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Petronas will own marginal fields

source: StarBiz, Friday January 28, 2011 - P Gunasegaram

PETALING JAYA: Petronas will own all the oil produced from marginal fields and will pay service providers a fee for extracting the oil. However, there will be a capped incentive payment over and above that based on oil produced.

Explaining the new contract agreement for extraction of oil and gas from marginal fields those that have already been exploited and which generally have less than 30 million barrels of oil equivalent (BOE) Petronas president and chief executive Datuk Shamsul Azhar Abbas said the national oil corporation will be the project owner.

The contractors are service providers with equity share in the asset, with upfront capital contributed by the contractors according to their equity share. Contractors will receive payment only upon first production of oil, generally expected within a year.

Shamsul described the arrangement as a risk service contract (RSC), unlike the production sharing contract (PSC) with oil majors. The PSC involves sharing the oil produced on an agreed formula, while the RSC is based on an adequate return for contractors taking into account investment and risk. He declined to disclose the quantum, citing competitive reasons.

“But we are working on a system of KPIs (key performance indicators) if you perform, there is a performance bonus,” he added. One of the KPIs will be the amount of oil produced.

He said that those who bid for marginal oil fields must have at least 30% local equity participation but the choice of local partner or partners would be left with the foreign partner.

“With this, Petronas shares risks as the project owner while contractors receive a reasonable return with limited upside, which provides a balance, in terms of the rewards and confined risks for the contractors,” he said.

Shamsul said that since development costs were high as much as US$800mil for a cluster of four or five marginal oil fields local participation may come through consortia made up of existing local oil field service companies.

Asked why foreign companies should take local companies as partners, Petronas' executive vice-president for exploration and production Datuk Wee Yiaw Hin said local companies already provided oil field services. Thus, it would be easy to bring them in as meaningful partners who have no less than a 30% stake.

Shamsul added: “We don't tell the foreign partner who should be the local partner but they must have a local partner. The incentive fee is based on production but there is a cap. There is limited downside (for the contractors) but they can share in upside. We want to attract niche players.”

He said if Petronas did not take efforts to develop marginal fields and enhance oil recovery, the reserves could run out in 15 to 18 years.

In November last year, the Government announced five new tax incentives under the Economic Transformation Programme to promote the development of new oil resources, facilitate the exploitation of harder to reach oil fields and stimulate domestic exploration. They are:

An investment tax allowance of up to 60% to 100% of capital expenditure to encourage the development of capital-intensive projects;

Reducing the tax rate of 38% currently for marginal oil field development to 25% to improve commercial viability of the development;

Accelerated capital allowance of up to 5 years from 10 years, where full utilisation of capital cost deducted could improve project viability;

Qualifying exploration expenditure transfer between non-contiguous petroleum agreements, and

Waiver of export duty on oil produced and exported from marginal field development to improve project viability.