Selling off Sarawak’s oil and gas assets: Myth or reality?

sarawak_petronas_6001By Suarah Petroleum Group

The news

Reuters on Feb 20, 2017 reported in Singapore that Petronas is aiming to sell its 49% stake in the SK316 offshore gas block in Malaysia’s Sarawak for up to US$1 billion (RM4.41 billion) seeking to raise cash and cut development costs. According to its sources, Petronas is said to be working with an investment bank on the stake sale and the process was kicked off in February 2017.

On Feb 21, 2017, The Star reported that Petronas president and CEO Wan Zulkiflee Wan Ariffin had denied the report that it was considering selling its stake in the SK316 offshore gas block in Sarawak to raise cash, adding that Petronas had a cash balance of RM130 billion and that there was no need to sell to get money.

Block SK316, located approximately 180km North of Bintulu, Sarawak, is operated by Petronas and contains a number of gas fields including the NC3 field which feeds Malaysia’s liquefied natural gas (LNG) export project, known as MLNG Train 9.

In 2011 and 2012, Petronas reported that Kasawari-1 and NC8SW-1 were the latest wells drilled in Block SK316 and were significant gas discoveries. The Kasawari field had over five trillion standard cubic feet (TSCF) with an estimated recoverable hydrocarbon resource of just over three TSCF, making it one of the largest non-associated gas fields in Malaysia.

The recoverable resource for the NC8SW field is estimated at more than 450 billion standard cubic feet of gas. In late 2015, Petronas called off the tender for the Kasawari field development, a contract worth over US$1 billion that had been offered earlier. The first gas for Kasawari was initially targeted for late 2018, which is now delayed.

According to the same Reuters’ sources, the stake to be sold is expected to include a combination of the producing NC3 gas field, the potential development of the Kasawari field and other exploration acreages in the block. The funds raised could also contribute to the future development of the Kasawari field.

The reality

As far as reported in the public domain, Block SK316 is still 100% held by Petronas Carigali. While in the early 2011/12, Petronas was optimistic that it could go on its own with the development of its gas discoveries in SK316, including the over US$1 billion required for the Kasawari development.

Things started to turn south in 2015, and with the falling oil prices and dwindling cash flows added to both the increasingly technical and project development challenges for Kasawari, Petronas decided to put the project on hold.

Fast forward to 2017, where many believe that the oil and gas industry has reached its bottom and is now back on the upward trend, with time being right for oil and gas asset owners to evaluate their portfolio of assets in order to extract their maximum value.

In this case, Petronas should not be exempted in assessing its portfolio of assets and identifying those that could be “flipped” wholly or partially in return for cash or asset swaps or both. In the case of the SK316 block, where there exist producing fields, development projects and exploration options, selling a minority stake or farming out part of the PSC to others appears indeed to be an interesting option.
However, as SK316 is a gas PSC and having the NC3 field already feeding LNG Train 9, added with the technical challenges of the Kasawari field, it is expected that there will be limited candidates for the minority stake in SK316.

Nevertheless, since NC3 is already producing, it becomes an interesting option for the existing partners in LNG Train 9 and the likes of JX Nippon Oil & Energy or parties with downstream interest in Bintulu to consider the upstream options.

Another interesting aspect for the minority stake in SK316 is that as Petronas will continue to be the operator, the stake is easily “bankable” as the buyer can be a non-technical party, opening the door for pure financial investors.

This is, however, subject to Petronas’ approval.

The possibilities

Putting aside the argument of whether Petronas is selling off Sarawak’s oil and gas resources, whether illegally or unconstitutionally acquired or whether it has the right to do so by seeking investments for a minority stake in SK316, there indeed exists the potential for Sarawak (or through one of its vehicles) to consider having a substantial and more meaningful participation in the upstream PSCs, all the more where PSCs are either expiring, expired or where operators withdraw.

This has to be done through a proper oil and gas due diligence process including examination of both technical and financial aspects of the PSC.

However, the more urgent question remains whether Sarawak is content to continue to be a mere spectator, or wants to become an active participant in the development of the oil and gas resources of Sarawak.

Sarawak Chief Minister Abang Johari Openg says Sarawakians must decide their own destiny, not to have somebody else deciding for them. Thus, the state government of the day must create policies that are Sarawak-centric and focused on the immediate and strategic needs of the state, he said.

“So we are left in a situation where we have oil and gas and cannot fully enjoy the benefit of having oil and gas. This cannot be….“

He said it is therefore of strategic importance that Sarawak should try to use as much as possible of its energy resources for its own economic development and industrialization.

The “recycled” news about Petronas’ intent to divest 49% of its stake in SK316 offshore Sarawak has been making the rounds again in the local news recently. It was first reported in February 2017 and was quickly denied by Petronas.

In April, the Reuters report again resurfaced. To oil and gas industry observers, the news is a positive one as it improves the outlook of the delayed Kasawari gas project.

BMI Research was upbeat on the potential sale of equity as the bulk of the funds generated from the stake sale in the SK316 offshore gas block is expected to be used to develop the Kasawari field.

The Kasawari gas project, which is part of SK316, is a deepwater, sour gas development estimated to hold about 3.2 trillion cubic feet of recoverable gas resources.

“Despite promising below-ground prospects, development has progressed slowly due to the field’s deepwater,high-cost structure, and the relative inexperience of domestic engineering firms involving carbon dioxide removal. Potential integration of a foreign partner could dilute the project’s cost burden.

Any future gas output from Kasawari will likely be designated for exports, given Malaysia’s comfortable surplus in gas,” the research house said in a statement.

We believe that Petronas’ search for a potential foreign partner in the project is not unreasonable, but nevertheless it should be looking closer to home, to the real owner of those assets.

Therefore, the news of the proposed sale is indeed a sour note for Sarawakians. It would appear that Petronas is not responding to the state’s concern to increase its participation and may even be sabotaging such efforts.

What is in such a sale for Sarawak?

Echoing the sentiments of Abang Johari, any proposed “sale” of Sarawak oil and gas assets by the party that was supposed to have the “vested interest” of Sarawak in mind without the apparent knowledge of the government and people of Sarawak shows the “tidak peduli” attitude of the parties involved.

Or more intriguing than this, questions may be raised as to why it is only Sarawak’s oil and gas assets that are the prime target for such selling off and could Petronas be undertaking a back door sale of Sarawak’s oil and gas assets as an exit strategy before the state can get its hands back on those assets?

Also, would not such sales reduce further even the measly royalties that Sarawak is now getting? Would such sales by Petronas while negotiations are ongoing with the state government in regard to devolution and return of those assets not be in bad faith?

These questions notwithstanding, instead of dwelling on the negatives, Suarah Petroleum Group would like to propose that in the period where devolution of authorities and negotiations on oil and gas rights are taking place between the state and Federal governments, a joint oil and gas development authority (Jogda) be created comprising the Federal government, the state government and Petronas, where all strategic matters concerning Sarawak’s oil and gas matters, including new PSC awards, and sale or transfer of interests, are deliberated.

‘Saya Peduli’

There are many experienced and qualified Sarawakians willing to lend their expertise to assist and support the government of Sarawak in the setting up of Jogda in the spirit of “Saya Peduli” in maximising Sarawak’s socio-economic benefit and safeguarding its rights in the oil and gas industry for its present and future generations.

Sarawak must not lose any more of its precious oil and gas assets to self-serving rent-seekers. Until and unless Sarawak takes firm and decisive action, we remain mere spectators at the mercy of others.

Suarah Petroleum Group is a think tank comprising Sarawakian professionals in the oil and gas industry.

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