E. Zari 21 April 2017.

1. Central Luconia field, the E11, F23, F6 …., the M- fields, Balangian, the offshore Sabah fields flows through the SSGP to Bintulu, the marginal fields, the Kenowit where the Floating LNG is currently anchored – these are some of the associated and non associated fields that feed the Petronas LNG Complex operating 9 process modules/trains in Bintulu producing about 28 mtpa of LNG or about 500 cargoes when it reaches pleateau production.

2. Indeed, Petronas has gone a long way from the first RFSU and commercial production and export of LNG since January 1983 to Tokyo Electric Power Company Incorporated and Tokyo Gas Company Ltd. at the Sodegaura LNG Receiving Terminal at Tokyo Bay in the thick of winter.

3. I was with MLNG when we first started the 3 modules operation producing about 6mtpa of LNG liquefying about 1300 mmscfd of gas per day and all the gas was from the Central Luconia Field of about 125nm offshore via a 24 inches trunkline. My career which spans for more than 30 years in the oil and gas industry and very well versed and fully involved in the 3 important ” Bibles” in this chain linked project from upstream until reaching to buyers’ doors for the monetisation of this natural resources – The Gas Sale Agreement, The Time Charter Party Agreement and the LNG Sales Agreement opened avenues for me to interact, learn and share knowledge with individuals such as technicans, reservoir engineers, planners, operators, lawyers, economists, marketeers, marine seafearers, accountants, insurance brokers etc which has enriched my knowledge in this field.

4. Exploration of oil and gas, its assessment for proven reserves, development, sustainence for monetisation is a very expensive and risky business. It is meant for big players with deep pocket and willing to take risk.

5. Lately, eventhough there are many findings with very prospective volume of reserves, the gas contains high level of CO2 which is termed as sour and will determine whether it is a lean or rich gas in calorific values which will involve cost for its treatment. I recall an American IOC has to hold on for nearly 20 years for the East Natuna (Indonesia) gas as we colloquially termed it as the ” Coca Cola” field as the volume of CO2 is enormous. I was happy to hear that Petronas recently makes a breakthrough of separating the CO2 in the Plant. CO2 is a killer as it will crystallize with freezing temperature in the Plant and for exploration of the raw natural gas it needs to be properly separated and disposed and the best prudent way is by reversed injection back to its origin which technology has not yet been perfected. Further, the raw gas needs to be filtered via the Slugcatcher where impurities, water etc or ” Wild Hydrocarbon” are separated. Sulphur will be separated via the Sulfinol Unit and the wet gas is dried via the Dehyderation Unit then precooled via the Propane Cycle before the C5++ or Pentanes plus is separated via the Fractionation Unit to extract raw gasoline. The clean gas then passes through the molecular seives in the Liquefaction Tower and cooled down further to minus 165 degree celsius to become Liquefied Natural Gas. This is no exception for the SK316 block which the NC3 provides natural gas for the Train 9 LNG Plant owned by Petronas and recently JX Nippon Oil and Energy Corporation has taken shares im this project. Within this field is the Kasawari which is very prospective to be developed and has large potential reserves.

6. For the arden observers, they will question why Nippon Oil? Why not other prominent players? In my opinion, if the present day market behaviourial environment still holds water, I firmly believed it is boiling down to ” synergy”. Petronas, being an experienced organisation knows that synergy plays an important role and the partner may have their speciality in certain aspects of the value chain. In the late 70s, Mitsubishi Corporation ( a huge conglomerate or Sogo Shosa) was the partners for the first project because of their familiarity with the Japanese market. For other LNG projects, they have Nissho Iwai ( C. Itoh), Mitsui and Marubeni as their shareholders. Nippon Oil or its subsidiary JX Nippon Oil is an experience upstream oil and gas company. Therefore, developing synergy for a win win endeavour is a must in this challenging and volatile business environment in oil and gas industry.

