Last Updated on Wednesday, 09 January 2013 04:10 Friday, 07 October 2011 03:46

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Risk-Service Contracts—from marginal to mainstream

SINGAPORE (21 March 2011) – Newly inked, the risk-service contract (RSC) between Petroliam Nasional Bhd (Petronas) and the consortium comprising London-listed Petrofac Energy Development Sdn Bhd, SapuraCrest Petroleum Bhd and Kencana Energy Sdn Bhd may further spell industry-wide ramifications.

The unprecedented deal comes at the heels of Malaysia’s announcement to concentrate on domestic exploration and production, incentivised by tax cuts from 38 per cent to 25 per cent for marginal field development.

Performance-based agreements like the trail-blazing Berantai RSC have a keener, laser-like focus on production and recovery rates as compared with production-sharing contracts favoured by oil majors.

Perhaps this emphasis on optimising production capacities in marginal fields can be extended to contracts governing recovery of main oilfields in an industry of rapidly depleting resources. Currently, Petronas’ recovery factor is about 26 per cent for main oilfields, which can be further improved with optimised production techniques and knowledge exchange.

In the interest of all, it is only prudent for industry players, vendors and operators alike, faced with insurmountable challenges posed by an ever-decreasing supply, to pool together peer operating practices and expertise to boost petroleum reserves.

The likes of RSCs make good business sense, providing “predictable cash-flow business”, said a well-known integrated service provider. The one big drawback is that, “there is too much emphasis on minimising capital upfront, which leads to expensive problems in operations that are largely avoidable”.

So why, on an industry average, would performance-based agreements for developing marginal field better optimise production? This is by sheer virtue of the fact that anticipated internal rate of return (IRR) for marginal fields is only between 11 to 20 per cent whereas the project IRRs of independent power producers (IPPs), involved in the 1990s “greenfield projects” were about 20 per cent and more than 30 per cent for equity IRR. Hence there is strong motivation to achieve production targets and obtain a fee/profit above cost to make up for the lower rate of return. IRR is a primary measure for investment decision for oil and gas companies, where cost of capital is typically used as a decision basis.

Given limited energy resources, it is not too premature to predict that performance-based agreements which optimise production will become more prevalent in the Malaysian oil and gas industry. This can only be good news for the country which is undergoing Transformation into a high-income, high-value economy powered by advanced technologies underscored by the 10^th Malaysia Plan (10MP).

In retrospect, with the RSC signed and sealed, we may want to ask these questions, with regard to its delivery:

• How can we spur industry-wide advancement for more win-win agreements, built to suit today’s high-demand, low-resource energy arena?
• What can we do to achieve optimal production, profitability and cost reduction altogether?
• In what ways can we streamline capital up front, whilst supporting production optimisation initiatives?

Discover peer operating practices on how to improve production and recovery rates on a multidisciplinary platform combining reservoir, production and completions engineering at Production Optimisation Week Asia (POWA) 2011.

Production Optimisation Week Asia (25 – 29 July 2011, Kuala Lumpur) is your way forward, providing you with a comprehensive, multidisciplinary technical platform, highlighting the breadth and depth of information you need to make your mature, marginal, deepwater and other reservoirs more technically and commercially viable to produce and increase your production effectiveness and efficiency, combining reservoir, production and completions engineering.

The Center for Energy Sustainability and Economics (Center for Energy) is an industry research centre (IRC) that works to bring top executives together in communities of learning and practice to act as a catalyst for generating high-value energy business insight and channel top expertise to where the world needs it most. Reach us at +65 6818 6343 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it

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If you’d like more information about this topic, or to schedule an interview with the speakers at
POWA 2011, please call Eunice Wee at +65 6818 6344 or email Eunice at This e-mail address is being protected from spambots. You need JavaScript enabled to view it