Thailand,

Malaysia,

Singapore

& Brunei

a special report from Oil and Gas Investorand Global Business Reports

THE ASIA-PACIFIC ENERGY SECTOR:

The following report looks at one of the most dynamicareas of economic activity in the world—the Asia-Pa-cific region, specifically southeast Asia’s tiger

economies: Malaysia, Thailand, Singapore and Brunei. Italso casts glances at the vast energy issues facing China, theirmighty northern neighbor.

The area witnesses spiraling demand, huge infrastructuralprojects, a frenzy of exploration activity and a plethora of op-portunity.

A cursory glance at world history will reveal that mostcountries in the region were under the yoke of Britain as acolonizer during the 19th and 20th centuries and/or underJapanese occupation between the 1930s and the end ofWorld War II.

Britain’s colonial expansion required stable supply lines.The British purchased the island of Singapore in 1824,which rapidly developed into an important shipping hub.The opening of the Suez Canal in 1869, and the steamship—a technological revolution of the time—assured Singapore’scontinued prosperity.

The defeat of Japan at the end of the second World Warguaranteed a continuation of British presence, maybe even a

prolongation thereof. From the many protectorates thatBritain then formed, federations emerged. The federation ofMalaysia gained independence in 1948. Singapore broke

Dancing with Tigers

June 2004 ▪ Oil and Gas Investor AP-3

This special report was prepared byLondon-based Global Business Reports. Authorsare Ryan Ayache (ryan@gbreports.com) andEmmanuelle Berthamet (emma@gbreports.com),energy reporters for Global Business Reports.

To complete the picture, Oil and Gas Investor willpublish Global Business Reports’ Asia-Pacific: II,which will focus on the hydrocarbon issues fac-ing the southern Pacific basin, specifically Aus-tralia and Indonesia.

THE ASIA-PACIFIC ENERGY SECTOR: AN OVERVIEW

The Asia-Pacific region of Malaysia, Thailand, Singapore and Brunei present new investmentopportunities in the hydrocarbon industry.

About the Cover: Bongkot, Thailand’s largest gas field,contains reserves estimated at 4.5 trillion cubic feet. It isoperated by state-owned PTT.

NOTE: All dollar figures in this special report are U.S.

The Bongkot gas field production facilities in the Gulf of Thailand.

away from the federation and became arepublic in 1965. Brunei acquired fullindependence from Britain in 1984.Most legal structures in the region bearthe unmistakable print of British pres-ence.

American presence also has to beconsidered, with diplomatic exchanges

between the U.S. and Siam (Thailand)beginning in 1833. Siam was already anold country by any standard, havingbeen established around the 13th cen-tury. By the middle of the 1800s, Siamhad forged commercial and diplomaticties with most Western powers.

Some have argued that this is why itwas never colonized. After World WarII, communist revolutions broke out inVietnam, Laos and Cambodia. As a re-sult, Thailand maintained very close re-lations with the U.S., and the U.S. hasinvested much to protect Thailand as astrategic partner in the region.

The great ethnic and religious diver-sity found in the region pre-dates thishistory by hundreds (if not thousands)of years of immigration, trade and com-merce between the various local com-munities and empires. Studies haveshown that modern-day Thailand was acenter of metallurgic trade and manu-facture as early as 4000 BC. MoslemArabs ruled Malacca in the 15th cen-tury, and traded there with the Indiansand the Chinese. Then came the Por-tuguese, followed by the Dutch, andthen the British. Recent history hasmerely crystallized borders.

The Asian oil industry dates from theearly 20th century. Discoveries werefirst made in Malaysia and Brunei, andthen, much later, in Thailand. Singa-

pore has maintained its obvious geo-graphic advantage, and developed astrong refining capacity to accommo-date crude oil imports.

Today, Singapore is the second busi-est port in the world. Thailand,Malaysia and Brunei enjoy combinedreserves estimated at more than 7 bil-

lion barrels of oil and 102.1 trillioncubic feet of gas. Commerce and tradeare yet again shaping a new course forthe region.

The rise and fall of the TigersIn 1967, the foreign ministers of In-

donesia, Malaysia, the Philippines, Sin-gapore and Thailand signed into lifethe Association of Southeast Asian Na-tions (ASEAN). This association’sprincipal aim is to promote cooperationin all fields—economic, social, culturaland educational—and to foster andpromote regional growth and stability.

The founding document reflects “thecollective will of the nations of South-east Asia to bind themselves togetherin friendship and cooperation and,through joint effort and sacrifices, se-cure for their peoples and for posteritythe blessings of peace, freedom andprosperity.”

Economic cooperation and diversifi-cation gained momentum in the 1980s.Economies moved from traditionaltrades such as tin and rubber to themanufacture of textiles, machinery,electronic goods, electrical appliances,cars, chemicals, pharmaceuticals andmore. The countries of the ASEANblock became known as the AsianTigers, a term used to highlight theirfierce economic growth. Thailand’s

economy averaged nearly 10% growthper year until 1996, as did Singaporeand Malaysia.

Yet all was not well.Excessive spending by governments,

coupled with financial speculation andpoorly managed lending by banks,wreaked havoc on the regionaleconomies. Investors and lenders pulledthe plug. Whereas capital inflow toAsian countries had reached around6.3% of their gross domestic product(GDP) in 1995, capital outflow was5.2% of their GDP by 1998.

The Asian financial crisis was in fulleffect.

On the road to recoveryStructural reforms and tighter regula-

tory frameworks in the banking sectorhave been good medicine. The surge inglobal economic activity in 1999 and2000 also contributed to the health ofASEAN economies. By 2002, Thai-land’s economy was again growing at asolid annualized rate of 6.6%.

Singapore is now America’s 11th-largest trading partner, recently over-taking Brazil. Malaysia is the world’s18th-largest net exporter, and on thefast track to the next economicparadigm shift, the “knowledge soci-ety.”

Brunei has also been moving to di-versify its economy, and is planning toattract US$6.7 billion of foreign directinvestment (FDI) within four years.The ASEAN group has doubled in size.Literacy in Brunei, Malaysia, Thailandand Singapore average more than 90%.

The effect of the SARS virus on re-gional economies has turned out to besmaller than previously expected. TheAsian Development Bank (ADB) re-cently announced that regional growthreached an annualized rate of 5.6% inthe second half of 2003, and is expectedto be around 6.3% in 2004.

The rise of China’s economy in thelast few years also bodes well for theeconomies of the ASEAN block. “Theemergence of China is driving funda-mental changes in the way people dobusiness in the region,” says John Perry,chief executive officer, the Brunei Eco-nomic Development Board.

Many opportunities and challengeslie ahead for regional economies. Thekey opportunity is China’s energyneeds, which have risen by leaps andbounds during the past five years.China’s energy demands are now sec-ond only to those of the U.S. Even themost conservative estimates lead to theinevitable conclusion that China will

AP-4 Oil and Gas Investor ▪ June 2004

Thailand produces only about 20% of its energy requirements, which makes it crucially dependenton oil imports from neighboring Malaysia, and more recently, from Myanmar.

be the biggest energy consumer by2020. Southeast Asia is uniquely posi-tioned to take advantage of this oppor-tunity.

