Marginal Fields

A significant proportion of Malaysia’s remaining resources lay in fields with less than 30 million barrels of recoverable oil. Developing these fields in an economically attractive manner is often challenging, as they need the same expensive infrastructure as large fields, while the expected revenue streams are smaller due to the smaller reserve sizes.

To make the most of these small fields, PETRONAS will work with the industry on three fronts. Firstly, PETRONAS, where necessary, will review the PSC terms and introduce new petroleum agreements to ensure that operators of these small fields receive enough economic incentives so that they find sanctioning investments in small field developments attractive versus their cost of capital and versus other opportunities available to them in Malaysia and abroad. Secondly, PETRONAS will attract E&P operators that specialise in small fields. These operators typically have a development and operating approach that is specifically adapted to the challenges of these types of fields. Thirdly, PETRONAS will facilitate collaboration between players to allow sharing of facilities and other synergistic measures to improve the economics of small field development.

Adjusting the development framework for small fields will increase Malaysia’s oil production by approximately 55,500 barrels per day in 2020 versus the base case. The total investment needed to achieve this is approximately RM13.3 billion and the contribution to GNI is RM5.5 billion, which makes up for the GNI that would have been lost due to declining production if small field development were not deployed.

Historically the anticipated internal rate of return (IRR) for marginal fields is only between 11 to 20 per cent whereas the project IRRs of independent power producers (IPPs), involved in the 1990s “greenfield projects” were about 20 per cent and more than 30 per cent for equity IRR. Hence there is strong motivation to achieve production targets and obtain a fee/profit above cost to make up for the lower rate of return.  IRR is a primary measure for investment decision for oil and gas companies, where cost of capital is typically used as a decision basis.

Given Malaysia’s limited energy resources it is expected that performance-based agreements which optimise production will become more prevalent in the Malaysian oil and gas industry. This can only be good news for the country which is undergoing Transformation into a high-income, high-value economy powered by advanced technologies underscored by the 10th Malaysia Plan (10MP). Worldvest believes RSCs make good business sense, providing “predictable cash-flow business”. We recognise that the one big drawback with the RSC model is that there is too much emphasis on minimising capital upfront and therefore a venture of this kind requires very hands-on management to avoid expensive problems in operations. The challenge for any JV will be to make mature, marginal, deepwater and other reservoirs more technically and commercially viable to produce and increase the proposed JV’s production effectiveness and efficiency, combining reservoir, production and completions engineering.

Marginal Field Tax Incentives

  1. A reduced tax for marginal oil field development, from 38% to 25%, to improve commerciality of their developments.
  2. Investment tax allowance of 60-100% of CAPEX will be deducted against statutory income to encourage development of capital intensive projects (i.e. enhanced oil recovery (EOR), high CO2 gas fields, high pressure high temperature, deepwater and infrastructure projects for petroleum operations).
  3. An accelerated Capital Allowance of up to 5 years (from 10 years) for marginal oil field development where full utilisation of capital cost deducted could improve project viability.
  4. Qualifying exploration expenditure will be allowed for transfer between non-contiguous petroleum agreements with the same partnership or sole proprietor to enhance contractors’ risk taking attitude.
  5. A waiver of export duty will be given on oil produced and exported from marginal field development
    Source: PEMANDU