Is RSC an invitation to the party of the year ?

By Lawrence Yong

In this final part of a series on the race for Malaysia’s marginal oil resources, we take a closer look at the some of the companies that are jostling for future risk service contracts. Speculative fever has driven many companies’ shares up and tie-ups, mergers and acquisitions have been sparked. The industry anticipates that Petronas may triple the number of RSCs to be awarded this year but can it find enough companies that are suitably qualified to deliver the goods?

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When they say oil and water can’t mix, one person who would probably have reason to disagree is Puncak Niaga’s Rozali Ismail. As Petronas considers bids for 10 RSCs by the end of this year – a big step up from previous awards – an interesting slate of companies are looking at tie-ups, mergers or acquisitions to enter the race for Malaysia’s marginal oil riches.

Rozali, who controls Selangor’s water supply company Puncak Niaga Bhd recently tied up with Indonesia’s biggest private oil interest Medco Energi for improved RSC chances.

Puncak last made the news for refusing to sell water supply rights in Selangor back to the state government. Through a subsidiary, Puncak forayed into oil and gas in 2011 when it bought GOM Resources, whose main asset was an old pipe laying barge. Last month, it bagged a RM187 million oil services contract from the US’ Hess to work on the North Malay Basin Gas project.

Push water in, get oil out. Rozali signed a cooperation deal with Medco Energi, Indonesia’s leading marginal oilfield developer as Medco operates an impressive 11 oil and gas blocks in Sumatra and Kalimantan and is also in the US Gulf, Libya, Yemen and Oman.

JSX-listed Medco Energi Internasional was founded in 1980 by Indonesian business tycoon Arifin Panigoro and is now 50.7 percent owned by Singapore-registered Encore Energy Pte Ltd,  which in turn is  60.6 percent owned by the Panigoro family and 39.4 percent owned by Japan’s Mitsubishi Corp.

Both Puncak and Medco are cash rich. For 1Q13, Medco reported cash reserves of US$456 million. Puncak Niaga had RM1.16 billion in cash at the end of 2012.

It remains to be seen if they will win a RSC. There has been no news since late March when Upstream magazine last reported that Petronas was looking to award some 10 risk service contracts (RSC) in its third round in 2013. When first introduced, Petronas said it would award four RSCs a year. So far, only three have gone out.

Of the 10 marginal fields, six — Bunga Pelaga, Rompin, Endau, Lada Hitam, D41 and A21 are in Sarawak,  three — Rusa Timur, Mutiara Hitam and Kuda Terbang — are off Sabah and only one, named Ophir, is off Peninsular Malaysia.

Bunga Pelaga  is  earmarked as one of the 10 fields under the Kumang Cluster, which has started production and is supplying gas to the Bintulu liquefied natural gas complex.

Ophir lies in Block PM305, previously awarded to Lundin Petroleum, while  Rusa Hitam is near  the producing Barton, South Furious and St Joseph fields currently being considered for enhanced oil recovery (EOR) development  by Shell.

Endau and Rompin are fields that have been relinquished by Malaysia’s first deepwater oilfield developer Murphy Oil.

There would probably be a lot of back dealing going on at the moment since the first two RSC contracts have so far made oil and gas giants out of SapuraCrest, Kencana Petroleum as well as Dialog Group and looks set to bolster the fortunes of Petra Energy. More jobs, including enhanced oil recovery works for nearby fields, often followed.

The interest is just growing. In its last known RSC offer, for the Tembikai and Chenang gas fields off Terengganu, Petronas is said to have shortlisted six parties, namely Baker Hughes, Halliburton, Petrofac, Australia’s Awe Ltd. and Hydra Energy. Malaysian  companies in  the  bidding mix included SapuraKencana Petroleum, Dialog Group, Alam Maritim, Daya Materials, Scomi Group and Malaysia Marine and Heavy Engineering (MMHE).

Earlier this year, sources in Scomi Group confirmed that they had tied up with Cue Energy to bid for the fourth RSC, but Petronas clarified the matter in January by saying:

“While a competitive bid exercise was conducted last year, Petronas has decided not to proceed with the award of the said contract and will not be re-opening the cluster for bidding.”

Why the controversial decision to pull back the Tembikai and Chenang RSCs?