Moreover, the robust economic fore-casts also point to a likely increase inregional energy consumption. Thailand,Malaysia, Singapore and Brunei have acombined population of more than 100million. Sustained economic growth—combined with ever-improving educa-tional opportunities, expandingindustry and infrastructure, and higherstandards of living—mean that the re-gion’s own energy requirements willneed to be increasingly coordinated.

As shipments of crude from the Mid-dle East are set to increase, greater re-fining and processing capacity will haveto be built. In turn, this will benefit thedevelopment of peripheral industries,such as petrochemicals. In sum, theprospects for energy investors are excel-lent for the years to come.

Strategic challengesThailand, Malaysia, Singapore and

Brunei each have unique strategic as-sets. Be they natural resources or geog-raphy, a distinct pattern is emerging:strategic planning based on hydrocar-

bon resources. Prepare for a massive up-surge in activity with excellentprospects for investors. Here are the keyissues to look for:

Malaysia expects to run out of oilwithin 20 years. Brunei has put a ceil-ing on its production levels in an effortto maximize its production period.Production of mature fields hasreached marginal recovery in Thai-land, and a lot of money is being spenttrying to increase the profitability ofthese operations. New technology andnew ventures are going to make thedifference.

Recent offshore discoveries suggesthuge potential. But the terrain is noto-riously difficult, and territorial claimsoverlap in crucial areas. Resolution ofthese issues and investment in E&P ac-tivity could mark a second dawn for theentire industry.

Investment in infrastructure has beenextensive throughout the region: LNGplants and trains, pipelines, refineries,and shipyards. National companies andservice companies are redrawing themap of large-scale projects. Investorsand partners will be needed.

The Malacca Straits pose securityconcerns, which can be addressed byinvesting in the right place. Thailandand Brunei are cooking up a storm ofinvestment opportunities with plans toalter the traditional supply lines fromthe Middle East to China and the FarEast.

Take a look at what 21st centurysupply lines will look like.

The articles that follow, made up ofextensive interviews and research inthe region, examine these issues in de-tail and portray one of the most excit-ing and rapidly developing areas ofdevelopment in the hydrocarbons in-dustry. �

Prepare for a massive

upsurge in activity with

excellent prospects for

investors.

June 2004 ▪ Oil and Gas Investor AP-5

HYRDOCARBON RESOURCES

Malaysia undeniably enjoys the greatest hydrocarbonresources—some 4.5 billion barrels of oil and nearly90 trillion cubic feet (Tcf) of gas—in measurement

against those of Thailand, Singapore and Brunei.The government plays a pivotal role in the exploitation of

these resources through the national oil company, Petronas,which was bequeathed ownership off all the country’s hydro-carbon resources through the Petroleum Development Act of1974. Any company wishing to exploit Malaysia’s resourcesmust do so in partnership with Petronas, normally through aproduction-sharing contract (PSC).

Shell and ExxonMobil have for a long time largely domi-nated production, though recent years have seen a consider-

able number of new entrants join the foray and more than 60PSCs have been signed to date.

The scale of production and the success of these PSCshave allowed Petronas to evolve from its indigenous begin-nings into a world-class player, with operations as far asSudan and Equatorial Guinea.

Despite the fact that the only major discoveries of oil stilllikely are to be found in deep water, such as that in theKikeh Field announced in 2003 by Murphy Oil, Petronas re-mains confident that $16 billion of new investment will beforthcoming during the next five years in both upstream anddownstream developments.

Petronas (through its operating arm, Petronas Carigali),

Exxon and Shell dominate the E&P sector. Malaysia’s oilproduction has been relatively stable in recent years, fluctu-ating between 650,000 barrels per day and 730,000 between1996 and mid-2003. In 2002, daily production averaged675,973 barrels. That figure has risen to 693,781 for the firstnine months of 2003 to which another 90,000 barrels per dayof condensate output can be added.

There are four principal areas of activity: offshore Peninsu-lar Malaysia, offshore Sarawak, offshore Sabah on the north-west side of Kalimantan Island, and in theMalaysia-Thailand Joint Development Area (MTJDA) inthe Gulf of Thailand.

ExxonMobil Exploration & Production Malaysia Inc.(EMEPMI) is by far the largest oil producer in Malaysia andsupplies two-thirds of Peninsular Malaysia’s natural gas out-put—at 1.3 billion cubic feet per day—and 44% of its oilproduction—approximately 280,000 barrels per day.

EMEPMI operates seven fields near the peninsula, andone-third of its production comes from the Seligi Field offthe coast of Terengganu. The company has also begun pro-duction from Larut Field, which is expected to yield 140,000barrels per day, going a long way in postponing inevitable de-clines in the company’s production.

In February 2003, EMEPMI began the first gas production

Who Has WhatMalaysia, Brunei and Thailand enjoy varying levels of hydrocarbon resources.

Khun Prasert, president of PTT Thailand, aims to increase the country’sdomestic production of energy supply.

Despite the dominance of Petronas,

Exxon and Shell, several other operators are

involved in Malaysia.

June 2004 ▪ Oil and Gas Investor AP-9

from Bintang Field, 220 kilometers off-shore Terengganu, on the east coast ofPeninsular Malaysia. It is expected toproduce about 1 Tcf of gas with a peakproduction rate of 355 million cubicfeet per day. Gas from the two Bintangplatforms—A and B—will flow via 11kilometers of new pipelines to Lawit Afor processing, and then to shore via ex-isting pipelines.

Bintang is the second field to be de-veloped under a gas PSC, a 50-50 jointventure of ExxonMobil, operator, andPetronas Carigali.

Most of Shell’s operations are off thecoast of East Malaysia (Sarawak andSabah on the island of Borneo). Thecompany has more than a century ofhistory in the country, beginning whenit first traded at local ports in the early1890s.

Shell’s key operations are focused inthree main sectors: exploration andproduction; oil products, which com-prises manufacturing, marketing anddistribution; and gas. Shell’s currentMalaysian oil and liquids production isapproximately 228,000 barrels per dayand gas production is approximately

426,000 barrels of oil equivalent perday.

The company invested about $265million in oil and gas E&P projects in2002. Shell will focus its efforts on con-tinued exploration drilling in deepwaterblocks E and G, offshore Sarawak andSabah, respectively and plans to drilladditional production wells at its SouthFurious Field, where it has so far locatedreserves of 5- to 6 Tcf of gas. The com-pany hired Houston-based AtwoodOceanics Inc. to drill five shallow-waterwells with an option to drill five addi-tional wells.

Throughout its tenure in Malaysia,Shell has pioneered advances in localextraction and export methods. Onenotable achievement is the introduc-tion of the single-buoy mooring (SBM)system in 1960. The SBM system,which eliminates the need for deepwa-ter harbor facilities, was later adaptedand used throughout the world.

“Thailand has manystrategic assets.”Khun Prasert,PTT Thailand

AP-10 Oil and Gas Investor ▪ June 2004

Atwood Oceanics Inc. has drilled shallow-water wells for Shell offshore Malaysia.

