A strong recovery in sight?-

Malaysia has one of the most dynamic oil and gas (O&G) sectors in Asia. It has the fourth largest proven oil reserves in the Asia-Pacific. It has companies present across the entire O&G value chain. Besides, the country is yet to explore its deepwater potential fully, making it one of the most exciting O&G industries in the region.

The country’s national oil company, Petroliam Nasional Berhad (PETRONAS) provides fully integrated O&G services including exploration, transport and marketing. All O&G resources in Malaysia are vested with the company. It currently has operations across 50 countries and is ranked amongst one of the largest corporations on the Fortune Global 500 list.

The Malaysian O&G industry has been going through challenging times since oil prices started to decline in mid-2014. PETRONAS’s total income for the year fell from RM 73.19 billion in 2013 to RM 30.2 billion in 2017. Low oil prices over a prolonged period have affected the Malaysian O&G industry significantly, but the economy is now taking the necessary steps to manage this downturn. This is being supported by the presence of a well-established industrial ecosystem, which creates significant demand for hydrocarbons.

Growth and evolution

The Malaysian upstream oil and gas segment started more than 100 years ago with Shell starting production from its discovery in Sarawak, East Malaysia, in 1910. Production was initially governed by the Petroleum Mining Act, 1966, which governed oil and gas activities in Malaysia and provided Exxon and Shell rights to explore and produce in return for royalties and tax payments to the government. With the government vying for more control over its hydrocarbon resources, it passed a new law in 1974 called the Petroleum Development Act, 1974 (PDA 1974). Under this, a wholly owned government entity called PETRONAS with exclusive rights to all O&G resources in Malaysia was formed. PETRONAS has today developed its upstream segment into one of the largest O&G producers in the world. Malaysia, which is the second largest O&G producer in the South Asian region after Indonesia, is expected to continue its dominance in the near future as well.

Over 3,500 businesses comprising international oil companies (IOCs), independent players, manufacturers and services providers are present in the Malaysian O&G sector. This extensive presence of companies coupled with a supportive government policy and vibrant demand has created a strong ecosystem that benefits the entire O&G value chain. There is also the presence of strategic players in key segments such as marine, drilling, engineering, offshore installation and operations and maintenance (O&M).

Recent developments in Malaysia’s upstream segment

The country’s domestic oil production has shown a falling trend mainly because of maturing oil fields in the shallow waters in offshore peninsular Malaysia. On the other hand, domestic oil consumption has increased, leaving smaller volumes available for exports. Now, the country is looking to attract new investments and reverse the declining production by enhancing output from existing fields through advanced enhanced oil recovery (EOR) techniques. It is also developing small, marginal fields through risk service contracts (RSCs) with private players. Under these contracts, PETRONAS is the project owner while investors are the service providers receiving revenues for oil produced throughout the project life.

PETRONAS is implementing 10 EOR projects to extend production from some of Malaysia’s oldest oil-fields. ExxonMobil is participating in the Tapis EOR project, which began in 2014. As part of a production sharing contract, ExxonMobil and PETRONAS use alternative natural gas and water injection processes to extend the life of the seven fields in the project – the Seligi, Guntong, Tapis, Semangkok, Irong Barat, Tebu and Palas fields. This is expected to extend the lives of the fields by 25 years and add up to 35,000 barrels per day (bpd) to current production. Malaysia is also maximising its oil production potential by issuing RSCs for smaller and marginal fields. These contracts involve risks shared between PETRONAS (the project owner) and the contractors (foreign and domestic companies), which act as service providers. These companies receive compensation for cost and a return on investment.

Malaysia is also drilling deeper to search for more oil resources. Several major projects are under development in the deepwater area in offshore Sabah state, which could boost Malaysia’s oil production over the next decade. This includes the Kikeh oilfield, which is operated by Murphy Oil in partnership with PETRONAS and was Malaysia’s first deepwater oil producing field. Another deepwater area in offshore Sabah, the Gumusut-Kakap project, uses the region’s first deepwater floating production system. The original Kakap field was commissioned in 2012 with production of 25,000 bpd. New production from the Gumusut field, which was commissioned in 2014, was the key driver in crude oil production growth in Malaysia. Currently, output from both fields averaged between 100,000 bpd and 120,000 bpd with a peak production of 135,000 bpd. These deepwater offshore fields have higher technical challenges and require larger investments by developers.

The way forward

In 2013, PETRONAS announced higher spending for exploration and production (E&P) activities to boost O&G production and to offset the decline from ageing fields. However, this plan has been revised after oil prices started declining since 2014. PETRONAS has now announced cuts to capital expenditures by about $11.2 billion between 2016 and 2020. This has slowed the enthusiasm in Malaysia’s upstream oil assets and has resulted in IOCs abandoning a few contracts in Malaysia.

As per the PETRONAS Activity Outlook 2018-20, PETRONAS will develop 20 greenfield projects having new facilities. Thirty per cent of these will be oil projects. It will also develop 30 brownfield projects, of which 10 per cent will have new facilities. Seventy-five per cent of these projects will be oil projects. PETRONAS expects to produce an average of about 1.7 million barrels of oil equivalent per day over the next five years until 2022. Although capital expenditure targets have been revised, the Malaysian upstream sector seems to be on a solid footing with a number of new contracts and discoveries in place.