Malaysia’s upstream shows new vigor – Brief Article

Kurt S. Abraham

As Southeast Asia recovers from financial doldrums and low oil prices, Malaysian E&P activity is ready to increase on the strength of an aggressive government crude policy and an expanding natural gas sector

Like many of its neighbors, Malaysia is beginning to show signs of renewed E&P strength after being battered by low oil prices from late 1997 to early 1999. Drilling rates are up, efforts are underway to bolster crude production, and natural gas is playing a growing role in the upstream scheme.

After a decade of strong economic growth that averaged 8.7% annually, Malaysia was hammered by the Asian crisis. However, a recovery began in second-half 1999, and it continues during first-half 2000. The economy showed minor growth in 1999 after shrinking 7.3% during 1998.

The economy has not always been consistent over the country’s 43 years as a sovereign nation, but the government has been a model of stability. Various incarnations of the dominant 14-party coalition known as Barisan Nasional have controlled Malaysia’s government since the nation gained independence in 1957. In the last general election in 1995, Barisan Nasional won an overwhelming majority–162 out of 192 parliamentary seats.

State oil company Petronas (through its operating arm, Petronas-Carigali), Exxon and Shell dominate an E&P sector that has persevered despite see-sawing oil prices. On average, six rigs are now drilling 70 to 80 wells annually. Crude production during 1999 averaged about 630,000 bpd, to which another 90,000 bpd of condensate output were added. There are three areas of principal activity: offshore Peninsular Malaysia, and offshore Sarawak and Sabah states on the northwest side of Kalimantan Island. Separately, additional work is done in the Malaysia-Thailand Joint Development Area (MTJDA), offshore in the Gulf of Thailand.

Despite the dominance of Petronas Exxon and Shell, several other operators are involved in Malaysia. Three new operators–Amerada Hess, Santa Fe Snyder and YPF–entered this market in 1998 by signing new PSCs. This had been the goal of Petronas when, in the mid-1990s, the company devised a flexible PSC, to attract more investors to small fields. The firm also loosened terms for all PSCs in 1997. In January 1999, Murphy Oil signed for three PSCs as operator.

Petronas-Carigali and the foreign operators face a challenge in their goal to keep Malaysian oil output up, to a range of at least 600,000 to 630,000 bpd. This will require them to find substantial new reserves, yet recent experience shows that the majority of new reserves are coming from incremental growth in existing fields, while oil discoveries are trending smaller and smaller.

The best exploration prospects for finding incremental crude reserves are near, or adjacent to, existing fields, where additional small pockets of oil are situated. Deepwater areas are also considered high on the list of prospectivity. Petronas acknowledges that with improved seismic techniques, it can now look at deeper horizons, as well as identify high-pressure horizons in shallower waters.

A number of development projects at small oil fields are underway offshore. Another 10 or more oil and gas fields are considered probable for development, with onstream dates ranging from 2001 to 2005.

Reasons for why natural gas is playing a larger role include expanding industrial usage, gas discoveries out-numbering oil finds and new oil pockets becoming smaller. Gas output was about 4.7 Bcfd during the last three years. Petronas would like to begin drilling for gas in deepwater areas, too, but that program has been delayed until the leftover effects of low oil prices have passed.


Petronas’ strategy, as mentioned earlier, is to keep oil output from slipping below 600,000 bpd, so new projects are geared to that goal. Meanwhile, condensate output is now at about 90,000 bpd, and its share of overall oil production is likely to grow, given the expansion of gas activity throughout Malaysia.

“We must find ways to keep up our reserves,” said Tuan Haji Akbar Tajuddin, senior general manager of Petronas’ Management Unit. “We must do this either through greater exploration or through growth of our existing finds. Realistically, we know that an increasing share of our incremental reserve growth is coming from revisions to existing fields.”

Akbar said that current policy is to maintain a very aggressive development program, something that the government has consistently supported for the last 30-plus years. For its part, Petronas-Carigali operates 12 fields offshore Sarawak, of which nine are in joint ventures with Shell. An additional seven fields are operated in joint ventures with Exxon offshore Peninsular Malaysia. Outside of joint ventures, Petronas-Carigali operates four fields on its own, offshore Sabah.

In efforts to improve a 36% average oil recovery rate, the company hopes to utilize new technologies to boost the figure. “We have the opportunity to do much more,” said Akbar. “If we can improve by just 5%, to 40% or 41% (which is something that is doable), we can see a measurable gain. It also is cheaper, pointed out Akbar, than drilling to find new discoveries. The use of new technologies, such as 4-D seismic and interpretation, also is expected to have considerable impact on the ability to find additional oil pockets within existing reservoirs.