Shell is also a shareholder inMalaysia’s three liquefied natural gas(LNG) plants in Bintulu, Sarawak:MLNG (onstream in 1993), MLNG-2(onstream in 1995) and MLNG-3 (on-stream in 2003).

Despite the dominance of Petronas,Exxon and Shell, several other opera-tors are involved in Malaysia. Threenew operators—Amerada Hess, Talis-man and Murphy Oil—entered themarket in 1998 by signing PSCs. Thiswas the goal of Petronas when, in themid-1990s, it devised a flexible PSC, toattract more investors to smaller fields.The firm also loosened terms for allPSCs in 1997. In January 1999, MurphyOil signed three PSCs as an operator.

BruneiBrunei also enjoys considerable hy-

drocarbon assets. As of July 2003,proven reserves are estimated at 1.35billion barrels of oil and 14 Tcf of gas.Production of oil is deliberately main-tained at around 210,000 barrels perday, in an effort to extend the life of thefields and improve recovery rates. Pro-duction of gas was about 340 billioncubic feet (Bcf) in 2001.

There are four fields onshore Bruneiand seven offshore. The giant onshoreSeria Field, where the country’s first dis-covery was made in 1929, produced itsmillionth barrel in 1991.

Some 90% of the country’s hydrocar-bons, however, are found in just twofields: Champion, which accounts forapproximately 40% of known reserves,and South West Ampa, which holdsroughly half of Brunei’s reserves. Bothof these fields are offshore, at depths ofabout 30 meters.

The remaining 10% is divided be-tween five offshore fields, the most sig-nificant of which is Magpie, producing10,000 barrels per day.

Brunei Shell Petroleum (BSP), a 50-50 joint venture of Brunei and Shell,has traditionally been the country’s soleoperator and producer. BSP also ownsand operates the country’s sole refinery,and supplies Brunei Liquefied NaturalGas (BLNG), itself a joint venture ofShell, Mitsubishi and Brunei.

Furthermore, BSP also ships LNGthrough another joint venture, BruneiShell Tankers. Export markets includeJapan, which consumes 90% of Brunei’sproduction, and South Korea. Brunei isthe world’s fourth-largest exporter ofLNG.

Mark Carne, BSP managing director,sees “the relationship extending longinto the future.”

June 2004 ▪ Oil and Gas Investor AP-11

ThailandThailand’s resources are compara-

tively more modest. Proven oil reservesare around 551.5 million barrels of oil,with production reaching more than193,000 barrels per day in 2002. Natu-ral gas reserves are estimated at around13.3 Tcf.

The majority of these resources areoffshore, in the Gulf of Thailand. Outof 37 producing fields comprising 43blocks, 21 fields are offshore (26blocks) and 16 are onshore (17 blocks).These fields are divided into 33 conces-sions among several operators, includ-ing Unocal, Chevron, Amerada Hessand the E&P arm of Thailand’s na-tional oil company, PTT.

Pending new discoveries, most re-serves are held in three fields: Pailin,Arthit and Bongkot. Unocal operatesthe first of these, while PTT E&P is theoperator of the other two.

The oil and gas industry in Thailandis dominated by state-owned PTT. Thisrelatively young company, which cele-brated its 25th anniversary in 2003, hasgrown from humble beginnings intoThailand’s most valuable company.PTT has acquired a good reputation for

sound business practices and solid man-agement. Though it remains focused onthe domestic market, PTT has a grow-ing international presence throughPTT E&P.

Thailand produces only about 20%of its energy requirements, whichmakes it crucially dependent on oilimports from neighboring Malaysia,and more recently, from Myanmar,which has been exporting some natu-ral gas. Khun Prasert, president of PTTThailand, says, “PTT is in healthyshape. We are Thailand’s largest com-pany by market capitalization. We dothings on a different scale thanPetronas, but we have managed to bevery successful. We have excellent rela-tionships with other operators. We wel-come partnerships and inviteinternational companies to participate

in the development in the Thai market.“We expect the economic growth to

remain buoyant, so the idea is to focuson our domestic market by using natu-ral gas to power electricity demand. Wemay then use some of the profits to ex-pand abroad, but for the time being weremain extremely focused on our do-mestic market.

“Thailand has many strategic assets.Our economy is strong, our people areskilled, and our government is stronglycommitted to strategic energy-relatedventures.”

The company’s international expan-sion is done through PTT E&P. “Omanis one of our exciting new ventures, andwe are currently in discussions with theAlgerian government for some work ontheir LNG fields. We also have agree-ments with Myanmar and Malaysia.”�

…Petronas remains confident that $16 billion ofnew investment will be forthcoming during the next fiveyears in both upstream and downstream developments.

AP-12 Oil and Gas Investor ▪ June 2004

The producing fields of Malaysia, Brunei and Thailandshare one unpleasant commonality: they are mostly ei-ther mature or maturing, and require increasing expen-

diture and care to produce profitably. Malaysia’s state-owned Petronas Carigali and foreign oper-

ators in the region face a challenge in their goal to maintainMalaysian oil output at at least 600,000 to 630,000 barrelsper day. This requires them to find substantial new reserves,yet recent experience shows that the majority of new re-serves are coming from incremental growth in existing fields,while virgin oil discoveries are becoming smaller andsmaller. Deepwater exploration is likely to play a large partin the future of the upstream industry in Malaysia.

In Brunei, Champion Field already has 260 wells, drilledfrom 40 platforms. South West Ampa Field has 212 wells.Fairley Field has close to 50 wells, while Magpie has 32 andcounting. The Petroleum Economist estimates an annual ex-penditure of $300 million is necessary to merely maintaincurrent levels of production.

The situation is analogous in Thailand, where Unocalalone operates more than 100 platforms in the Gulf of Thai-land. Given the diversity of concessions and operators, onecan guess the number of wells in the Gulf to be significant.

Randy Howard, president of Unocal Thailand, says, “Wespend about $400 million a year just to upgrade and maintainwellheads.”

The reason is quite simple. As fields mature, new pockets

need to be explored, requiring new wells to be dug routinely.Some pockets are difficult to access, and require specific an-gles of drilling. This tends to mean expensive wellheads. Yetmany reservoirs are believed to hold substantial reserves.Marginal recovery costs therefore provide somewhat of adilemma.

While the overall situation is not dramatic, it is certainlycostly. One can argue that, second to sound geological assess-ment, new technologies are the single most important vari-able for the profitability of these mature fields. Necessity

being the mother of invention, new tech-nologies have benefited greatly from this cost-conscious stateof affairs.

A good example is found in Brunei, where Brunei ShellPetroleum (BSP) was the first company to build a “snake-head” well. This special well is five kilometers long, and lit-erally “snakes” its way through the numerous pockets of alarge field. This project was a veritable engineering feat, andwhile presumably rather costly, it is certainly cheaper thandrilling five new wells.

Moreover, this new design allows excellent operationalfreedom—each pocket can be operated individually or to-gether in any combination.

Unocal has gone so far as to create its own joint venture tosecure new, cost-efficient technology. Enter CUEL, the newgeneration of service provider that is likely to cause profoundchanges in this segment of the industry.

