PETRONAS in the news-Part 2

What is the purpose of this article? Lest it is seen as a cantankerous rant against a justifiably good business arrangement for the good of the country, let's spell out the objectives.

1.    To raise the possibility that PETRONAS hasn't been upfront about defining what is a marginal field.

2.    To raise awareness that the commercial terms by which PETRONAS entered this RSC may not be in the interests of our country.

3.    To question whether the RSC method is the best deal or is it just a scheme to enrich selected people?

4.    To discover the basis of PETRONAS's choice of equity partners with petrofac.

5.    Who decides on Petrofac? How was it chosen among the many players in the market? Who decides on Petrofac as the Project Delivery Partner (since this term is now vogue).

6.    What is the USD 800 million for? This is cost oil? How do the incentive and correspondingly penalty elements figure in the profit oil portion?

7.    Is there a time limit for the extraction upon which either incentives or penalties are enforced?

8.    To pressure PETRONAS to be transparent in its revelations to the public as to how it conducts its business, it appoints contractors; it shares its profits and applies its profits.

When PETRONAS was formed, the government knew it hasn't got the technical knowhow to manage and exploit our oil and gas resources. The solution was to leverage on the capabilities of the oil majors operating in Malaysia then. The main players then were Shell and Esso. A scheme was devised where a commercially viable partnership can exist between the resource owner who owns the resource and the technology owner. Both need to be compensated for the ownership of their respective resource. The government tasked Tengku Razaleigh Hamzah to come out with such a scheme. This was the origins of the Production Sharing Contract.

The scheme in itself is easy to understand. The oil majors and exploration companies get to extract oil and gas from Malaysian owned sources. They get to recover fully the costs (OPEX and CAPEX up to the point of extraction. In addition they get to share what is produced over and above the costs on an agreed basis. The get the oil equivalent to the costs they have sunk in- this is the cost oil portion of the produced oil. After subtracting cost oil, they have oil which can be sold for profit- profit oil. They then divide the profit oil upon agreed terms.

The practice I think is PETRONAS to share with its exploration partner on an 80:20 basis. Also if I am not mistaken, all the CAPEX Items become the property of PETRONAS. So when you go to Miri Shell for example, while the refinery and all the property and chattels therein are operated by Shell, they do so as custodian of what will eventually become PETRONAS property.

Because it is simple and easy to operate, this scheme has been adopted by many countries such as Indonesia and Nigeria.

But it must be said once more, when Tengku Razaleigh introduced this scheme in 1974, the countries behind the oil majors looked upon the scheme as a disguised form of nationalization.

It's Risk Sharing Contract now. RSC

Now PETRONAS is embarking on a new approach in extracting oil in our waters. It is now introducing the concept of RSC- Risk Sharing Contract. Two, it is encouraging local players to team up with foreign service providers to extract oil and gas from they termed as marginal oil fields. In all PETRONAS is aiming to develop some 106 fields and 580 million BOEs. That's barrel of oil equivalents.

We must congratulate PETRONAS for finding new commercial methodologies to ensure we get the best from our resource and in that process if we can help our local boys to make money, we do so. This is a straightforward agenda on which little quarrel can be built on.

Our only concern will then be, are the commercial terms sound to ensure that we get the best returns? How do we assign and choose the local players? Who actually talked to Petrofac? How do we ensure technology transfer? The main contractor chosen to lead the recovery from marginal fields for example, how will we ensure they will indeed pass the technical knowhow to the local players?

Since operating from 1974, hasn't PETRONAS acquired the technology transfer it needs to do the jobs themselves? If it's in line with the agenda of nurturing or fast-tracking the capabilities of local players, is RSC the best way to do it?

The boggling question first of all is this. How does PETRONAS define a field as being marginal? The basis of defining has important repercussions. We may justifiably assume that PETRONAS has taken all the meticulous studies to arrive at defining a particular field as marginal. This is to allay fears of a mistaken classification- a still productive field being categorized as marginal.

Surely an important element is the market price of oil and gas. If the quantity is marginal but the price is good, the revenue to be earned is still very large. Even if we call the relevant fields marginal ones, there is still a lot of money to be made and the amount increases as oil prices rise. At 580 million BOE, and using an oil price of US$80 per barrel, the oil is worth nearly RM140 billion! In terms of value, this can hardly be termed as marginal. And surely too, RM140 billion can't be uneconomical to extract. It is important to ensure that PETRONAS does not lose out in this and extracts the best deal for itself.

Then there is the issue of technology transfer. There is a lot of expertise involved and those who extract marginal oil are not going to be sharing their expertise readily with local partners they are forced to take.

The question is, are Kencana and Sapura, and the others who follow them, merely equity partners who provide some amount of oil field services? If that is so, why could not PETRONAS itself have become an equity partner? After all it has the funds and more capability and capacity than all the oil field companies put together. It has its own specialized unit under Carigali. If Carigali is omitted from partaking in exploiting the 'marginal' Berantai Fields, PETRONAS stands accused of shirking its duties to guard our precious resource.

It comes back to the Organizational Disclosure thing in the Report on Promoting Revenue Transparency in Oil & Gas companies. It involves disclosure on PETRONAS's partnership deals and structures.