Datuk Mokhzani Mahathir bowed out of the corporate sector in 1998, only to nine years later stage a comeback. But this time, he did so with his “first love”, through oil and gas company Kencana Petroleum Bhd. A petroleum engineer by profession, Mokhzani's first job stint was at Shell in Kuala Lumpur.
Mokhzani's corporate career has been patchy. His once-controlled Pantai Holdings Bhd and Tongkah Holdings Bhd buckled under severe pressure following the Asian Financial Crisis in 1998 on huge borrowings, which had forced him to relinquish his investments. His business involvements had also come under intense scrutiny, not least because he is the son of the former prime minister Tun Dr Mahathir Mohamad.
Having learnt the stick-to-your-knitting lesson is probably the best thing that has happened to Mokhzani. Four years after he listed Kencana and just recently, the company a US$800mil contract from national oil company Petronas involving a marginal oil field.
In an interview with StarBizWeek, Mokhzani elaborates on the recent development and his take on the risk-service contract (RSC) awarded by Petronas. Below, excerpts of the interview:
SBW: What expertise will Kencana bring to the consortium?
The consortium partners got together because of the expertise we have in-house. Kencana's portion of the work will include fabrication, engineering for the fabrication, hook-up and commissioning. Together, the consortium will provide end-to-end solutions, which is why this project was awarded to us. Also between the three, we have the financial capacity to take on this size of job we are actually putting money on the table, which shows that we have the financial capability to finance the project first before the client pays us.
What are the key performance indicators (KPIs) under the RSC?
We have been given KPIs by the clients, which include deliverability, production and (project) cost. All three KPIs have to be achieved before we get the returns we are hoping for. The original production targets are 10,000 barrels per day and 90 million cubic ft of gas per day. We will ramp that up once we start actual production by next year. Another target is to produce first gas by the end of this year, which is an extremely tight schedule. As for project cost, we have given the client an estimated cost and the client has agreed on what is going to be the overall cost of the project.
While Petronas will own all the oil produced from the marginal oil field, the consortium will be paid a fee. How is this fee structured? And what's the project's estimated return on investments?
If we achieve all our targets, we will be paid a fee above the cost of the project. I'm not at liberty to tell you what sort of percentages that would be or the internal rate of return. The onus on us is to deliver on all the targets the client and us have agreed on. If we achieve or better that, then we are compensated accordingly.
The reverse is also true which is what the risk is all about. If we do not perform or achieve end of the year targets (i.e. lower production rates or cost overruns), it will be at our cost, which means our margins will be eroded.
Based on estimates, how much oil and gas can be extracted from the Berantai field?
I don't think I can disclose that for a simple reason a unique feature of the RSC is that the consortium does not own the reserves; the client does. The client tells us 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 to pay us from the oil and gas that are produced.
On top of that, if we do it all according to the plan, they will pay us a better margin than we would normally get from a usual contract. But the condition remains we will have to hit all of those targets and put in our own money.
We are risking our ability to provide the solutions on time and according to the productions that they (Petronas) are looking for and at the cost that they are looking at. If we do all of that, they will use what we have produced for them to pay us ... that could be two years down the road.
Why the emphasis on “risk” in the RSC?
Because people forget that all the time. This is not just like any other contract from a client. Yes, like other contracts, it has penalty clauses for certain eventualities but in this particular case, the risk is also our own equity. We've raised RM800mil so that we can put US$200mil plus on the table. That is at risk. In this RSC, if we fail catastrophically, the client is not exposed at all.
Do you think you've raised sufficient funds to undertake this project, risk and all?
We have raised RM400mil plus through a private placement and we will raise another RM400mil through (ringgit denominated) bonds and warrants that will come in the next couple of months. This money will be put on the table to proceed with the project as we've committed that we will have unencumbered cash associated to this project. This is to ensure that we have enough money to pay ourselves initially for the work until the production kicks in and the client pays us back. Hopefully, if we are successful and meet the satisfaction of the client and the shareholders of this project, we can roll the money into the next project, whether it is in Malaysia or the region.
How long will it take before (the consortium) is able to extract all the oil and gas from the marginal fields?
We are planning for about seven years.
What do you hope to learn from the consortium?
We hope to learn how to handle RSCs. The Kencana Group is essentially a service provider, we are a group of contractors.
We've been trying to integrate all the companies within the group to perform as one entity. From this RSC, we will learn how to provide end-to-end solution. Of course we are learning some of those skills from partners and it is my hope that we do not need everything in-house. We would like to be partners in joint ventures (JVs) or in incorporated JVs to provide solutions to clients in Malaysia or the region. This is why it is important to team up with those who already have experience, in this case, Petrofac.
Have you made a bid for other marginal oilfields?
If I'm not mistaken, the bid is made to foreign companies, who will then have to find local partners to form a consortium, so there is a transfer of technology in the process. There is a huge learning opportunity for the local companies but they have to be serious players.
The foreign players will look for local partners that can fulfil the needs of a particular project, which includes required expertise and capabilities, track record and financial abilities. Then, they will go out and talk to these companies and this is exactly how we ended up with Petrofac, as they have been our client.
So, have any other foreign players approached you?
Yes they have, but we are comfortable with the partnership that we've got right now.