CUEL calls itself a “new breed of professional serviceprovider.” This new company was created in an effort to ad-dress the thorny issue of cost-efficient marginal recovery. Itsraison d’etre is low development cost per barrel of oil equiva-lent (BOE) and that will be good news to most operators inthe region and beyond.

Created in 2000 by Unocal and Unithai, a Thai conglom-erate which owns and operates Thailand’s largest shipyard,CUEL has unique experience in designing platforms that areaimed at marginal recoveries. But its edge comes from strate-gic alliances with suppliers and subcontractors, and these en-able it to keep costs low. Aligning the strategic overlaps andinterests of designers, suppliers and subcontractors, CUELboasts total control of supply-chain management.

This is a more targeted approach: it reduces the ambiguous

TECHNOLOGY

Recovery EconomicsNew technology is the answer to maturing fields and marginal recovery in theAsian Pacific.

Michael Cvetanovic,chief executive ofindependent PacificTiger, says, “We liketo tell our story onresults. Each well wehave drilled hasproduced, sometimesmarginally, but it hasproduced.”

“We spend about $400 million ayear just to upgrade and maintainwellheads.” Randy Howard, Unocal Thailand

June 2004 ▪ Oil and Gas Investor AP-13

pricing methods dear to suppliers andsubcontractors, and any unnecessaryoutsourcing, which can frequently re-sult in delays and a lack of flexibility.

CUEL’s approach is expected to yieldenormous benefits to customers, andpotentially to their host government,insofar as low development costs willenable operators to commercialize oiland gas fields that would previouslyhave been considered unprofitable.

Effectively, from an operator’s pointof view, this approach can also help todiversify a portfolio, thus diversifyingthe risk approach. Yet beyond its tech-nical and visionary qualities, CUEL’slocal solution may be brought to aglobal issue, enabling Southeast Asia topotentially export its know-how, and intime, to enrich Western counterpartsby applying the lessons learned.

The access to low-cost developmentis also key in ensuring that indepen-dents continue to drill where others donot and that majors stick around whenreserves diminish beyond what would

have been deemed too little some yearsago.

The integrated construction andmanagement team of the UCU Al-liance has carried out the design, pro-curement, fabrication and installationof wellhead platforms, submarinepipelines and offshore facilities, for Un-ocal’s fields in the Gulf of Thailand.

Deeper waterAs the potential for further signifi-

cant offshore discoveries diminishes inshallow waters, operators are looking atdeeper waters off the coast of Sabah forthe next generation of upstream pro-duction. Murphy Oil’s recent discoveryat Kikeh in August 2002 at a depth of1,400 meters with estimated oil reservesof 400- to 700 million barrels has pro-vided added incentive.

Its significance is huge, boostingMalaysia’s estimated reserves by 7% to4.54 billion barrels. Murphy Oil hassince signed further production-sharingcontracts (PSCs) in neighboring blocks

L and M where it hopes to replicate itssuccess.

Deepwater drilling is a new and chal-lenging development for the region, butbrings opportunities that may rejuve-nate the entire area.

That Murphy Oil made a significantdiscovery in many ways confirmed whatmany geologists had been suspecting forsome time: that the deep waters of theSouth China Sea present appealingE&P prospects.

Deepwater drilling, however, pre-sents many challenges, not least ofwhich is the climate in this particularregion. Tropical storms, monsoons andscorching heat take turns to punish theintrepid. Commercial ships dare notpass these routes for several months ofthe year. But the Kikeh Field is proofthat the risks are well worth the trou-ble.

Geophysical appraisals and seismicsurveys are being carried out with re-newed fervor, both onshore and off-shore. As we shall see, a number ofindependents have stepped up their ac-tivities during the past few years in aneffort to focus on previously disregardedbasins. Many of these companies aremade up primarily of geologists withvast experience, who are united in theirbelief that this region offers very realprospects.

Another indication of the highhopes for new discoveries is the recentacquisition (2002) of a license for E&Poffshore Brunei by Total, in conjunc-tion with BHP Billiton and AmeradaHess. The lease concerns Block J,which is immediately adjacent to theKikeh Field.

But the hottest basins are also themost contested: parts of Kikeh Fieldcould well be in Brunei’s waters, osten-sibly included in what is known as theBrunei Exclusive Economic Zone(EEZ), which stretches 200 nauticalmiles from the coast of Brunei.

Unfortunately, Total was forced tostop its activities in 2003 after Malaysiasent warships to dislodge them.Malaysia and Brunei are currently in-volved in high-level negotiations to re-solve the matter, both parties beingacutely aware that political skirmishestend to be extremely costly when itcomes to oil.

Students of recent economic historywill point out that Association ofSoutheast Asian Nations (ASEAN)members have a good track record forsettling territorial disputes and workingin tandem to resolve matters equitably.

A case in point is the joint develop-

AP-14 Oil and Gas Investor ▪ June 2004

Combining large and small wells, Canada-based Pacific Tiger Energy Inc. has 49 million barrels ofreserves in Thailand.

ment area (JDA) between Malaysia andThailand. Placed under a special jointauthority in 1991, the site (which holdssubstantial natural gas basins) has be-come the theater of considerable in-vestments by both Malaysia-ownedPetronas and Thailand-owned PTT.Natural gas is expected to be producedas of 2005. Malaysia has hinted that asimilar scheme may be desirable to set-tle the contested offshore area withBrunei.

While it is clear that Malaysia enjoysgreater reserves than Brunei, the lattermay be more eager to break newground. Its economy is highly depen-dent on oil and gas revenues, and newdiscoveries would certainly bring a wel-come extension to the vast annual in-come Brunei derives from itshydrocarbon exports.

Moreover, the hitherto conspicuouslack of a national oil company is being

remedied: Sultan Hassan Bolkiahsigned a law creating a national oilcompany in 2001, which signals a cer-tain amount of confidence in the yet-to-be found reserves. And even if thecontested Block J area presents themost immediate prospects, one shouldnot rule out other areas.

Mark Carne, BSP managing director,thinks Brunei presents a lot of explo-ration opportunities. This bodes wellfor everybody. But most of all, it bodeswell for independents and new ven-tures, for whom a potential discoveryneed not equal hundreds of millions ofbarrels to be deemed successful.

Southeast Asia is fertile ground for anew breed of independents. The eco-nomic climate is sound and investorsare once again looking for overseas op-portunities.

This new breed of independent com-pany tends to be headed by geologistsand other industry veterans who havespent many years in the region withsome of the major companies. They areunited in their confidence that the re-gion has yet to bear significant finds.Clearly, the Kikeh discovery has fo-cused attention on deepwater potentialand rekindled investor interest. But in-

dependents are working the entire re-gion, and onshore basins have also at-tracted renewed scrutiny. In Malaysia,for instance, Talisman and AmeradaHess are challenging the majors.

Talisman Malaysia Ltd. is one ofCanada’s largest independent oil andgas producers. Talisman began operat-ing in Malaysia through the acquisitionof Lundin Malaysia Ltd. and is currentlythe operator of the PM-3 CAA produc-tion-sharing contract and the PM-305contract offshore the eastern coast ofPeninsular Malaysia.

