Bhd (30%), in July 2012. The eight-year RSC saw first oil in December 2013 in the Kapal field.

The Banang and Meranti oilfields are scheduled to be operational by the end of 2014 and 2019, respectively. The development cost until 2014 was estimated at US$320 million.

It was previously reported that initial production rates in the cluster could reach a peak of 13,000 barrels per day. As at early last year, KBM was said to be producing 30,000 barrels of oil equivalent a day.

An industry player notes that the current capex (capital expenditure) of the KBM consortium is below what it had budgeted. The consortium is expecting to recover its capex by the third quarter of this year.

The terms and conditions for each RSC vary.

The industry executive stresses that while crude oil prices are the main factor that determine the viability of a marginal field, geological conditions also have a bearing.

“At US$60 per barrel, some of the RSC fields are still able to produce and recover expenditure, especially those located in shallow waters where the cost of production could be about US$30 to US$40 per barrel,” he says.

Generally, most, if not all, of the risk in developing marginal oilfields is borne by Petronas, which reimburses the firms’ capex. This is a carrot that the national oil firm dangles to get  companies to participate in such greenfield projects.

Consequently, the consortiums undertaking RSCs should have minimal risks.

Another oil and gas player points out that should Petronas put a halt to other RSCs that are already producing oil, it would have to compensate the contractors and operators the capex promised.

“Whatever the oil price level, the revenue from oil producton will be first used to pay off opex (operating expenditure), followed by capex. It is just that RSC players will need a longer time to recover their capex at the current low oil prices,” he explains.  

“Even if any of the RSCs are halted, it will not impact the companies’ earnings much anyway and will not put them in a bad cash position. Petronas guarantees remuneration and capex compensation and these companies also have strong order books to sustain them over the next few years,” he adds.

The first RSC — for the Berantai field — was awarded in January 2011 to a joint venture between SapuraKencana Petroleum Bhd (SKPB) (50%) and Petrofac Energy Developments Sdn Bhd (50%). The seven-year RM2.56 billion RSC was brought on stream in October 2012.

The most recent RSC, for the development of the Ophir oilfield, was awarded to Scomi Energy Services Bhd (30%), Octanex Pte Ltd (50%) and Vestigo Petroleum Sdn Bhd (20%). The seven-year contract has an estimated development cost of US$135 million and first oil is expected to be produced 18 months after the award of the contract.

Uzma Bhd (30%) and EQ Petroleum Developments Malaysia Sdn Bhd (70%) were awarded a nine-year RSC for the development and production of the Tanjong Baram small field located offshore Sarawak in March last year. The cost to develop the filed is estimated at US$100 million and first oil production is expected in the second quarter of this year.

Of the five RSCs, only that of SKPB has started contributing to the group’s revenue  — in the fourth quarter of 2014. The group saw revenue of RM1.88 billion for the financial quarter ended Jan 31, 2014,  compared to  RM1.95 billion for the same period last year. Its quarterly net profit balooned to RM333.23 million from RM123.89 million in the previous year.

Uzma is expected to see contributions from its RSC in FY2015 while Dialog’s Balai Cluster is expected to start contributing in FY2017.

This article first appeared in The Edge Malaysia Weekly, on March 2 - 8, 2015.

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