Industry sources said Cue may have fallen out of favour as its CEO and chairman Mark Paton suddenly left the company in November. The Melbourne-based but NZX-listed Cue Energy’s major shareholders are New Zealand’s Todd Energy and Singapore Petroleum Co (SPC), which was purchased by China National Petroleum Corp in 2009.  Cue has assets in Papua New Guinea, Indonesia, New Zealand and Australia.

Scomi was acquired by Kaspadu Sdn Bhd in 2000, a company controlled by Shah Hakim Zain and Kamaluddin Badawi (the only son of Malaysia’s fifth prime minister) and ventured into oil and gas. It was the leader in providing drilling fluids and drilling waste management by 2005. Scomi’s shares more than quintupled after it was listed in 2003, the same year Abdullah Badawi became prime minister.

In a well-publicized feud with his appointed successor, Mahathir Mohamad had then publicly charged that Scomi had received billion ringgit government contracts from Petronas since Badawi became prime minister. Badawi denied any favouritism was involved. Around the same time, Mahathir’s own son Mokhzani was competing against Scomi for Petronas jobs through his recently acquired Kencana Petroleum.

Early this year, IJM Corp. bought up to 25 percent of Scomi to become their biggest single shareholder in a move which would usher the construction group into the oil and gas sector.

“Upside  to IJM’s investment in Scomi is if Scomi lands a  lucrative marginal oil  field  contract from Petronas,” one analyst with a local research house said.

And the RSC game goes on.

Among the top Petronas-licensed marine fabricators, analysts said Bumi Armada, TH Heavy Engineering (THHE) and Malaysia Marine Heavy Engineering (MMHE) were prospective RSC winners.

Even after divesting a chunk of shares in BumiArmada in the last two years,  Ananda Krishnan, Malaysia’s second richest man and the one behind the Petronas Twin Towers, may still own 42 percent of the company, sources said. BumiArmada is one of the largest owners and operators of offshore support vessels and is a leader in floating production storage offloading (FPSO) units, the prime way in which marginal oilfields can be exploited.

THHE, a loss-making entity for nearly two years, is due to make a comeback. The company has tied-up with the US’ McDermott, thereby becoming a fully integrated oil and gas service provider.

THHE, formerly known as Ramunia Holdings, is 32 percent owned by Lembaga Tabung Haji. The loss-making company fell into PN17 status for two years due to the lack of business orders, after divesting its fabrication yard in Johor to Sime Darby Bhd in 2010 for RM515 million. It turned a profit from last year and acquired the Pulau Indah fabrication yard near Port Klang for RM84 million cash.

Petronas subsidiary MMHE (owned through shipper MISC) has also been considered by analysts as a qualifier for a RSC job but the company has said marginal fields is not a priority business. MMHE has tied up with France’s Technip and are the main contractors for Shell’s billion dollar Gumusut-Kakap and Malikai platforms, to extract deepwater oil.

The other smaller cap companies who may be looking at RSC business include Daya Materials, Perisai Petroleum and Alam Maritim, analysts said.

Meanwhile, analysts also do not rule out current RSC contractors getting more jobs.

BC Petroleum – a consortium of Australia’s ROC Oil Co, Dialog and Petronas Carigali – said mid last year that it  was eyeing as many as eight more marginal fields. Dialog Group has raised spare cash. As at 31 March 2013, Dialog had a cash balance of RM424 million, after raising RM476 million through its first ever rights issue in 2012.

Petronas is rich thanks to the oil and gas boom. Since Shamsul Abbas Azhar took over as president and CEO of Petronas in 2010, he has made several big spending decisions. Petronas’ plan to spend RM300 billion over five years from 2011 to 2015 has been widely reported. It only makes sense that some of this should be plowed back into Malaysia to replenish dwindling oil and gas reserves.

Officially, exploration drilling in Malaysia under the Production Sharing Contractors (PSC) has resulted in the discovery of 163 oil fields and 216 gas fields, which is a notable success.

But the big changeover from a PSC to a RSC, if it comes to fruition this year, is more than cosmetic. Under a PSC, Petronas lets the experts such as Shell, ExxonMobil and others do the work they have been doing best for over a century; find the oil and bring it up cheaply. The oil majors have not considered marginal oilfields of Malaysia a worthy pursuit for now.

Under an RSC, Petronas assumes it knows better, enough to pay the full-priced bill for every hole that is drilled, even risking amateurs to do it. Does Petronas really want to do this … and why?

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Yesterday: Finding a winning formula for marginal oil success