Convinced that technology will permit them to do what was not feasible 10 years ago, Petronas officials say they will go back to many older wells and see what kind of measures can be applied to squeeze out additional reserves. “We also need to look at the life cycles of these fields,” said Akbar. “We must put a lot of energy into this and focus on it. An important factor in this effort is that service firms, rather than oil companies, are coming up with the new methods necessary for extending field life. Meanwhile, we should continue to bring in fresh people to evaluate field conditions–people with `new’ pairs of eyes to look at the fields and their accumulated data.”

The growing role of service companies in maintaining the health of Malaysia’s upstream assets is a trend that has not gotten enough attention, said Akbar. “If you look at the evolution of the local oil companies, you can see how we have gone from them trying to do everything in-house to a point where they farm out a large share of the tasks to service firms. At Petronas, we now recognize that all parties have to work as a `composite.’ This includes the national oil company, the major foreign oil company, the service companies, everyone. When we all work as a team, we all win. This is good for our industry at large.”

An increasingly important contributor to fostering the teamwork concept is a project spearheaded by Petronas and known as “CORAL” (Cost Reduction Alliance). It is the Southeast Asian counterpart to the UK’s CRINE initiative and something that Petronas is heavily involved in. The programs share a common goal: to reduce average finding, development and production costs.

“Petronas has taken the lead on CORAL,” said Akbar. “Our company is using 1995 as a cost base and has calculated that it can reduce average development and production costs by 30% by later this year. Additionally, we are trying to reduce development cycle times by 30%.” Akbar stressed that all companies active in the country can discuss common standardization, optimization, etc. If any of them comes up with a good cost- or time-saving idea, then the state firm will listen and most likely adopt it.

“You know, it’s a funny thing,” said Akbar. “Whenever there is something new introduced in the industry, we have some people who do not want to change. They say, `Why change what we always do?’ But we must adopt new technologies early enough before they become obsolete. We must learn to change to new methods early enough to get some value creation from them. If you are not prepared for challenges, you may not be able to survive.”


Forty five years of operating in Malaysia will be celebrated this year by Exxon Mobil’s subsidiary, Exxo Production Malaysia Inc. (EPMI). The company opened its office in 1965, and the first exploration well (Tapis 1) was drilled in 1969.

However, it was not until 1971 that EPMI struck its first oil discovery in Tembungo, offshore Sabah. This find was followed by a second crude discovery offshore Terengganu in 1973. Oil production was initiated at Tembungo and Terengganu in 1974 and 1978, respectively. Responsibility for operations at Tembungo was handed off to Petronas in 1986. An additional five fields were handed to Petronas in 1995 under a global agreement.

Today, EPMI is the largest oil producer in Malaysia and the largest supplier of natural gas to Peninsular Malaysia. The firm produces about 50% of the nation’s oil production. “Our company has seven production sharing contracts (PSCs) offshore Peninsular Malaysia and operates 31 platforms in 12 fields within these areas,” said Dr. Lee Chee Fook, EPMI’s corporate affairs manager. “EPMI also has six PSCs in deepwater plays offshore Sabah and Sarawak in eastern Malaysia. In total, our company holds an interest in 13.4 million acres offshore Malaysia. In 1998, Malaysia accounted for 8% of Exxon’s net oil and gas production, worldwide.”

The 1998 completion of the Raya-A platform, which developed North Raya and Yong fields, marked the first oil production from the PM-8 PSC area. After putting Yong and Raya fields onstream, EPMI is developing Larut field on its PM 5/8 Block. “PM 5/8 is north of our major fields and is a site where we have found smaller oil accumulations,” said Dr. Lee. “We are now beginning to develop some of these, while to the south of there, we also have installed a new platform at Tapis field.”

In the 1995 PSC area, development drilling continued on the Seligi-F platform. In other existing fields, the focus continues to be on infill drilling to capture additional reserves and provide new production capacity. In addition, improvements to base business activities are providing operating expense reductions.

EPMI’s net gas production in 1998 and 1999 was maintained at over 600 MMcfd. Detailed contractual arrangements were concluded in 1998 on a new, long-term, gas production sharing contract (GPSC) with Petronas. Gas sales of 12 Tcf from 15 fields under this contract and a separate, existing agreement should meet about two-thirds of Peninsular Malaysia’s projected gas demand for more than 25 years.

Planning continued into 1999 for Angsi field, which will be an integrated oil and gas development, and the first GPSC field to be developed. Production is expected to commence in 2002 through a new gas pipeline system in which EPMI holds a 50% interest. New compression became operational in 1998 in Lawit field, increasing gross capacity by 170 MMcfgd.

