DESPITE THE cloudy outlook for the oil and gas sector, market observers believe that the Sabah government’s involvement in recently signed production sharing contracts (PSCs) bodes well for the state.
“Although the low oil price environment has caused the market to be jittery, the partnership in the PSCs provides long-term revenue visibility for the state,” a source close to the PSC partners tells The Edge.
The PSCs are for 27 years, effective from Nov 20.
To recap, on Nov 22, Petroliam Nasional Bhd (Petronas) awarded the Sabah government’s wholly owned company, M3nergy Bhd, its first upstream project — PSCs for Blocks SB331 and SB332 onshore Sabah. M3nergy will hold up to a 25% stake.
The operator of the oilfields, SapuraKencana Petroleum Bhd, will hold 70% interest and Petronas Carigali Sdn Bhd, the remaining stake.
The source points out that the PSCs comprise three years for exploration, four years for development and 20 years for production.
“So, in the near term, the project will be in the exploration and development phase and will not be affected by the low oil price environment,” he says.
He highlights that the oil and gas market is cyclical and that it is bound to recover from its sluggishness in the coming years. “The fields will likely see production during the upswing of the industry — in 2021.”
Another source close to the partners points out that a low oil price environment provides a good opportunity for investments.
“Services to execute the work are expected to be cheaper due to lower demand. So, targeted returns on investment should grow when the market improves,” he says.
Initial capital required for the exploration and development phases of the PSCs is about US$40 million (RM137.7 million), of which Sabah’s 25% stake would require it to contribute up to US$10 million.
“It’s a minimal amount, considering the potential return on investment,” the source points out.
The capital will be spent over three years by the partners to conduct detailed and systematic reviews of the hydrocarbon potential of the PSC areas.
Last year, Sabah’s three main sources of revenue were sales tax on crude palm oil, oil royalty and issuance of bonds, which accounted for over 70% of total revenue.
Oil royalty accounted for 30.5% of total state revenue, the highest amount paid due to the discovery of the Gumusut-Kakap oilfield and expectations of higher production in the Kikeh oilfield, both of which are deepwater projects.
With 5% oil royalty being guaranteed to oil-producing states, a major stake in PSCs could provide additional and sustainable contributions to Sabah’s coffers.
Petronas gives state an opportunity to participate in oil and gas
The Sabah government’s big stake in the PSCs caught many by surprise as previously, state governments only held minor stakes in downstream projects. For instance, the Sabah government has only 10% interest in LNG 9 in Bintulu, Sarawak.
Nevertheless, the PSC awards to M3nergy came on the back of dissatisfaction over the quantum of oil royalty earlier this year, which led to several state governments proposing to have more control over oil revenue and to request higher royalty.
In May, Sarawak passed a resolution to request an increase in oil royalty from the current 5% to 20%, which prompted other oil-producing states (Terengganu, Sabah and Kelantan) to follow suit.
However, certain quarters believe that some states have come to realise that getting 20% oil royalty is not feasible and that participating in PSCs would be more realistic.
Back in 1974, the amount of oil royalty (or cash payment) to be distributed to oil-producing states was agreed upon by three parties — Petronas, the federal government and the states — under the Petroleum Development Act 1974.
While Petronas is the custodian and owner of all oil and gas resources in the country, the state and federal governments are each entitled to a 5% royalty.
Under the pioneering production-sharing formula between the three parties and the oil companies, both the federal government and the oil-producing states are entitled to five barrels each for every 100 barrels of oil (or gas equivalent) that are produced.
The remaining portion is to be shared by Petronas and its production sharing contractors (mostly the multinational oil companies) with a certain percentage allowed for cost recovery.
The Edge had previously reported Petronas’ inability to increase the oil royalty payments as that would disrupt its capital expenditure requirements, expansion and development plans.
The award of the PSCs to a local consortium, comprising M3nergy, SapuraKencana’s wholly-owned subsidiary SapuraKencana Energy Sabah Inc and Petronas Carigali Sdn Bhd, marks the first opportunity given to local players by Petronas.
These are the first PSCs in the country without foreign shareholding and a foreign oil company operating the field.
The award was made after an international bidding exercise in which Petronas invited tenders from upstream companies.
A source tells The Edge that the award of the PSCs by Petronas was based on capability and not due to the oil royalty issue.
The bidding exercise had involved international players, and local players that could prove their capability.
M3nergy is an oil and gas company that was acquired by Sabah Development Bank to pursue the state’s oil and gas activities. The acquisition paved the way for the state government to increase its participation in the local oil and gas industry.
The award of the two PSCs adds to M3nergy’s existing exploration and production portfolio. It currently has 100% interest in a PSC for Block Ujong Kulon in southwest Java, Indonesia.
The company is an integrated service provider for marginal fields with over 30 years of experience. It has also proved its capability in providing early production systems and innovative floating solutions, such as floating production, storage and offloading units, mobile offshore production units, floating storage and regasification units and tension-leg platforms.
This article first appeared in The Edge Malaysia Weekly, on December 8 - 14, 2014.