Thursday 28 Mar 2024
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KUALA LUMPUR: Dialog Group Bhd’s risk service contract (RSC) for the Balai Cluster marginal oilfield project could be facing a setback as Petroliam Nasional Bhd (Petronas) will likely postpone the project’s second phase until crude oil prices go back to at least US$80 per barrel, said industry sources.

The Balai Cluster marginal oil field is part of Petronas’ enhanced oil recovery (EOR) programme to revive flagging production from mature and depleting oil wells. As such, Petronas views it as a costly, non-essential expense.

“The delay could go on until 2016. Petronas expects that is when crude oil [prices] will hit US$80 [per barrel] as shale oil and crude oil prices reach an equilibrium,” said one source.

If the postponement comes through, the Balai Cluster project will become one of the victims of capital expenditure (capex) tightening measures undertaken by the state-owned oil corporation to combat the impact of depressed crude oil prices on its earnings. 

As it is, outgoing Petronas president and group chief executive officer Tan Sri Shamsul Azhar Abbas (pic) had already issued a warning late last year that Petronas would be cutting up to 20% of its capex.

The Edge Financial Daily also learnt that Petronas Carigali Sdn Bhd is now renegotiating its current contracts and is seeking for discounts of up to 30%.

It sent a circular to all its contractors last month informing them of a slowdown in exploration works, said a source familiar with the matter.

Meanwhile, a Dialog (fundamental: 2.1; valuation: 0.7) official, when contacted, declined to comment on the possible delay in the Balai Cluster project’s development phase, saying that the decision lies solely with Petronas.

Dialog yesterday closed four sen or 2.5% higher at RM1.64, giving it a market capitalisation of RM7.9 billion.

Located some 130km northeast of Bintulu, Sarawak, the Balai Cluster project is operated and managed by BC Petroleum Sdn Bhd, a tripartite joint venture among Roc Oil Malaysia (Holdings) Sdn Bhd (with a 48% stake), Dialog (32%) and Petronas Carigali Sdn Bhd (20%). The project comprises a cluster of marginal oil and gas (O&G) fields — namely Balai, Bentara, West Acis and Spaoh.

The 15-year RSC, awarded by Petronas in August 2011, is the second of its kind. Separated into two phases, the Balai Cluster project has undergone its pre-development phase and the development phase or second phase was supposed to take place after the submission of development plans for all the fields.

At the time of the announcement, Dialog said the total cost of the development phase would be between US$650 million and US$700 million.

The development phase’s plans included drilling of additional wells, installation and commissioning of other support facilities.

Last year, Shamsul said Petronas would not award new marginal oilfield contracts until crude oil prices hit US$80 per barrel. O&G service providers of all kinds are already feeling the pinch of the state oil company’s tightening measures as Petronas is also looking to cut costs of all ongoing projects.

“Petronas’ initial forecast also had a higher volume of work. Now contractors will be feeling the brunt of it as not only will they be forced to give lower prices but will also be receiving a substantially lower work order. The smaller ones, especially, will be heavily affected,” said an O&G executive.

With fewer jobs and lower contract values, industry insiders expressed concerns that service players would not be able to sustain the high costs of their operations after crude oil prices have been nearly halved from a peak of US$114 per barrel last year.

At the time of writing, Brent crude was trading at US$59.38 per barrel while the West Texas Intermediate was at US$49.70 per barrel.

“Layoffs have been done, and could continue to happen for a while,” said another executive, adding that contract workers are the ones who are most likely to be the first to go.

Last December, upstream O&G player TH Heavy Engineering Bhd, unable to withstand the current headwinds in the O&G industry amid tumbling crude oil prices, announced that it would be retrenching some redundant staff, but did not say how many. 


The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.

 

This article first appeared in The Edge Financial Daily, on February 25, 2015.

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