PM-3 CAA is the largest petroleumdevelopment undertaken by a Cana-dian company in Asia, extracting oiland gas from six different offshore fieldslocated throughout a 1,350-square-kilo-meter area in the overlapping zone be-tween Malaysia and Vietnam.

With the completion of PM-3 CAAdevelopment in Malaysia and Vietnam

in 2003, on schedule and on budget,production from the region is expectedto quadruple in 2004. Current produc-tion in the region is approximately40,000 BOE.

Amerada HessThe entry of Amerada Hess into

Malaysia occurred in 1998, when newPSCs were signed for two blocks. Inpartnership with Petronas Carigali,Amerada Hess holds operatorships inblocks SK 306 (80%) and PM 304(70%). Both blocks contain oil and gasdiscoveries with established oil reserves.The firm has an initial five-year explo-ration period for the blocks.

What prompted Amerada Hess to getinvolved in Malaysia was the company’sidentification of Southeast Asia as agrowth area. The firm already had of-fices in Bangkok and Jakarta, as well asproduction in Thailand and Indonesia.What also helped the company decideto enter Malaysia was the depth of in-formation available on both blocks.

Michael Hugues, Amerada Hessgeneral manager, says, “As a new en-trant and a medium-size company, weare looking for rewarding opportunities.Actually, we are quite happy, for in-

stance, to drill for 10- to 20 millionBOE, while big companies cannot do it,as it doesn’t impact their bottom line.”

Pacific TigerSmall independent E&P company

Pacific Tiger Energy Inc., a Canadianpublicly listed company that is cur-rently headquartered in Singapore, isactive in north-central Thailand.

Michael Cvetanovic, chief executive,says, “We like to tell our story on re-sults. Each well we have drilled has pro-duced, sometimes marginally, but it hasproduced. We think that maybe someof the old maps weren’t correct, andeach well has provided us with more in-formation.”

Apparently that extra informationhas been correct: independent auditingfirm Gaffney, Cline & Associates (Sin-gapore) has recently upgraded PacificTiger’s audited proved, probable andpossible reserves by 25 million barrels.Of that, 4 million were added after thelatest drilling round. In less than 10years of activity, Pacific Tiger has ac-quired proved reserves of 1.17 millionbarrels, and has a total audited estimateof 49.1 million barrels of reserves.

While much has been made of off-shore potential, Pacific Tiger has goodreasons to focus on its SW-1 onshoreconcession. This acreage is found in ageological province known as thePhatchubun Basin. It is one of thelargest petroliferous basins in Thailand,and as Cvetanovic believes it is perhapsthe least explored, with a mere well per800 square kilometers. He says, “We’reexcited about our work, and excitedabout the future. This is a greatacreage.”

Pacific Tiger has recently begun todrill horizontal wells. This approach hasconfirmed that the basin contains“stacked” reservoirs, and is a further in-dication that the Pacific Tiger team wascorrect in its basic assumption—thatprior understanding of this dynamicbasin was incorrect.

Says Cvetanovic, “We realized thatwe had to drill differently, and wehave really changed our approach todrilling. Now we are drilling horizontalwells.”

By changing its approach, PacificTiger has intersected a huge amount ofoil pay—400 meters and 90 meters onthe two most recent wells.

“I think we have a huge competitiveadvantage in Thailand. We have excel-lent relationships with local communi-ties, and government support, and wewill be applying for further licenses.” �

June 2004 ▪ Oil and Gas Investor AP-15

“…We are quite happy…to drill for 10- to 20 millionbarrels…while big companies cannot do it, as it doesn’timpact their bottom line.”Michael Hugues, Amerada Hess

CRESTCRESTPETROLEUM

assetmanagement

offshoredrilling

automation

maintenance

power

marine

CREST PETROLEUM BHD(Company No. 45631-D)

No.7, Jalan Tasik,The Mines Resort City,43000 Seri Kembangan,Selangor, Malaysia.Tel:603-89497000Fax:603-89497773www.crest.com.my

a member of the Sapura Group ofCompanies

quoted on the Kuala Lumpur StockExchange

integrated services contracting

(KLSE Stock Code: 8575,Bloomberg Code: CRES MK)

CREST

Self Erecting Tender Rigs

Integrated Services ContractingProject Mangement

Light Industrial Turbine MaintenanceHeavy Industrial Turbine Component RepairThird Generation Coatings

Plant MaintenanceApplication of Surface CoatingsSurface Preparation Using Ultra High Presure WaterWell MaintenanceCommissioning Services

SCADA / DCSRetail Business SolutionsMaintenance Management Systems

Remote Operated Vehicle ServicesOffshore Hook-up & CommissioningDiving & Diving Support Vessels Accommodation Barges / WorkboatsOffshore Installation & ContructionSurvey & Offshore Geotechnical

AP-18 Oil and Gas Investor ▪ June 2004

Liquefied natural gas (LNG) has been a rising star in theenergy world. Unstable oil prices, rising concerns aboutthe durability of world oil reserves, and environmental

issues have encouraged a drive towards energy diversifica-tion.

Coal, nuclear power, hydroelectric power and LNG havebeen tried and tested variously. But LNG has proved farmore attractive than other alternatives because it is highlyefficient and has wide-ranging applications. It is also be-lieved to be environmentally friendly.

Japan has played a pivotal role in the growth of the LNGindustry worldwide. Possessing no natural resources of itsown and having to cope with massive energy demands, Japanimports the entirety of its energy requirements. SoutheastAsia has been its key supplier of LNG for more than 30years, and has amply proved its worth as a reliable and effi-cient supplier. The regional LNG industry provides excellentlong-term prospects. Bold projects and new infrastructure arethe order of the day.

In the Asia-Pacific region, 40% of gas reserves are inMalaysia and Indonesia, followed by 10.2% in China. Interms of production, Indonesia accounted for 23.8%, fol-lowed by Malaysia (18.5%) and Australia (11.7%). Thesecountries export natural gas, mainly in the form of LNG. Interms of consumption, Japan ranks first, accounting for

23.9%, followed by Indonesia (11.3%) and Malaysia (9.8%).Malaysia is the world’s third-largest exporter of LNG, after

Algeria and Indonesia, with gas reserves estimated to be 89trillion cubic feet (Tcf), which could last up to 43 years.Three LNG plants are in close proximity at in Bintulu,Sarawak. Natural gas is supplied to the plants from the fieldsoffshore and Malaysia’s state-owned Petronas maintains thecontrolling interest of each. The three plants combined rep-resent the largest integrated LNG capacity in the world witha capacity of 22.7 million metric tonnes per year.

Brunei’s LNG industry also provides appealing prospects.Brunei is Southeast Asia’s third producer of LNG, behindIndonesia and Malaysia. It is the world’s fourth exporter. Re-serves are estimated at 13.8 Tcf, with production reaching366 billion cubic feet in 2002. Brunei is also hoping thatnew exploration and development will yield significant gasdiscoveries, potentially as much as 7 Tcf.

Brunei’s gas is piped from major producing fields to theBrunei LNG plant, where it is separated and liquefied. Thisplant, located near the country’s border with Malaysia’sSarawak province, has been operating for some threedecades. It was the first LNG plant in Southeast Asia.

