MOBIL PLANS EXPLORATION PROGRAM IN DEEPWATER AREA OFF MALAYSIA

Production sharing contracts signed by Mobil Corp. and Malaysian state oil company Petroliam Nasional Bhd. (Petronas) call for an exploration campaign in the South China Sea off Sarawak. The contracts for Blocks SK-A and SK-B are Malaysia's first deepwater acreage awards. They also are the first acreage awards in Malaysia since February 1991. Wood Mackenzie Consultants Ltd., Edinburgh, said the awards contain the first significant revisions to Malaysia's fiscal regime since 1985.

Nov. 22, 1993

4 min read

Production sharing contracts signed by Mobil Corp. and Malaysian state oil company Petroliam Nasional Bhd. (Petronas) call for an exploration campaign in the South China Sea off Sarawak.

The contracts for Blocks SK-A and SK-B are Malaysia's first deepwater acreage awards. They also are the first acreage awards in Malaysia since February 1991.

Wood Mackenzie Consultants Ltd., Edinburgh, said the awards contain the first significant revisions to Malaysia's fiscal regime since 1985.

But the analyst warned that Mobil will have to discover about 300 million bbl of oil on either block to justify field development on a rate of return basis.

The tracts lie about 280 km off the Malaysian state of Sarawak on the island of Borneo.

Block SK-A covers 9,262 sq km in 1,000-1,800 m of water. Block SK-B covers 4,173 sq km with water depths of 200-1,000 m.

Petronas conducted a 10,000 line km 2D seismic survey in deep water off Sarawak in 1989. Wood Mackenzie said the survey revealed a number of large structures at 2,400-3,000 m on Blocks SK-A and SK-B.

Mobil is said to have committed to spend $21 million on the blocks. A 4,000 line km seismic survey is to be acquired and one well drilled in a 7 year exploration phase.

A 3,000 line km survey on Block SK-A and a 1,000 line km survey on Block SK-B are scheduled to start in April 1994.

Exploration drilling is slated for late 1994 or early 1995.

Wood Mackenzie said Petronas Carigali has a 15% carried interest in the exploration phase of both contracts. This is convertible to a working interest in the event of a commercial discovery.

LICENSE TERMS

Terms for Blocks SK-A and SK-B were said to differ from other Malaysian contracts in several ways, including:

Cost recovery ceilings for oil developments are 75% on Block SK-A and 70% on Block SK-B, compared with 50% for licenses awarded after 1985. Cost recovery for nonassociated gas development remains at 60%.
License periods are 7 years for exploration, 6 years for development, and 25 years for production. That compares with 5 years, 4 years, and 15 years respectively on other post-1985 acreage.
Contractor's share of profit oil on Block SK-A will be 86% for 0-50,000 b/d of production, 82% for 50,001-100,000 b/d, 63% for production beyond 100,000 b/d, and 50% once cumulative production exceeds 300 million bbl. Contractor's share of profit oil on Block SK-B will be 70% for 0-50,000 b/d, 55% for 50,001-100,000 b/d, and 50% beyond 100,000 b/d. On other post-1985 contracts, contractor's share was 50% up to 10,000 b/d, 40% for 10,001-20,000 b/d, and 30% beyond 20,001 b/d.
Contractor's share of profit gas on Blocks SK-A and SK-B is 60% for the first 2.12 tcf and 40% for further production. That compares with 50% for the first 2.12 tcf produced and 30% for further production on other post-1985 contracts.

VIABILITY

Wood Mackenzie reckons Mobil will need to discover at least 300 million bbl of oil to allow Block SK-A development. On Block SK-B, the analyst figures a 275 million bbl find will be required. However, a discovery with reserves of 500 million bbl would still be marginal on either block.

"Such poor rates of return, given the high up front capital costs and inherent risks associated with field development, may even preclude development of such large accumulations-if found," Wood Mackenzie said.

On the positive side, Wood Mackenzie said a 400 million bbl field would achieve payout after 7 years. Maximum cash exposure is estimated at more than $1.7 billion, which would be covered twice during the project's life. This possible stable long term cash flow and the prospects of bolstering Mobil's reserves were said to make the project more attractive than the rate of return analysis suggested.

Wood Mackenzie also sees Blocks SK-A and SK-B terms as a step in the right direction toward easing of license terms in Malaysia's shallower waters.

The analyst said, "Certainly some action will be necessary if the government is to achieve its long term policy of maintaining oil production at or close to existing levels after 2000."

Malaysia's oil production is about 630,000 b/d. Its oil reserve life is estimated at only 18 years.