Deepwater blocks will become increasingly important in EPMI’s portfolio. “The last five blocks (SB 302, SB-H, SK-A & B, SK-C and SK-D) that we signed up for are deepwater exploration tracts,” said Dr. Lee. “A few of these were once held by Mobil, and we farmed into them. To develop them economically, we are going to need good people and good technology, and we are going to have to find ways to do things more efficiently. Of course, the same could be said for most operations in today’s upstream environment.”


More than 100 years of operations of one kind or another have been chalked up by Shell in Malaysia. The firm began business by selling kerosene under the name of Marcus Samuel and Company. In 1891, the company set up oil storage depots at various straits settlement ports, including Butterworth. Also at this time, Shell purchased Singapore’s Pulau Bukum and set up a depot to distribute petroleum products in the region.

On Dec. 22, 1910, the firm struck Malaysia’s first oil discovery, Miri 1, on top of Canada Hill in Miri. This was followed by construction of Malaysia’s first refinery, also in Miri, in 1914. This refinery still produces a wide range of petroleum products for the Sabah and Sarawak markets.

Offshore exploration began in 1954, but it was only in the mid-1960s that Shell made its first marine oil finds. These included the discovery of major natural gas reserves in central Luconia Province, offshore Bintulu. Offshore Sabah, sufficient quantities of crude were not found until 1971, when Erb West 1 came in. When Miri field was closed onshore in 1972, Shell’s upstream operations subsequently were confined offshore.

Throughout its tenure in Malaysia, Shell has pioneered advances in local extraction and export methods. One notable achievement is the introduction of the single buoy mooring (SBM) system in 1960. The SBM system, which eliminates the need for deepwater harbor facilities, was later adapted and used throughout the world.

While Shell’s E&P business has concentrated on efficient development and extraction of crude oil, the focus increasingly is on natural gas offshore Sarawak and Sabah. The company also has made an entry into Peninsular Malaysia blocks. To this effect, four Shell companies–Sarawak Shell Berhad (SSB), Sabah Shell Petroleum Co. (SSPC), Shell Sabah Selatan Sdn Bhd (SSS) and Shell Exploration and Production Malaysia B. V. (SEPM BV)–operate as PSC contractors to state oil company Petronas. In some cases, efforts are on a joint venture basis with Petronas-Carigali (the E&P arm of Petronas).

Prior to 1975, Shell Malaysia, through SSB and SSPC, operated on the basis of concessions granted by the state governments of Sarawak and Sabah. However, these mining leases ceased to have effect on April 1, 1975, following promulgation of Petroleum Development Act 1074.

SSB operates Balingian oil field and the Central Luconia gas field. The latter supplies unassociated gas to Malaysia LNG Sdn Bhd, ASEAN Fertiliser Sdn Bhd, and Sarawak Electricity Supply Corporation in Bintulu. Crude is also produced under a joint operating agreement with Petronas at Baram Delta, offshore Lutong, SSPC is involved in activities offshore Sabah. It is a joint partner with Petronas-Carigali under a PSC. It produces mainly crude for export, while associated gas output is sent to Petronas Gas Supply (Labuan) Sdn Bhd.

Shell’s recent venture into the relatively more challenging–and costly–deepwater tracts offshore Sabah and Sarawak is an affirmation of its long-term stance in Malaysia’s upstream industry. The company continues to pursue application of various state-of-the-art, cost-efficient technologies in the field. One of these was the application of the region’s first multilateral drilling. In addition, one of Shell’s offshore production facilities, Kinabalu, became the first remotely controlled, unmanned platform in the history of Malaysian E&P. Meanwhile, development work continues at Shell’s F 23 SW satellite and Asam Paya field, straddling the Malay/ Brunei border.


The entry of Amerada Hess into Malaysia occurred in 1998, when new production sharing agreements were signed for two blocks. In partnership with Petronas-Carigali, Amerada Hess holds operatorships in Blocks SK 306 (80%) and PM 304 (70%). Both blocks contain oil and gas discoveries with established oil reserves. The firm has an initial five-year exploration period for the blocks.

According to the company’s general manager in Malaysia, David Abrahamson, an exploration program is in progress, with drilling anticipated in both blocks during 2000. “We are shooting more seismic and doing additional interpretation,” said Abrahamson. “We will acquire some 3-D seismic in Block PM 304 this year, and we plan to begin drilling late in 2000, with one well per block.”

