Other oil firms expected to follow suit by calling off marginal field exploration
PETALING JAYA: Now that leading local oil and gas (O&G) player Dialog Group Bhd has called off its marginal oil field exploration project, the question is: will the other local companies, which had been awarded risk sharing contracts (RSC) by Petroliam Nasional Bhd (Petronas), be doing the same?
Since 2011, Petronas had begun a process of awarding RSCs to local companies which are partnered with international players to extract hydrocarbon assets in fields which have reserves of less than 30 million barrels of oil.
But this was when oil prices were over US$90 per barrel. At current prices of around US$30 per barrel, the extraction of oil in marginal oil fields, at least in Dialog’s case, has become no longer viable.
One analyst reckons that it is highly possible that other RSC holders may opt to do the same.
“One leading RSC player (other than Dialog) has already halted further development of its project, while we understand that another will cancel its RSC soon.
“Oil prices are just too much below the economic breakeven prices for RSC,” said an O&G analyst without revealing the names of the companies involved. But he did point out that Uzma Bhd’s Tanjung Baram RSC had the lowest breakeven price because it was “a fast-track, low-capital expenditure (capex) project”.
Another analyst pointed out that RSCs had varying breakeven costs, noting that some which were operating on lower costs and already operational might be able to stay afloat.
He said RSCs that had yet to hit their first oil, Petronas would likely reconsider the total capex and operational expenditure or opex for those fields.
“Given the overall cost-cutting measures amid the industry slowdown by oil majors, Petronas might put some RSCs on hold. For example, we believe the Ophir RSC project might need to be reassessed at the current oil price,” said the analyst.
Notably, Petronas in September had approved the revised field development plan (FDP) for Scomi Energy Services Bhd’s Ophir RSC oil field that reflected a 30% cut in the cost of production.
Ophir Production Sdn Bhd is a joint venture between Scomi Energy, Vestigo Petroleum Sdn Bhd and Australian-based Octanex Pte Ltd.
One analyst reckons that SapuraKencana Petroleum Bhd’s (Sapken) Berantai RSC does not contribute substantially to SapKen’s bottom line. However, for Uzma, its Tanjung Baram RSC has played a part in buffering the company’s oilfield services which has experienced a slowdown since oil prices plunged, he opined.
In Dialog’s case, AffinHwang Research commented last week that the decision to pull out of the Balai RSC did not come as a surprise.
“The management had previously warned in its financial year 2015 annual report that the shareholders of BC Petroleum Sdn Bhd, a consortium of Dialog, ROC Oil Ltd and Petronas Carigali Sdn Bhd, were reviewing their options for the Balai cluster RSC in light of the persistently depressed oil price,” it said.
AffinHwang said the development cost for Balai RSC was estimated at US$900mil.
AmResearch said that even though two fields at Dialog’s Balai and Bentara cluster had achieved first oil production, the continuation of the project had become financially unfeasible due to the current low crude oil price environment.
“This development was not unexpected, given the high operating cost for marginal fields,” it said.
It added that BC Petroleum and Petronas had mutually terminated the RSC on Dec 1, 2015.
“The RSC mitigates the risks to operators, with the capex for the field being underwritten by Petronas.
“Only the interest cost for the project and administrative expenses are not reimbursable,” it said in a report.
Petronas’ former boss Tan Sri Shamsul Azhar Abbas had previously said that the national oil company would not dish out any more new RSC at below US$80 per barrel because of the high cost of production.
Yesterday, Brent oil closed at US$33 a barrel, which was 70% lower than its peak of US$105 a barrel in mid-2014.
The termination of RSCs is just another symptom of the ailing O&G sector, which has already seen hundreds of people being laid off and placing stress on the finances of Malaysia and other oil-reliant countries.