Plans are currently under way to upgrade much of the fa-cility and to expand train capacity. This is in view of in-creasing exports to Japan and South Korea. Exports to Japan

LIQUEFIED NATURAL GAS

Natural Gas ExportsSoutheast Asia hopes to provide supply to growing demand for liquefied natural gas.

The LNG business keeps ports and shipyards throughout Southeast Asia busy.

Malaysia is the

world’s third-

largest exporter of

LNG, after Algeria

and Indonesia….

and South Korea operate under 20-yearcontracts, which were recently re-newed. 2003 also saw a few spot sales,notably to the U.S.

If that were not enough, Brunei isplanning to use LNG as the key for itsdiversification strategy. The Bruneieconomy is highly dependent on hydro-carbon revenues, which make up 40%of its gross domestic product (GDP).Using LNG as its engine, Brunei isseeking to develop a massive industrialinfrastructure in a bid to diversify rev-enues and create jobs.

The Brunei Economic DevelopmentBoard (BEDB) has instigated a two-pronged strategy to attract investments,both of which are based on the coun-try’s LNG industry. The first part is tobuild industrial capacity that can bepowered with LNG. Alcoa, the world’slargest aluminum-maker, has alreadysigned a memorandum of understandingwith Brunei to build an aluminumsmelter.

A British company is pursuing plansto build a massive rubber-recyclingplant. In both instances, the availabilityof LNG is a key requirement for suc-cess.

The second part of the strategy aims

to build a port on a small island about akilometer from Brunei. This island’smain appeal is that it enjoys waterdepths of about 20 meters immediatelyoff its coast. This compares with depthsof about 14 meters in Singapore.

The planned increase in LNG capac-ity and the consequent rise in exportsamount to good rationale for building aspecialized LNG port. Add to that anew generation of LNG carriers, largerand heavier, and an increase in globalLNG exports. Pending sufficient invest-ment, this new port could well becomethe new major servicing point for theentire LNG-carrier fleet in the Asia-Pa-cific region.

Thailand also enjoys considerable gasreserves, estimated at around 13.3 Tcf,with an additional 9 Tcf classified asprobable. LNG is not used commer-cially in Thailand. The country hasadopted a massive energy-diversifica-tion program to cope with rising energydemands, chiefly due to strong eco-nomic growth.

Until the authorities decide other-wise, Thailand-owned PTT will be thesole buyer of natural gas, and it will sellit only to generate power for the coun-try’s 60 million inhabitants. �

June 2004 ▪ Oil and Gas Investor AP-19

Gas produced from Bongkot Field offshoreThailand is not converted into LNG; instead, it isbrought ashore and used to generate electricity.

Malaysia’s service industry has risen to the challengeof providing world-class service to the sizable do-mestic market. It has matured and may now be look-

ing to expand in the entire region. From the outset, the development of the Malaysian oil

and gas support service companies has been linked to the ex-pansion of state-owned Petronas. Continuing its drive to in-crease local participation in the oil and gas sector, thecompany was dedicated to building a strong support base tohelp it in its role in assuring the country’s energy supply. Thesuccess of Petronas, now a worldwide player, has thus beenmirrored by the world-class development of Malaysian ser-vice companies.

The oil and gas sector is set to emerge as the new keydriver of the Malaysian economy this decade. The sector isthe largest taxpayer and the biggest hard-currency earner. By2007, contributions are expected to reach 21.7% of federalrevenue.

Moreover, the sector is the largest recipient of direct in-vestment. In 2002, approved investments by the MalaysianIndustrial Development Authority (MIDA) in the electricaland electronics (E&E) sector and petroleum products totaled4.9 billion Malaysian ringgits and 5.7 billion, respectively.Including exploration and production (E&P) investments,the oil and gas sector has outshined E&E as the country’slargest recipient of direct investments.

According to Thong & Kay Hian Securities, in the nextfew years, spending on oil and gas will exceed that on infras-tructure. E&P spending alone reached more than 10 billionringgits in 2003. Based on the Eighth Malaysia Plan, thegovernment only has 6 billion ringgits a year to spend on in-frastructure projects. The oil and gas sector is set to replace

construction as the epicenter of large contracts.Finally, the value-add of the mining and quarrying sector

(mostly oil and gas) is more than six times that of E&E, eventhough its contribution to gross domestic product (GDP) isonly 9.4%. Every additional 2.5-billion-ringgit investment inthe oil and gas sector can potentially add 0.5% to GDPgrowth.

Undoubtedly, Petronas has played a key strategic role infueling the development of a solid supply chain to the off-shore oil industry.

Petronas has endeavored to get as many local companiesas possible to assist in the development of the country’s oiland gas resources. The strategy is certainly an old formula.The plan, which consisted of insisting that foreign operatorsput local content in their production activities associated tothe “revenue over cost” concept (R/C production-sharingcontract), smacks of protectionism, but has ensured thatlocal companies benefit from predictable and viable streamsof orders and are favored partners in joint ventures.

To favor effective local participation in the oil and gas in-dustry, Petronas has adopted an integrated approach. Thisinvolves favoring indigenous companies when awarding con-tracts and licenses and implementing a vendor-developmentprogram (VDP), which is an affirmative action program forthe Bumiputra (the indigenous race of Malaysia, as opposedto citizens of Chinese and Indian origin).

To encourage foreign investment and technology transfer,the Malaysian government offered tax-incentives and otherfinancial motivations.

Herein lays a paradox. Sorraya Denney, managing director

of Amsito Oilwell Services, a medium-size Bumiputra servicecompany, says, “If Petronas wants to go on moving up thevalue chain, which in our case means improving the qualityof services, there is a real need for further competition on thelocal market, as well as on the international level. Interna-tional competition is the best way to benchmark ourselves.”

Local companies are asking for independence as a way toimprove their competitiveness. This suggests that the indus-try has matured to a point where it is now willing and able tostand on its own feet, and is ready to emerge from theshadow of Petronas.

Besides Petronas’ national strategy, another initiative isthe Cost Reduction Alliance (Coral) which was imple-

SERVICE SECTOR

The New Services

AP-20 Oil and Gas Investor ▪ June 2004

Southeast Asia’s homegrown oil-service sector is evolving into international markets.

Tan Sri Hamdan, chief executive officer of Ranhill Berhad Malaysia,presides over a firm whose engineering and related services qualify it asan “engineering supermarket.”

“We are constantly chasingacquisition opportunities in order tocomplete our range of services.”Kamarulzaman Omar, Ranhill

mented by the Malaysian petro-leum industry in 1994 to meet thechallenges of low oil prices and ris-ing operating costs. Together,Petronas, E&P companies andlocal services companies decided towork together in the definition ofbest practices and established aforum and guidelines to ensure thatthey are met across the board.

Petronas and its production-sharing contractors (PCSB, Shelland EPMI) embarked on the firstphase, identifying three main costcenters: fabrication, drilling, andprocurement and contracting.