What prompted Amerada Hess to get involved in Malaysia was the company’s identification of Southeast Asia as a growth area. The firm already had offices in Bangkok and Jakarta, as well as production in Thailand and Indonesia. What also helped the company decide to enter Malaysia was the depth of information available on both blocks.

“Previous operators logged a considerable amount of drilling data on these blocks when they drilled the discoveries and, in some cases, followed with appraisals,” said Abrahamson. “The data show significant oil and gas accumulations in these discoveries, and we have the benefit of being able to examine the production rates achieved when they conducted well tests. While we have not drilled ourselves yet, we are learning a lot from the sizeable amount of activity and data already available.”

Abrahamson believes that the previous operators may have opted not to develop the blocks for one or more reasons. Their decisions may have reflected the availability of better prospects at that time, or the contract terms for the blocks may not have been attractive enough. In addition, quite a few technical advances have been made since these blocks were first drilled.

“For instance, we face a challenge on Block SK 306, where the target is beneath some thick carbonates, causing older seismic data to not be as good as it could be,” said Abrahamson. “We know that the reservoir holds oil, but there is some gas too. Our goal is to get as accurate a picture as possible.”

On Block PM 304, the challenge is to increase the potential rates of production, in order to justify commercial development of the field. Accordingly, there is a need to identify zones that are more productive before drilling targets are selected. “One of the technical challenges offshore Malaysia is overpressure,” said Abrahamson. “In addition, it can be a challenge to achieve a good, high production rate, but we are targeting what we believe will be more productive zones. The reservoirs are technically thin by international standards.”

During his career, Abrahamson has worked in a variety of countries and environments. Prior to Malaysia, he served a five-month stint in London, which came after working three-and-a-half years as exploration manager for Amerada Hess in Gabon. “I can say without qualification that things work here,” said Abrahamson. “The infrastructure is good, and the work ethic of the local people is excellent. This certainly is a place where you can do business, and we intend to make Malaysia a core area for us.”


Vigorous efforts by Murphy Oil’s Frontier E&P group were rewarded in 1999, when the company became Malaysia’s third-largest acreage holder by acquiring three offshore blocks. The firm hopes that three Murphy-operated properties will serve as a platform for its future growth in Southeast Asia. Because the firm is optimistic about, and committed to, the Malaysian program, an office was opened in Kuala Lumpur in 1999 to identify new opportunities in this high-growth region.

Blocks SK 309 (85%) and SK 311 (85%) are contiguous shallow-water tracts offshore Sarawak, and they contain several undeveloped discoveries in an area with existing infrastructure. Work commitments over the next five years include acquisition of seismic data and the drilling of four exploratory wells. The first wildcat is expected to spud in late 2000 or early 2001.

The third tract, Block K (80%) covers 4.1 million undrilled acres in offshore Sabah’s deep waters and represents the largest block ever awarded in Malaysia to date. Beneath water depths of 4,800 to 10,000 ft, significant potential (verified by nearby drilling success) exists in Block K for large single-field discoveries. Existing commitments require a seismic program and one exploratory well over seven years. Near term, Murphy Oil is shooting seismic in 2000 to prepare for its first well, planned for 2002.


Santa Fe Snyder initiated operations when it signed a production sharing contract with Petronas in July 1998. The PSC covers offshore Block PM 308, which lies along the east coast of the Malaysian peninsula. Santa Fe Snyder operates the block and has an 80% working interest. Petronas Carigali holds the remaining 20%.

In addition to exploration opportunities on Block PM 308, Santa Fe Snyder has the right to develop Rhu field, a potentially commercial 1992 discovery within the block. Rhu field requires additional appraisal work to determine commerciality, and the company will drill at least one additional well.


Malaysian PSCs operated

PSC area/blocks Operator

PM301, PM302, PM306, PM307 Petronas,Carigali

PM3 Lundin Oil

PM304 Amerada Hess

PM308 Santa Fe Snyder

PM303 Shell E&P Malaysia

PM320, PM322 Shell E&P Malaysia

Deepwater Blocks A, B, & C Exxon (EPMI)

SK306 Amerada Hess

SK 301 YPF Malaysia

SK308, Deepwater Block E, SK312 Sarawak Shell

SK307 Petronas-Carigali

SK309, SK311 Murphy Oil

SB302, Deepwater Block H Exxon (EPMI)

SB301, Oeepwater Blocks G & J Sabah Shell

SK312 Sarawak Shell

Area Covered PSC tracts is divided fairly evenly between Peninsula Malaysia, Sarawak, and Sabah. The most recent award is Block SK312, offshore Sarawak, to Shell in March 2000.

COPYRIGHT 2000 Gulf Publishing Co.

COPYRIGHT 2000 Gale Group

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