Petronas sets aggressive targets for overseas ops as local production dwindles

MALAYSIA - PETROLIAM Nasional Bhd (Petronas), facing dwindling production at home, is in a race against time to scour for new oilfields beyond Malaysia's shores.

But with depleting hydrocarbons on the homefront, where oil has been extracted for well over a century, and stiff competition abroad, how will Petronas fare in the new age of energy?

For Datuk Wee Yiaw Hin, the oil giant's executive vice-president of exploration and production, this is exactly what Petronas has planned for.

A relative newcomer to Petronas, Wee has helmed the group's core business since 2010.

He has set his team up for some aggressive targets, among them an average production growth of 3.5 per cent per year up to 2020 and a reserve replacement ratio (RRR) of 1.1 times.

RRR is the amount of oil and gas added to a company's proven reserves versus what it produces during the year. A ratio of 1.1 indicates that Petronas has a good balance between hydrocarbons produced and discovered. Petronas achieved a RRR of 1.3 times in 2013.

Wee, who says he runs the upstream operations with all the rigour of a listed company, tells StarBizWeek that Petronas places fifth on the global ranking of oil and gas (O&G) firms, which is topped by the super-majors Shell, BP, Total and ExxonMobil.

"We want to maintain this position, and even move up, perhaps into the top four," he quips.

To be sure, that isn't an apple-for-apple comparison. Petronas is a national oil company (NOC), while the others are independent oil companies (IOC).

As an NOC, Petronas owns the hydrocarbon deposits in Malaysia. IOCs, meanwhile, act as specialist operators extracting oil and gas, typically in profit-sharing ventures with state oil firms via agreements called production sharing contracts.

That doesn't mean Petronas hasn't made headway in the international market, where it competes side by side with the world's top IOCs.

According to Wee, Petronas is often looked upon as a case study by other NOCs.

It is understood that countries such as Vietnam and Indonesia are now learning from Petronas in the area of marginal oil fields.

Another feather in Petronas' cap is the deal it struck with Progress Energy for the Canadian firm's shale gas assets. Petronas now controls shale gas deposits even larger than Shell's, Wee notes.

On the domestic side, Malaysia has been "lucky" when it comes to gas reserves, he says.

"Over the past three years, we have found gas fields that were huge, for instance, Kasawari offshore Sarawak. It's never been so hot. We've got so much gas."

Petronas now boasts gas reserves totalling 100 trillion cu ft (tcf) - no mean feat considering it had just 60 tcf some three years ago.

Those discoveries were a boon for exploration activity, with the number of drilling rigs in operation jumping to 30 from less than 15 previously.

The volume of its gas production has blown past expectations, so much so that Petronas is mulling additional processing facilities at its Bintulu liquefied natural gas (LNG) complex.

Gas makes up more than 50 per cent of Petronas' total production, which last year grew 5.8 per cent to 2.13 million barrels of oil equivalent per day (boepd).

Budget airline

The year 2011 was a turning point of sorts for Petronas.

Petronas saw its production of crude oil and condensates tumble to a two-decade low of 640,000 barrels per day (bpd), from a peak of 776,000 bpd in 2004.

That helped galvanise a landmark five-year, RM300bil investment plan to rejuvenate Malaysia's maturing and marginal oilfields, as well as fund a string of overseas acquisitions, some of which, like Progress, is paying off handsomely.

Research by Petronas has found that some 50 per cent of Malaysia's producing fields have enhanced oil recovery (EOR) potential. This refers to the method of boosting oil recovery through steam, gas or chemical injections.

Petronas is embarking on 10 EOR projects, involving US$14bil (RM43.82bil) in capital expenditure (capex), that could add between 800 million and 1 billion barrels of oil to its resources over the next 20 to 40 years.

Meanwhile, 106 fields have been earmarked as "marginal", with reserves of 580 million boe.

EOR and marginal field initiatives are crucial as they are estimated to account for 20 per cent of the country's crude oil resources.

But extracting value from them will be a delicate task. For now, only 27 marginal fields are deemed to have commercial value, Wee says.

So far, four risk-service contracts (RSC) have been dished out to local-foreign consortiums, of which three are in production.

Only two more RSCs are left to be awarded, while the remaining five to seven will be placed under the care of Vestigo, an entity set up by Petronas Carigali to oversee the development of marginal fields.

Despite some early skepticism, the RSC model has proven to be a successful one, according to Wee.

Marginal fields are mature oil fields with reserves of less than 30 million barrels of oil. RSCs were mooted by Petronas in 2011.

Unlike the production sharing contract, Petronas will own all of the oil extracted under an RSC, while contractors that build the oil rigs and other facilities will be paid a fee based on their performance.

Wee likens Vestigo to the budget airline offshoot of Petronas.