Coral managed to cut costs inthe industry by an estimated $342million (1.3 billion ringgits) over aperiod of five years. The lateststring of achievements by Coralwas the recent announcement of theon-schedule completion of a drillingand riser platform for the ANGSI-Aproject. A 27% savings from the origi-nal estimated cost was achieved with65% of the work undertaken by localcontractors.

Coral’s success during the First Wavewas built around major issues affectingthe production-sharing contractors, fo-cusing mainly on cost-reduction efforts.Now in the Next Wave (2001-05),Coral aims to ride on this success andstrives to bring the service industry fur-ther into the fold.

The ambition for the industry is toattain competitiveness, “everywhereand anywhere.” The Next Wave in-tends to promote business opportunitiesthrough value creation by reducingfinding-to-production costs, increasingproduction/recovery of identified oilfields, accelerating cost-recovery timesand enhancing service-sector competi-tiveness.

Today, Malaysia-based service opera-tors range from engineering firms tofully integrated service companies. 2003was marked by significant merger andacquisition activity among key players,mainly because Petronas’ VDP helpedsmall and midsized enterprises (SMEs),consequently fragmenting the market.

The consolidation movement willallow the players the critical mass to ex-pand regionally and internationally,which is the aim of many of the largercompanies.

Petronas has again played a key role.First, local operators, as subcontractors,have been able to build strong domesticpositions. Second, by venturing intonumerous overseas contracts, Petronashas set the example and led the way.

Moreover, Petronas actually startedto benchmark Malaysian service com-panies by including them in its overseasactivity. This gave them the opportu-nity not only to build a reputation butalso to demonstrate their competitive-ness on an international level.

As an engineering contractor, theRanhill Group services a multitude ofindustries. Originally, it provided onlymechanical and electrical engineeringdesign services as an engineering part-nership formed by the Australian engi-neering concern, Rankine & Hill.Malaysian operations were establishedin July 1981 and rapidly a completerange of engineering capabilities wereattained and ownership became fullyMalaysian.

“Ranhill stands for excellence notjust as engineers and constructors witha growing international presence, butalso as the owners and developers of oiland gas facilities,” says Tan Sri Ham-dan, Ranhill Berhad Malaysia chief ex-ecutive.

The initial development of a broadengineering base had allowed Ranhillto offer a comprehensive range of ser-vices so as to be regarded an “engineer-ing supermarket.” Full turnkeycapability was achieved in 1985.

Kamarulzaman Omar, Ranhill execu-tive director, says, “The oil and gas in-dustry has become an importantcontributor to Ranhill’s earnings. Thissector covers both upstream and down-stream activities. We are constantlychasing acquisition opportunities inorder to complete our range of services.Moreover, we are competing and bid-ding for jobs not only here but also inPakistan and the Middle East.”

Another company now entering the

global arena is Crest Petroleum, al-ready one of the largest local oil andgas well drilling and marine construc-tion contractors in Malaysia. CrestPetroleum is involved in marine in-stallation and construction, offshoredrilling and marine services. Thanksto its latest acquisition, the SapuraGroup, Crest Petroleum’s servicesnow include not only oil and gas rigmanagement, but also offshore plat-forms and pipelines installation.

Datuk Shahril Shamsuddin, thefirm’s executive vice chairman, adds,“Where previously we had a divisionof resources and a duplication of ef-forts, we now have better economiesof scale, increased flexibility and focuson resource allocation as well as thean ability to provide our clients with agreater degree of integrated services.”With an impressive 40% market

share in Southeast Asia, Crest, the onlyMalaysian-owned company with off-shore drilling assets, offers excellent op-tions for investors looking for exposurein companies involved in deep-sea oiland gas exploration and production.

Following in Crest’s wake, Malaysianplatform fabricators have evolved to apoint where they are also touting theirservices to foreign markets. NickWalker, general manager of TalismanEnergy, stresses, “Local fabricators havethe yards, the facilities and the designcapabilities that we require. Malaysiaoffers very highly skilled workers in theoil and gas industry and price-wise, theregion is very attractive. As a conse-quence, we outsource most of our plat-form fabrication jobs locally.”

One company that should not bemissed by investors is Malaysia’s Dialoggroup. As the name makes clear, thiscompany’s trademark is its client focus.The numbers almost speak forthemselves: Dialog has achieved anaverage ROE of 32% during the past sixyears, and an annual compoundedprofitability rate of 27% in the sameperiod. Clearly they have been doingsomething right.

Dialog was created in 1984, focusingon oil and gas and petrochemicals. Thisfull-service engineering firm has sincethen expanded its capabilities toengineering, procurement, commissionand construction (EPCC), offshoreconstruction, plant maintenance andtankage facility, among other services.It has offices in Singapore, Thailandand Indonesia, and it is headquarteredin Kuala Lumpur.

Ngau Boon Keat, co-founder andchairman of Dialog, says, “When

June 2004 ▪ Oil and Gas Investor AP-21

Singapore-based Keppel Fels has built some 60% of thejack-up rigs on order in the last decade.

someone is sick, he can go to the hospital to find the rightspecialist. It is the same at the Dialog group. Here you willfind the right specialized department for each of your needs.”

The concept may sound benign, but Keat’s track recordmakes it credible. Dialog has the full confidence of Malaysia’sinvestor community, being a component of the Kuala Lumpurstock exchange composite index. Under Keat’s newmanagement and service principles, the Dialog group aims toincrease its capabilities, either through acquisitions or organicgrowth.

SingaporeMalaysia’s service industry provides an interesting contrast

with Singapore’s. Singapore has been the traditional servicedestination of choice for the oil industry in the South ChinaSea. Strong engineering, offshore know-how, and famed effi-ciency have contributed towards building a vibrant serviceindustry.

But things are not what they once were. The 1997-98 financial crisis has had a severe impact on

Singapore’s economy, particularly on engineering firms andshipyards. The crisis caused a general downturn in the oil andgas industry, to which Singapore was particularly sensitive.Moreover, the market was already showing signs of saturationby 1997, with several firms working similar niches, such asoffshore engineering and shipyard repairs and upgrades.

Competition became intense for the few lucrative con-tracts for a market marked by efficient, though high-cost, ser-vices. The effects have been clear: declining revenues andrising costs have meant that few firms have managed to staytruly competitive.

Competition from neighboring Malaysia has been hurtingSingapore’s service industry. Though its port and shipyardsare still a qualitative advantage, Malaysian labor is farcheaper, and where once stood a wide gap in engineeringknow-how, now only a marginal difference exists.

Engineering and service firms now face a simple, yet brutal,dilemma: expand or die. This is especially true for midsizecompanies, whose revenue base is not diverse enough to with-stand expansion. Consortiums have been formed in an effortto export services more successfully, but have shown littlesuccess so far.

Every generalization must come with exceptions. In thiscase, the exception is a big one. Keppel Fels, a Singaporeanservice company is a global powerhouse. The world leader inthe building and designing of jack-up rigs, it has built about60% of the jack-up rigs on order in the last decade. The com-pany is also the world leader in the conversion of FPSOs(floating production, storage and offloading vessels) andFSOs, being capable of the widest range of repairs and con-versions imaginable.

