understanding the rsc contract with petronas

"Petronas has identified between 25 and 27 that it plans to award RSCs to develop."

http://www.allens.com.au/pubs/ener/foener13jun13.htm


I found this article as i am trying to get an understanding of what is involved in the RSC.

FOCUS: MALAYSIAN RISK SERVICE CONTRACTS – THE IMPLICATIONS

13 JUNE 2013

In brief: The offshore licensing unit of Malaysia's national oil company recently invited bids for 10 marginal fields in its third risk service contract licensing round in as many years. Partners Igor Bogdanich (view CV) and Anthony Patten , and Lawyer Ainsley Reid-Willet, discuss the background to the need for such contracts, and the implications of the new contracts for oil and gas companies looking at investing in Malaysia.

Background
The RSC
Background

In May 2013, Petronas, the offshore licensing unit of Malaysia's national oil company, Petroliam Nasional Berhad, invited bids for 10 marginal fields off the coast of Sarawak, Sabah and Peninsular Malaysia. This is the third risk service contract (RSC) licensing round in three years, and has reportedly drawn interest from small to medium-sized oil and gas independents and foreign oilfield services contractors.

Malaysia's Petroleum Development Act 1974 vests the entire ownership, and the exclusive right to exploit petroleum resources on land and offshore in Malaysia, in Petronas. To date, Petronas's exploitation of petroleum resources has primarily been carried out under a production sharing contract (PSC) regime, with the contract entered into between Petronas and an international oil and gas company.

However, in an effort to boost domestic oil production after a number of years spent focusing on projects overseas, Petronas has sought to encourage the development of Malaysia's marginal oil and gas fields by introducing the RSC as an alternative to the PSC regime. Along with the Malaysian Government having announced tax incentives – including a reduced tax rate for marginal oilfield development, from 38 per cent to 25 per cent – it is hoped that the introduction of the RSC model will improve the commerciality of the development of marginal fields.

In Malaysia, marginal fields are considered to be small fields with reserves of less than 30 million barrels of recoverable oil or oil equivalent, and Malaysia has some 106 marginal fields containing approximately 580 million barrels of oil. Of those fields, Petronas has identified between 25 and 27 that it plans to award RSCs to develop.

Ahead of potential awards following the third licensing round, only three RSCs have been awarded: the Berantai Cluster to Petrofac Limited, along with SapuraKencana Petroleum Berhad; the Balai cluster to ROC Oil Company Limited with Dialog Group Bhd; and the Kapal, Banang and Meranti Cluster to Coastal Energy Co, along with Petra Energy Bhd. In January of this year, Petronas decided not to award an RSC in relation to the Tembikai and Cenang fields, despite a competitive bidding exercise conducted in 2012, stating it would not be re-opening the cluster for bidding.

Despite the relatively few RSC awards to date, Malaysia's oil and gas sector was identified as a 'National Key Economic Area' under Malaysia's 2010 Economic Transformation Program to boost economic growth. Petronas is reportedly committed to spending nearly US$100 billion over the 2011-2015 period, to maintain or grow production in Malaysia, including by encouraging development of marginal oil and gas fields.

The RSC

The RSC model is a departure from Petronas's PSCs, and aims to strike a balance between risk sharing and fair returns for the development and production of fields that have already been discovered. Petronas defines the RSC as:

There is no standard, publicly available RSC and therefore there is a lack of transparency around the terms that would apply to any particular field or the RSC model in general. However, according to publicly available information, the key features of RSCs are as follows:

the contractor (that is, the relevant oil and gas company) develops, operates and maintains the field, while Petronas retains ownership and control of the reserves. We understand that Petronas's view is that this means contractors cannot book the reserves (we discuss this further below);
up-front capital investment and initial costs are contributed by the contractor, which are reimbursed at an agreed point in time, such as after the pre-development phase on or the production of first oil;
after that, the contractor receives a per barrel remuneration fee, subject to taxes, up to an agreed ceiling – contractor compensation is contingent on reaching production by a target date, and achieving certain rates of production throughout the contract term; and
each international services company must join with a Bursa Malaysia-listed local partner, giving the local partner at least 30 per cent equity ownership, in order to qualify for an RSC.
It is anticipated that the RSC will offer a higher-than-industry average internal rate of return on investment, at between 7 per cent and 20 per cent, subject to terms and conditions.

The limit on revenue upside resulting from the RSC's remuneration ceiling and lack of ability to benefit from high oil prices, and the inability to book reserves, make the RSC a less attractive option than PSCs for major oil companies. However, it is hoped that the RSC will encourage the participation of niche to medium players in developing smaller fields more quickly and efficiently.

As noted above, as Petronas retains ownership and control of the reserves, it seems that contractors cannot book the reserves themselves. One of the stock exchange-listed contractors, awarded an RSC in one of the earlier bidding rounds, expressly notes in its annual report that it has not booked the reserves that are the subject of the RSC. Depending on the identity of the relevant contractor (eg oil major, independent, trading house, utility etc), the ability or otherwise to book reserves may prove an important threshold issue.

With the status of awards from the third licensing round as yet unknown, whether or not the RSC model will become a widespread success remains to be seen. However, Petronas appears to be committed to playing a revitalised role as an 'enabler for industry development' which it hopes, coupled with improvements in fiscal policy, will create a more favourable environment to increase domestic oil and gas production in Malaysia.

Footnotes

Tan Hwee Hwee for Upstream, 'Players set sights on Malaysia's RSC round', 16 May 2013.
J.P.Morgan Asia Pacific Equity Research Report, 'Malaysian Oil Services', 13 March 2013, p. 4.
Petronas media release, 'Petronas Clarifies Status on Tembikai and Chanang RSC', 25 January 2013.
J.P.Morgan Asia Pacific Equity Research Report, 'Malaysian Oil Services', 13 March 2013, p. 4.
Petronas media release, 'Petronas Awards First Risk Service Contract to Petrofac, Kencana and Sapura', 31 January 2011.
Petronas 2011 Annual Report, p. 91.
The Oil and Gas Week, 'Deep blue sea', 5 December 2012. Tan Hwee Hwee for Upstream, 'Players set sights on Malaysia's RSC round', 16 May 2013; and Petronas PE 2011 Annual Report, p. 201.
Wordvest Asia Pacific Sdn Bhd, 'Risk Service Contract Framework'.
The Oil and Gas Week, 'Deep blue sea', 5 December 2012.
Petronas 2011 Annual Report, p. 39.
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