Just over the last week, news broke that Perunding Ranhill Worley Sdn Bhd (PRW), an affiliate of Ranhill Energy has had its Petronas licence suspended for both upstream and downstream projects. Ranhill was on the verge of a MYR753m ($232m) listing on the Malaysian bourse and was to have made its debut on 31 July before being forced to pull the plug at the last minute.
The move was apparently triggered by unsatisfactory work done on Petronas Gas Bhd’s LNG regasification plant in Malacca, for which a consortium Muhibbah Engineering and PRW had won a MYR1.07bn contract in 2011.With business from Petronas contributing some 10% of Ranhill's revenue this dealt a big blow to its O&G business.
All companies who want to bid for Petronas contracts must have a licence to do so. In other words, their fates are inextricably tied to their favour with the NOC.
This system has done well for many of them as the Malaysian government has used Petronas as a de facto oil industry regulator to help redistribute some of the nation's energy resources wealth locally. It has benefitted companies all across the offshore services value chain and may even have led to the consolidation of some at the top end such as the merger last year of Sapura Crest Petroleum and Kencana Petroleum.
With the move towards using risk sharing contracts (RSCs) to exploit Malaysia's smaller marginal fields, the incentive to just throw their lot into the Petronas pot is even greater. The RSC is a new type of oil exploitation contract Petronas has pioneered for Malaysia where it remains the project's owner while the contractors are the service providers.
As part of Petronas' requirements, bidders must consist of established foreign O&G players with proven local partners. The contractors have to come up with the initial investment to develop and produce the oil before being compensated later for their costs as well as services rendered. While an attractive proposition since the internal rate of return on these RSCs is estimated to be between 15% to 20% since they are for proven reserves, the upfront cost is high, with average contract size of between $800m and $1bn.
Petronas probably hopes that these contracts will be a way for Malaysian companies to step up into the big leagues. However, the large capex involved puts it out of the reach of many of them and Petronas' own exploration arm Petronas Carigali has had to step in to partner local companies in two of the three RSCs awarded so far.
The circular dilemma for Malaysian oil and gas service providers is that their small size does not allow them to break out of their local market while the limited scale of the Malaysian market makes it difficult for them to get bigger.
The question for them then is whether it make sense to live and die by the Petronas gravy train. They may have little choice but to do so but as seen in the case of Ranhill, this can prove disastrous should things go wrong.
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