National oil and gas (O&G) corporation Petroliam Nasional Bhd (Petronas) is gearing to sustain and optimise production on the back of its massive capital expenditure (capex) to catalyse key drivers in mega projects involving enhanced oil recovery (EOR), petrochemicals, storage facilities and extraction from recently identified oilfields.Elaborating on the sector’s prospects for 2012 was HwangDBS Vickers Research Sdn Bhd (HwangDBS Research) analyst Quah He Wei who opined, “We expect Malaysia’s O&G upcycle to start in 2012 with Petronas going full throttle to sustain oil production.
“Petronas’ record RM300 billion, five-year capex will be a strong re-rating catalyst for Malaysian O&G players. Critical gas shortage in the country has also prompted Petronas to fast-track upstream activities, which will benefit local players.”
To recap, Petronas announced last year several plans including the development of marginal oil fields (RM5 billion), enhanced oil recovery (RM46 billionn), and North Malay Basin project (RM15billion).
Malaysia’s O&G sector was identified as a key transformation area to help propel the country into a high income nation. Petronas has been increasing capex spending in Malaysia over the past two years, with domestic capex at 67 to 72 per cent of its total capex (versus 55 per cent previously).
Petronas’ blueprint comprised a three-prong development plan: to enhance oil recovery at existing mature oilfields by better managing its technological reservoir, develop marginal oilfields and rationalise its international operations.
Downstream activities were picking up, led by the RM5 billion Pengerang deepwater petroleum terminal, while Petronas’ RM60 billion Refinery and Petrochemical Industrial Development (RAPID) project in southern Johore would conclude a feasibility study by end-2012.
Petronas was gearing up its exploration and production activities to meet increasing demand with 11 new production sharing contracts (PSCs) in Malaysia awarded by Petronas in 2011 in contrast to just four PSCs in the previous year.
Malaysia’s crude oil and condensate reserves remained healthy at 5.86 billion barrels of oil equivalent as at January 2011, implying approximately 26 years of production.
“We expect Malaysian O&G players to ride on Petronas’ rising capex and major development plans going forward.
“The government started the ball rolling in late 2010 when it granted tax incentives to enhance the commercial viability of abandoned marginal fields.
“There are another 22 marginal oilfields identified for development, and we could see more RSC by mid-2012 given that bidders would submit proposals by the first quarter of 2012 (1Q12),” Quah said.
Petronas was also focusing on enhanced oil recovery (EOR) because of declining output at mature producing fields, where the average recovery factor was only half the 46 per cent average in the North Sea.
EOR implementation was expensive with cost of deploying chemical EOR up to US$13 per barrel but the initiative would be supported new tax incentives for marginal field development as well as bullish oil prices.
Foreign players with qualified technical expertise and sound financials would be required to partner up with local listed partners with at least 30 per cent equity ownership. O&G players with proven track records were set to benefit from this expertise-sharing requirement and this could be the game changing plan for local players to move up the value chain.
Malaysia has 106 marginal oil fields (producing 30 million barrels of oil equivalent or less) with combined 580 million barrels of oil reserves, and Petronas had firm plans to develop a quarter of these fields.
Quah expected favourable RSC terms to entice more Malaysian O&G players to participate in subsequent marginal field projects, especially after they see the results of the first two RSCs awarded last year.
Addressing price risks involved in the sector, Quah remarked, “The huge spending could be derailed if oil prices tumble from about US$100 per barrel currently. However, it is unlikely to fall below US$80 per barrel.
“We view that as long as oil prices remain above US$70 per barrel, Petronas will continue to invest heavily in exploration and production.”
Downplaying project delays, the analyst noted, “This concern is not new, as we have seen delays and pullback of development projects over the years for various reasons. The difference now is that the risks are more diluted.”