Sabah’s foray into oil and gas has risks
Published on: Sunday, November 05, 2023
Text Size:
Samarang oil field.
It also aims to conclude its RM1.2 billion acquisition of debt-ridden Sabah International Petroleum Sdn Bhd (SIP).
Rescuing the debt-ridden Sabah International Petroleum Sdn Bhd (SIP), wholly owned by Sabah Development Bank, should be a major lesson for Sabah – the state’s first major foray in a capital-intensive high risks oil and gas ventures.
Some of the risks in the oil and gas industry include commodity price volatility, supply and demand shocks, huge capital and time to bring to full capacity, and the possibility of an oil spill or accident during the production of oil or natural gas. ExxonMobil and BP two of the largest oil companies in the world nearly went under due to oil spills.
According to its website, Sabah International Petroleum Sdn Bhd (SIP) was formed in 2014 by the State Government of Sabah, as a special purpose entity to support the State’s expanded involvement in the energy, oil and gas sector and to further strengthen Sabah State Government’s position in the industry.
SIP with several valuable operating FPSO and FSO assets and exploration blocks has succumbed to the volatility of the Oil & Gas industry. Sabah taxpayers money may now be required to bail it out.
Even Petronas, a Fortune 500 company is not spared. It registered a net loss of RM21 billion in the year ended December 31, 2020. This was largely due to the effects of plummeting oil prices which saw lower average realised prices for all products, along with demand disruption resulting in lower sales volume from processed gas, petroleum products and liquefied natural gas (LNG).
The main test ahead will be whether the state can weather the storm of price volatility and oil and gas knocks as it expands it foray into the oil and gas value chain. It’s not going to be all rosy for small state players with limited capital.
The state acquisition of the Samarang PSC is a passive acquisition of an old PSC block where most experts would label it as a marginal field. No figures are available as to how much the state paid for its 50% share. Shell was the initial operator and relinquished the concession to Petronas Carigali Sdn. Bhd. (PCSB) in April 1995.
Currently it is producing approximately 36,000 barrels of oil equivalent per day for both oil and gas.
The success of acquiring the 50% Samarang block will largely depend on the oil prices going forward, cost of maintaining its production capacity and the life of the field.
SMJ has also announced acquiring 25% equity interest in Petronas Chemicals Fertiliser Sabah Sdn Bhd (PCFS), which operates an integrated ammonia and urea production complex (Sabah Ammonia Urea [Samur]) in Sipitang, Sabah.
This acquisition may be a little too late as the going in costs is much higher than had it acquired the stake when originally offered. It was reported the state was offered 25% equity in 2011. At that time the project costs was RM4.6 billion and Sabah’s stake would be around RM1.15 billion had it taken up the equity stake.
The current going in price would be much higher than what was originally offered and it would be interesting to find out how much the state is going to fork out for the 25% share at current prices.
Samur production is mainly for exports and has little benefits for Sabah downstream chemical derivatives. The state has in the past attempted to create its own chemical derivatives industry from the second proposed Ammonia and Urea plant, on gas allocation promised by Petronas to the state.
Sabah with its big palm oil acreage would benefit if it can produce its own fertilizers instead of relying on imports. That proposal for the second ammonia and urea plant has now been shelved depriving the state to go downstream to create new petrochemical industries and jobs.
On Dec 7, 2021, the Sabah Government and Petronas signed a Commercial Collaboration Agreement (CCA) that gives the state the rights to acquire producing assets.
This is a step in the right direction but MA63 activists have pointed out Sabah is acquiring oil and gas fields already claimed by the state. It will also force the state to enter higher risk upstream ventures to increase state revenues while Petronas benefits by spreading its risks.
The Sabah Government is maintaining its stand in rejecting the Territorial Sea Act 2012, which limits the state’s maritime boundary to only three nautical miles, said Chief Minister Datuk Seri Hajiji Noor.
“Sabah opined that its sea boundary should be more than 200 nautical miles per the North Borneo (Alteration of Boundaries) Order in Council 1954,” he said in a statement. Based on the government stand, Sabah Action Body Advocating Rights (Sabar) has initiated legal action to determine questions of law relating to the continental shelf boundaries of the state.
The success of SMJ will also be dependent on its management and personnel employed. Most of the announcements by SMJ only relates to acquisitions and fall short on mentioning the transfer of technology and expertise to Sabahans.
One petroleum business observer pointed out if we are to go upstream, we need to develop a company similar to Petronas Carigali or Petros Sarawak, otherwise we will become as passive operator.
In Sarawak, the Board of Petros and its organizations is helmed by oil and gas veterans and professionals while Sabah is mostly helmed by civil servants and political appointees.
With a flurry of oil and gas acquisitions, the question remains what the state strategy and plan in the long term is and how it is going to benefit the people of Sabah.
According to SMJ’s information memorandum to shareholders, the company had cash and cash equivalents of RM21.1 million as of 31 Dec 2022 which is insufficient for acquisition of the projects mentioned.
A major newspaper, reported SMJ, as Sabah’s fledgling oil and gas company, having achieved a key milestone after successfully pricing its inaugural RM900mil Islamic medium-term notes (IMTN), or sukuk wakalah, on Oct 16.
While this is good news, we presume that this money will be used for SMJ acquisition of Petronas assets and to bail out SIP.
Oil and gas expansion along the value chain is limited in scope by the PDA Act 1974 which gives Petronas the exclusive rights to oil and gas in Sabah. The state is a buyer of oil and gas products and partake in investments sanctioned and controlled by Petronas.
What Sabah Government needs to do is to carry out a risk assessment to ensure that all bases are covered and not expose the state to bigger liabilities as in the case of SIP.
Sabah should also ensure that it receives appropriate share of the economic rent generated from extraction of oil and gas and not limited to the 5% oil royalties and 5% petroleum sales tax which now accounts for 50% of the state budgeted revenue.
It’s hard to predict the long-term gain from the CCA with Petronas-oil and gas is a capital-intensive industry requiring long term outlook. Most of all, players need deep pockets to overcome any eventualities.
- The views expressed here are the views of the writer and do not necessarily reflect those of the Daily Express.
- If you have something to share, write to us at: [email protected]
ADVERTISEMENT