7. In this economic situation and also the nature and profiling of the gas fields, Petronas as a prudent upstream player through its exploration arm – Petronas Carigali is finding a suitable partner/s who has/have the experience and technology to develop the block for SK316. It is not the issue of purely in need of fund. It is rather spreading of risks and the appropriate experience and technology. Lately, due to the oil and gas slump and also competition from the Shale derivatives, we witnessed many mega oil and gas players went burst and are sheltered for protection under Chapter 11 in the United States with no exception for these shale derivatives player. At a lengthy period of time when crude prices hover around USD40 or 50/ bbl, these players if no drastic move to restructure, reallign or the worse sheltered for protection from creditors will be “dead standing”. Last year, we witness the take over of BG by Shell. The consolidation and reallignment of businesses and other initiatives for these mega players faced with the low oil and gas prices is the norm. Basically, the big players are now very cautious and realigning their business model faced with this challenging situation. Many of them are moving away from the Asian region living the vacuum for the 2nd tier players. Petronas as an experience player knows this well and they needs to entice these players to participate in order to maintain competitiveness in the the ever challenging upstream activities.

8. Development of the fields after its finding is very crucial and it needs technical expertise and those who could share the risks. Technically, looking at the reserves of 3TCF, based on my ball park estimates flowing a volume of 600mmscfd of gas, the reserves could last for 15 to 20 years. But usually base on my experience it lasted less than that this duration and as times passes it needs more compression to flow the gas as it is slowly dropping for depletion. On the commercial side considering 600mmscfd the equivalent amount of LNG produced is about 3.0 mtpa or 155TBtu or about 51 cargoes annually at 3TBtu per cargo. At an LNG price of USD8/mmbtu and the ratio of gas revenue of about 40% of the LNG revenue and deducting the development costs, it takes about 6 to 8 years to Breakeven. Eventhough, it sound prospective it needs gut to take this challenge as risk is always imminent if prudency is overlooked and prices fluctuate and go south and worse if proven reserves does not meet its expectation as time passes. This is a common occurrence faced by a season players. The Egyptian gas reserves is a fine example experiencing an early depletion. So from the first drilling bits entering the shore or sea bed, the factor “RISK” will creep in. But if there is risk alone and no rewards no player will want to enter this industry. The larger the risk, the larger will be the rewards.

9. I heard recently, the various views posed by politicans and the NGO about this proposed sale by Petronas. It sounds easy to have Sarawak for the first right of refusal. But the big question is do we have this deep pocket fund, risk adversion foresight, and the technology to go pairing with Petronas. It sounds very simple but the question is – are we ready for it? We even do not have the vehicle at present to shoulder it. But if I could give my advice – my answer is definitely a big NO. It is too risky for the State to go into the exploration business such as this SK316 or even Kasawari.Even for Shell, I understand they are concentrating on the development of the deep water Gumusut and Malikai offshore Sabah and I understand they are intending to sell the shallow water blocks north of Sabah. The assets capitalisation of these IOCs or NOCs are huge compared to the GDP of our State. My humble advice is (after 30 years in this field and and at one time the lead negotiator for the purchase of the upstream gas from the PSC contractors of Carigali, Shell and Nippon Oil) this is not the area we should go into. Instead, we should concentrate in the mid-stream or down stream or even increasing our stake in the shareholding of the Petronas LNG Complex ( the 4 projects of MLNG, Dua, Tiga and Petronas Train 9). The State’s share here is still minimal.

10. Therefore, I do hope with sharing of my views on the nitty gritty of the upstream business, the readers will understand the difficulty that Petronas is facing. The main consideration, I feel is not lack of funds on the part of Petronas. It is more than this – risk adversion/sharing and technology as well as deep pocket partners. I may be wrong.

11. Since the State has a representative recently in the Board of Petronas who was my former colleague in Petronas in the early 80s, he could serve better and keep the State in the loop. Actually, I feel he is well informed on this matter. It is not an issue at all – it becomes one because of the nature of it being reported. As I commented earlier, any matter of this nature, a direct engagement is much better to know the real situation. Sarawak can choose their own “destiny” in the oil and gas activities but my advice is that this “destiny” must be accompanied by reality in the quest to prosper the State. With that I end my 2 cents view on this very topic of SK316.

Cheers.

FT Kuala Lumpur.

SK316 : PROPOSED SALE AND DEVELOPMENT.
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