Petronas awards US$800mil first ever risk service contract

PETALING JAYA: Kencana Petroleum Bhd and SapuraCrest Petroleum Bhd, together with Petrofac Energy Developments Sdn Bhd (PED), have bagged an estimated US$800mil contract from Petroliam Nasional Bhd to jointly develop and operate an oil and gas field in Berantai.

This would mark the first time the national oil company has awarded a risk-service contract (RSC) (as opposed to a production-sharing contract) for the development and production of petroleum resources in the country.

The joint operating agreement (JOA) will be 50% owned and led by PED, part of London-listed 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, said both companies in an announcement to Bursa Malaysia.

Datuk Shahril Shamsuddin ... ‘The risks are real and it’s a serious project.’

The operating parties will be jointly responsible to provide field development plan, execute and complete the plan including its funding and carry out production of petroleum resources from the Berantai field over the course of the RSC, which is for a nine-year period starting from Jan 31. The project is targeting first gas by end of December 2011 with the first development phase of 18 wells expected to be completed by end-2012.

“This is a very fast-track project to be delivered by year-end (for the first gas production). It's not a normal timeline but with the concerted effort of all the three parties ... (we are quite confident of meeting the timeline).

“We do not own the concession but we are proud Petronas has given Malaysian companies a chance to participate and take on more risks. We estimate the development cost to be a minimum US$800mil. It all depends on the first phase of production ... there may be a second phase, so the expenditure could go up,” Kencana's group chief executive officer Datuk Mokhzani Mahathir told StarBiz.

SapuraCrest executive vice-chairman Datuk Shahril Shamsuddin said: “We need to work very fast as the timeframe is tight. But it's not unachievable. We have allocated resources to ensure this project is completed on time. The whole idea is to bring local companies into the value chain.

“There are no freebies in this. The risks are real and it's a serious project.”

Datuk Mokhzani Mahathir ... ‘We are proud Petronas has given Malaysian companies a chance to participate.’

The rights and liabilities of each party will be in proportion to their respective interest in the JOA. Kencana Energy and Sapura Energy's contribution into the development cost would be approximately US$200mil each. Kencana Petroleum said it will fund this via internal funds, borrowings and proceeds from equity/debt fund raising exercise.

As at end-July 2010, Kencana Petroleum Group's borrowings stood at RM225.9mil. Assuming that 50% of Kencana Energy's cost to develop the project is funded through borrowings, the total borrowing of Kencana Petroleum Group will increase by RM310mil to RM535.9mil.

Accordingly, the company said its gearing, after adjusting for the private placement of 166.70 million new shares, would increase from 0.30 times to 0.47 times.

Sapura, for its part, said it would fund the job through a combination of internal funds and external borrowings.

The operating team undertaking the project shall comprise personnel from each of the operating parties.

“Overall supervision and direction of the operations are vested in a management committee consisting of representatives from each of the operating parties. Each of the operating parties shall have the right to deploy works and services to the project,” said the companies.

Kencana said the contract presented the opportunity to expand its service offering within the upstream oil and gas services and move up the value chain as a field developer and operator while extending the group's earning visibility.

For SapuraCrest, it said the contract would mark a “step change in ascending the oil and gas value chain and developing new competencies in new areas of the oil and gas industry.”

The project is expected to improve both companies' net asset, net asset per share and earnings per share over the duration of the contract.

The companies pointed out that the risk factors included execution risks such as availability of technical expertise, skilled manpower, materials, changes in prices of materials, and changes in political, economic and regulatory conditions.

The Berantai field is located about 150 km offshore Terengganu. The development of the Berantai field will involve the provision of one well-head platform with 18 wells together with related pipeline linking it to another existing platform and a provision of a floating production, storage and off-loading vessel. A second well-head platform is expected to be installed in a subsequent phase.