"In the same way that full service carriers started budget airlines, so Petronas Carigali created Vestigo as its smaller, leaner, faster counterpart, and with a lower cost base.

"Petronas Carigali will tackle the big stuff, but smaller projects are not within its expertise. Hence the need for Vestigo."

The new frontier for Petronas are fields that pose inherent challenges but which hold potential if the right technology and processes are used. These include the ultra-deep water, the high-pressure high-temperature and the high carbon dioxide content oilfields.

Referring to these fields as a "new play", Wee stresses that they will require careful study due to the significant costs and risks involved.

Based on industry data, only 30 per cent of Malaysia's estimated 10 billion boe of deepwater reserves has been discovered, making this a huge untapped resource.

Another method to increase production is what Wee terms the "mop-up" strategy for mature fields.

"You may think this room is already clean, but when you take a mop to it and sweep one more time, you might find some jewels. This is where we have been most surprised," he explains.

Progress on Progress

Amidst the flurry of upstream activity, Petronas has managed to keep a lid on costs, Wee says. It has moved up to the first quartile from third for completing work on schedule, even better than some IOCs.

"In the past, 80 per cent of our projects incurred cost overruns. Now 90 per cent of them stay within budget," he says.

Petronas currently gets two-thirds of its production from domestic sources and the remainder from abroad.

Thanks to Petronas, Malaysia is ranked the second largest producer of O&G in South-East Asia, and the No. 2 exporter of LNG in the world behind Qatar.

Yet it lags in areas such as cost. MIDF Research notes that Petronas' cost of offshore development in Malaysia, and also its hurdle rate, touches US$70 per barrel.

This can head north of US$100 per barrel for EOR or deepwater extraction. In contrast, the Middle East's extraction cost is about US$17 per barrel.

By some projections, Malaysia is poised to turn net oil importer as early as 2017, when internal demand for crude oil outstrips the country's ability to produce it.

Still, industry sources say Petronas has one of the best portfolios of any NOC, with its international petroleum resources standing at 10.2 billion boe as of January 1, and local resources at 22.6 billion boe.

Progress is a standout example. Its shale gas assets on the coast of British Columbia was acquired last year in a C$5.2bil deal that drew much flak in Canada, coming as it did on the heels of a similar proposal by a state-owned Chinese firm.

Petronas has since hived off a combined 23 per cent stake in Progress to NOCs from Japan, Brunei and India, significantly paring down its effective cost. Word is that another block will be sold to a Chinese party, but that deal is still being finalised.

The sales have also enabled Petronas to secure long-term offtake agreements for its shale gas production out of Canada, besides easing its own capex burden.

Overseas forays

Yet the group's ventures abroad remain open to debate.

Detractors reckon that while it sits pretty on local shores, comforted by its status as custodian of the country's hydrocarbon deposits, Petronas doesn't do as well in the international arena.

Industry executives say its international sales form a big chunk of its turnover, but a much smaller portion of the bottom line.

Petronas does not disclose a breakdown of its profit from international and domestic sources.

Nonetheless, Wee says Petronas is "making money" in a number of its overseas locations. He singles out Myanmar, Sudan and South Sudan, and Turkmenistan. Iraq and Indonesia also hold promise, he notes.

But Petronas has not been so lucky in Venezuela and Brazil, although the latter is still on its watch list.

Petronas got its fingers burnt when last year OGX, owned by Brazilian tycoon Eike Batista, filed for protection from creditors in Latin America's largest-ever bankruptcy filing.

Last year alone it exited Venezuela, Cuba, Oman and Sierra Leone. It had to write off projects in Pakistan, Ethiopia, Venezuela and Egypt.

"That's not unlike what a normal IOC has to go through. E&P is a high risk business," Wee explains.

"It's easy to be an armchair critic or to see failure in hindsight, but we have to make our bets. Some we win, some we lose. We stayed on in Myanmar when everyone left, and we have been rewarded for it."

The NOC is seeking a sale for three of its blocks in Vietnam because of unexciting growth prospects, say sources. It has a total of 10 blocks there.

Be that as it may, Petronas fetched a premium of double its investment when it cashed out of India.

Wee says efforts are underway to "high-grade" its assets. This means dismantling deals and government-to-government arrangements that are no longer economical.

In the meantime, Petronas is keen on prospective oil reserves in countries such as West Africa's Gabon and Angola.

While it is early days yet, Petronas wants to further venture into shale oil, after a successful foray into shale gas. China and the Americas are well known for their shale oil reserves and these locations are on Petronas' merger and acquisition radar.

To sharpen its expertise on the international front, Petronas has taken the decision to create a stronger demarcation between its domestic and international team.

Sources say the move, which is in the final stages, will see a internal split between management of the international and domestic assets.

Clearly, such a move is aimed at nudging Petronas closer to becoming an IOC.