In addition to its technical expertise, Keppel is one of onlya few Singaporean companies with a truly global reach. C.B.Choo, Keppel chief executive, says, “Our market is not Singa-pore, our market is international. We want to be where ourcustomers are, where our customers need us to be. We believein a near-market/near-customer approach.”

Offices can be found in the U.S., Brazil, the Netherlands,Norway, Bulgaria, Azerbaijan, China, Vietnam and Australia.Altogether, 16 yards and 10 representative offices supplementan enormous headquarters and shipyard in Singapore.

Keppel has invested a considerable share of its profits intoresearch and development (R&D), ensuring that it maintainsa cutting edge of technology and design. “I think improvingyour R&D and improving your execution is very important.With new technologies, we can reduce the number of steps,cutting both costs and man hours. This saves a lot of time anda lot of money, and helps our workers to be more productive,”Choo says.

Keppel further expanded the scope of its activities in 2000by acquiring a majority stake in the country’s largest refinery,Singapore Petroleum. Choo says, “You have to maximize yourearning potential from the core. When the core is unstable,you go to adjacencies.”

He adds, “Getting to know your customers’ business is veryimportant.” �

AP-22 Oil and Gas Investor ▪ June 2004

Vessels are converted into floating production, storage and offloading(FPSO) facilities in Singapore.

Singapore’s location near the MalaccaStraits has made it the most impor-tant shipping hub in Asia, alongside

Hong Kong. The Malacca Straits link theIndian Ocean and the Pacific Ocean. Oth-erwise put, it links major oil-producingcountries from the Middle East with themajor oil-consuming markets of the FarEast.

Southeast Asia’s rapid industrializationand economic development during thepast 20 years have resulted in vast in-creases in energy consumption. Singaporehas therefore been a key transit point forglobal oil trade.

The Port of Singapore is the world’sbusiest in terms of tonnage, and consti-tutes the heart of the country’s economicwell being. The country has, until now,managed to leverage economic advantagesinherent in its geography with great suc-cess. Industries such as electronic compo-nents and biotechnology have flourished,and contributed to the diversification ofthe economy.

Singapore has also become an impor-tant financial center. More pertinently,Singapore has developed a massive refin-ing capacity to accommodate crude oil im-ports. It enjoys one of the largest refining capacities in theworld—around 1.4 million barrels per day.

These two factors—location and large refining capacity—have until now provided Singapore with virtually assuredrevenue. Shipping is not likely to diminish, energy demandsare set to grow, and refining capacity is being used to powerthe growth of a large petrochemical industry. By all accounts,Singapore has sunny days ahead. Or does it?

Dire straitsThe Malacca Straits is one of the world’s great “choke

points” for oil transit. It is the shortest sea route betweenthree of the world’s most populated countries: India, Chinaand Indonesia. More than 50,000 ships transit through thestraits each year, and China’s ever-growing energy needs arelikely to make that number grow. Currently, the straits seemore than 15 million barrels of crude oil transit every day.Liquefied natural gas (LNG) carriers also use this route daily.

At its narrowest point, near Singapore, the MalaccaStraits are only 1.5 miles wide. This creates a natural bottle-neck with good potential for collisions or spills. Piracy is alsoa concern, being far from uncommon in the SingaporeStraits. Should any of these lesser problems occur, groundingof tankers would be the most likely result—a costly affair, but

not insurmountable. Closure of the straits, however, would have far more wide-

reaching consequences, such as huge worldwide increases inthe cost of freights and energy shortages in much of Asia.

An ever-growing concern is international terrorism. TheBali bombing in 2002 put Indonesia on the map of “high se-curity-risk” countries. Insurance costs have increased accord-ingly for tankers docking in Indonesia. Various scenarios arebeing considered, under which terrorists could hijack an oiltanker or an LNG carrier and use it as a giant bomb to belaunched at nearby Singapore, or anywhere else within reachfor that matter.

While this represents the most alarmist scenario, countriessurrounding the straits are taking no chances. Malaysia andSingapore have stepped up naval patrols, and have report-edly begun to escort some tankers. But ultimately, if theMalacca Straits are to sustain increased traffic, more far-reaching measures will have to be found.

The rising traffic and security concerns make Singapore’seconomy, which is so vitally dependent on maritime trade,quite vulnerable in the long term.

Part of the solutionThailand possesses two strategic assets that could radically

HYDROCARBON TRANSPORTATION

Singapore

June 2004 ▪ Oil and Gas Investor AP-23

The Port of Singapore is key to the transportation ofoil and LNG through Southeast Asia.

Singapore hosts a world-class marine construction industry.

alter the global supply equation. Thefirst of these is location: Thailand’swestern coasts are passing points for alltankers from the Middle East en routeto Singapore. The second is its infras-tructure: Thailand benefits from a goodbasic infrastructure, from refining topipelines, which could be expanded toaccommodate larger volumes.

Consider also that Thailand links In-dochina and China. It is a central pointbetween Indonesia and southernChina, and its ports are closer to Chinathan either Singapore’s or Malaysia’s.In short, Thailand has the potential tofundamentally alter energy dynamics inthe region and beyond.

Thailand’s energy minister PromminLertsudeji, is spearheading the govern-ment’s efforts to market an ambitiousplan to turn the country into a regionalprocessing and transportation hub forthe oil industry. The plan includes sev-eral projects: a marine maintenanceand repair facility on the western coast,complete with docking facilities; in-creased refining capacity (a new refin-ery was inaugurated in January 2004);the establishment of a tax-free zone;and several new pipelines, the most im-portant of which would link westernand eastern Thailand, and by exten-

sion, the entire Mekong area andSouthern China. By building adequateinfrastructure, Thailand could also be-come a regional stockpiling center forcrude oil.

The potential benefits of the projectare enormous. Once the marine facili-ties and refining capacity have beenprepared, Thailand will provide an im-mediate alternative to the MalaccaStraits. That, by itself, will already be aconsiderable achievement.

Another huge benefit will be the op-portunity to further develop the down-stream and petrochemical businesses.This will increase domestic demand foroil, create jobs and strengthen the

economy. Another potential benefit could be

Thailand’s development into a regionaloil stockpiling center. This would bringadded energy security to the region. Butthe chief benefit of this ambitious pro-ject is undoubtedly access to China.

China on a silver plateChina is the world’s fastest-growing

economy. It is now second only to theUnited States in terms of energy con-sumption. But the gap is narrowing in-exorably. If Thailand manages toimplement its energy plans, it couldwell take over Singapore as the destina-tion of choice for transit of crude oilsupplies.

Moreover, if Thailand can become aregional stockpiling center, it will alsobecome Southern China’s immediate“oil basket.” The Association of South-east Asian Nations (ASEAN) regionalready enjoys considerable pipeline in-frastructure, from Indonesia to Singa-pore, from Singapore to Malaysia, fromMalaysia to Thailand.

Future pipelines linking China withThailand will therefore also provide astable and cost-efficient export routefor Indonesia’s abundant oil and gasresources. �

AP-24 Oil and Gas Investor ▪ June 2004

…If Thailand canbecome a regionalstockpiling center, it willalso become SouthernChina’s immediate “oilbasket.”