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The Big Oil & Gas Push

Definition of Marginal Oil Fields

A marginal field is defined as a field that can produce 30 million barrels of oil

equivalent or less. Some of the marginal oil fields have been exploited before. PETRONAS

CEO, Dato Sahmsul Azhar Abbas said if PETRONAS did not take efforts to developmarginal fields and enhance oil recovery the reserves (marginal oil field) could run out in 15

to 18 years. Furthermore, five new tax incentives under the Economic Transformation

Program (ETP) have encouraged the development of these marginal oil fields. They are: 1) an

investment tax allowance up to 60% to 100% of capital expenditure to encourage the

development of capital intensive projects, 2) reducing the tax rate of 38% currently for

marginal oil field development to 25% to improve commercial viability of the development,

3) accelerated capital allowance of up to 5 years from 10 years, where full utilization of

capital cost deduction could improve project viability, 4) qualifying exploration expenditure

transfer between non contiguous petroleum agreements, and 5) waiver of export duty on oil

produced and exported from marginal field development to improve project viability.

Marginal Oil Fields Reserve

Malaysia has 106 marginal oil fields containing 580 million barrels of oil with

PETRONAS having firmed plans to develop 25% of the total marginal oil fields to replenish

its oil reserves and generate new revenue streams. The original production targets for Berantai

field as example are 10,000 barrels per day and 90 million cubic ft of gas per day. Thus,

PETRONAS expects the first oil by year-end, and the first development phase of 18 wells to

be completed by the end of next year.

Marginal Oil Fields Risk

However, such small fields are seen as highly risky and it is difficult to extract oil due

to the geological conditions or the oil quality heavy crude oil or high carbon dioxide

content, for instant. In addition, ECM Libra highlighted that marginal fields were inherently

risky because they did not have the economies of scale that major fields like Tapis have. As

such, relatively high oil prices would be required for these fields to be profitable. While the

weaker players are expected to consolidate to be in a better position to land these big jobs. If a

field is estimated to produce say, 30 million barrels, then development cost would be derived based on that. However, if the field eventually only produces 15 million barrels, the higher

development cost will have to be absorbed by the contractor. Therein lies the risk.

Risk Sharing Contract

Smaller oli fields with smaller reserves aside, some PSC contractors are relinquishing

their gas fileds because it is not viable for them to extract gas under the present terms of the

contract. For the development of the margianl fields, the capital base is too small. Taking too

many small field to cover high capital expenses will be too complex to manage for big oil

company such as Shell. Small project like marginal oil fields would have very little impact in

growing the value of their capital. Thus, new Risk Sharing Contract was introduced to attractthe contractors. RSC is that the consortium does not own the reserves; the client does. The

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client tells contractors how much oil and gas they think is available in the field, the timeline

needed for it to be developed at a given production rate and how much they will be able topay the contractor from the oil and gas that are produced. On top of that, if the contractor do it

all according to the plan, PERONAS will pay them a better margin than they would normallyget from a usual contract.

Benefits to Local Company

Since the local oil and gas service providers cannot become exploration and

production (E&P) players, local service providers could become D&P players. Therefore,

Petronas hopes that the sharing of know-how with local players will help the latter venture

into development of marginal oil fields overseas. In this new RSC, the bid is made to foreign

companies, who will then have to find local partners to form a consortium, so there is atransfer of technology in the process. There is a huge learning opportunity for the local

companies but they have to be serious players. Compared to 30 years ago, local players todayhave acquired the expertise to execute 60%-70% of works in the life cycle of an oil field,

thanks to Petronas that has done well in developing the locals to execute work in the oil andgas industry.

Latest Contract Awarded

Petrofac is, so far, the key foreign party in the development of these fields as they have

managed the first marginal field, Cendor Phase 1, since 2007. Latest for ths year, the first

RSC was awarded to a consortium formed by Kencana Petroleum Bhd, SapuraCrest

Petroleum Bhd and Petrofac Energy Developments Sdn Bhd (PED) in January to develop and

produce petroleum resources in Berantai over a nine-year period starting from Jan 31 thisyear. The joint operating agreement will be 50% owned and led by PED, part of the London-

listed Petrofac Ltd group of companies, while Kencana's wholly-owned Kencana Energy SdnBhd and SapuraCrest's wholly-owned Sapura Energy Ventures Sdn Bhd would each hold a

25% interest.