The Big Oil & Gas Push Definition of Marginal Oil Fields A marginal field is defined as a field that

can produce 30 million barrels of oil equivalent or less. Some of the marginal oil fields have been exploited before. PETRONAS CEO, Dato Sahmsul Azhar Abbas said if PETRONAS did not take efforts to develop marginal fields and enhance oil recovery the reserves (marginal oil field) could run out in 15 to 18 years. Furthermore, five new tax incentives under the Economic Transformation Program (ETP) have encouraged the development of these marginal oil fields. They are: 1) an investment tax allowance up to 60% to 100% of capital expenditure to encourage the development of capital intensive projects, 2) reducing the tax rate of 38% currently for marginal oil field development to 25% to improve commercial viability of the development, 3) accelerated capital allowance of up to 5 years from 10 years, where full utilization of capital cost deduction could improve project viability, 4) qualifying exploration expenditure transfer between non contiguous petroleum agreements, and 5) waiver of export duty on oil produced and exported from marginal field development to improve project viability. Marginal Oil Fields Reserve Malaysia has 106 marginal oil fields containing 580 million barrels of oil with PETRONAS having firmed plans to develop 25% of the total marginal oil fields to replenish its oil reserves and generate new revenue streams. The original production targets for Berantai field as example are 10,000 barrels per day and 90 million cubic ft of gas per day. Thus, PETRONAS expects the first oil by year-end, and the first development phase of 18 wells to be completed by the end of next year. Marginal Oil Fields Risk However, such small fields are seen as highly risky and it is difficult to extract oil due to the geological conditions or the oil quality heavy crude oil or high carbon dioxide content, for instant. In addition, ECM Libra highlighted that marginal fields were inherently risky because they did not have the economies of scale that major fields like Tapis have. As such, relatively high oil prices would be required for these fields to be profitable. While the weaker players are expected to consolidate to be in a better position to land these big jobs. If a field is estimated to produce say, 30 million barrels, then development cost would be derived based on that. However, if the field eventually only produces 15 million barrels, the higher development cost will have to be absorbed by the contractor. Therein lies the risk. Risk Sharing Contract Smaller oli fields with smaller reserves aside, some PSC contractors are relinquishing their gas fileds because it is not viable for them to extract gas under the present terms of the contract. For the development of the margianl fields, the capital base is too small. Taking too many small field to cover high capital expenses will be too complex to manage for big oil company such as Shell. Small project like marginal oil fields would have very little impact in growing the value of their capital. Thus, new Risk Sharing Contract was introduced to attract the contractors. RSC is that the consortium does not own the reserves; the client does. The

client tells contractors how much oil and gas they think is available in the field, the timeline needed for it to be developed at a given production rate and how much they will be able to pay the contractor from the oil and gas that are produced. On top of that, if the contractor do it all according to the plan, PERONAS will pay them a better margin than they would normally get from a usual contract. Benefits to Local Company Since the local oil and gas service providers cannot become exploration and production (E&P) players, local service providers could become D&P players. Therefore, Petronas hopes that the sharing of know-how with local players will help the latter venture into development of marginal oil fields overseas. In this new RSC, the bid is made to foreign companies, who will then have to find local partners to form a consortium, so there is a transfer of technology in the process. There is a huge learning opportunity for the local companies but they have to be serious players. Compared to 30 years ago, local players today have acquired the expertise to execute 60%-70% of works in the life cycle of an oil field, thanks to Petronas that has done well in developing the locals to execute work in the oil and gas industry. Latest Contract Awarded Petrofac is, so far, the key foreign party in the development of these fields as they have managed the first marginal field, Cendor Phase 1, since 2007. Latest for ths year, the first RSC was awarded to a consortium formed by Kencana Petroleum Bhd, SapuraCrest Petroleum Bhd and Petrofac Energy Developments Sdn Bhd (PED) in January to develop and produce petroleum resources in Berantai over a nine-year period starting from Jan 31 this year. The joint operating agreement will be 50% owned and led by PED, part of the Londonlisted Petrofac Ltd group of companies, while Kencana's wholly-owned Kencana Energy Sdn Bhd and SapuraCrest's wholly-owned Sapura Energy Ventures Sdn Bhd would each hold a 25% interest.