A decline in production among Malaysia’s shallow-water reserves has prompted the country to shift its focus towards new development opportunities in deepwater areas and marginal fields. However, incentives designed to attract investors have only recently been introduced, indicating that further fiscal changes are unlikely to come soon, according to research and consulting firm GlobalData.
The company’s latest report* states that as most of Malaysia’s oil production has historically come from shallow-water areas, the government has been pushed to introduce a number of tax incentives this year to help improve the attractiveness of the country’s fiscal terms and promote further development activity.
Under Production Sharing Contracts (PSCs), marginal fields defined by reserves of up to 30 million barrels of oil, or 500 billion cubic feet of natural gas are subject only to petroleum income tax at a rate of 25% instead of the usual rate of 35%.
Meanwhile, under Risk Service Contracts (RSCs), which are also offered for marginal fields, contractors only pay a corporate income tax of 25%, rather than the petroleum income tax.
GlobalData believes that the additional investment allowance introduced by recent legislation should prove to be a significant improvement to Malaysia’s fiscal regime.
Jonathan Lacouture, GlobalData’s Lead Analyst for the Asia-Pacific region, says: Numerous measures have been involved in the government’s drive to increase production from its marginal fields. Since the introduction of RSCs in 2011, there have been two forms of contract into which investors may enter, and this, combined with reductions in the tax liability afforded to marginal fields under 2013 legislation for PSCs, should increase the attractiveness of investment opportunities.
However, due to these recent changes to Malaysia’s fiscal terms, it is expected that any further alterations will be unlikely over the next few years.
If the terms do not achieve their desired investment amounts in the medium to long term, the government may decide to make additional changes, but this will depend on short to medium-term results. It is most probable that terms will remain stable until the effects of these recent policies can be assessed,concludes Lacouture.
*Malaysia Upstream Fiscal and Regulatory Report
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Business Monitor has just released its latest findings on Nigeria’s volatile oil and gas sector in its newly-published Nigeria Oil and Gas Report.
The report notes that Nigeria's hydrocarbon sector continues to struggle amid a worsening political and business environment. Most recently, Chevron’s decision to move out of the OKLNG project signals that even the large upside potential of the Nigerian gas market is not sufficient to offset the degradation in investor sentiment. The weak output flows in 2012 were the consequence of flooding, repeated oil thefts and regulatory uncertainty. Business Monitor expects continued feeble production from 2013 and for the following two years. They note that output should ramp up more significantly as many large fields come online after 2014, more than offsetting current depletion. Adoption of the Petroleum Industry Bill, which they expect around Q413-Q114, would, Business Monitor believe, be a strong signal for investors that Nigeria's hydrocarbons sector is ready to move forward.
The main trends and developments Business Monitor highlight for Nigeria's oil & gas sector are as follows:
■ China agreed on a US$1.1bn loan deal with Nigeria bearing a very advantageous interest rate. In
exchange, the West African country will allow the lender to get a privileged access to natural resources
including oil. Business Monitor expect that, as such, further deals could be an occasion for Nigeria to revive its oil and gas sector by boosting export potential for producers.
■ Chevron decided to withdraw from the OKLNG project following the path Shell adopted last year. This brings another blow to Nigeria's gas market limiting further upside potential for liquefied natural gas (LNG) exports. The report notes, however, that the soon-to-open Escravos GTL plant could help monetise part of the gas currently flared.
■ Disturbances and outages due to oil thieves are continuing throughout 2013, with Shell having declared force majeure on Bonny Light exports several times since the beginning of the year. Business Monitor therefore forecast that 2013 production will be slightly lower than 2012 estimates, reaching 2.50mn barrels per day (b/d).
■ Business Monitor expects oil production to increase from an estimated 2.5mn b/d in 2012 to 2.70mn b/d by 2020, as ambitious projects such as Usan (180,000b/d) peak and Egina (150,000-200,000b/d) come on stream in the coming years.
■ Consumption of crude is forecast to rise at a compound annual rate of 7% year-on-year between 2012 and
2022, boosted by anticipated strong GDP growth. Business Monitor forecast consumption rising from an estimated
252,000b/d in 2012 to 495,000b/d by 2022.
■ Business Monitor forecasts gas production increasing from an estimated 36.4bn cubic metres (bcm) in 2012 to
56.2bcm by 2022, as the authorities and companies reduce the practice of flaring and start monetising associated gas resources.
■ Booming demand from the government's ambitious power sector plans and large export engagements will thus bolster production growth. The report sees Nigerian gas consumption rising from an estimated 5.8bcm in 2012 to 15.0bcm by 2022.
■ Nigeria National Petroleum Cooperation (NNPC) is aiming to more than double its annual production of LNG, from 22mn tonnes per annum (tpa), or 30.36bcm, to over 52mn tpa (71.76bcm). This was announced on September 19 2012, at a forum of LNG producers and consumers held in Japan. Group Nigeria managing director of NNPC, Andrew Yakubu, gave no deadline as to when this target would be met, but he did clarify that new LNG projects in Nigeria will help the company meet this goal.
■ In October 2012 Nigeria's Petroleum Minister, Diezani Allison-Madueke, announced that the government is planning to direct more than US$1.6bn towards the repair of three of its refineries. The maintenance work started in late 2012 and is due for completion in October 2014. The three refineries are located in Port Harcourt, Warri and Kaduna. The Port Harcourt refinery is currently halted indefinitely, as oil thieves damaged the feeding pipeline in early 2013.
Business Monitor is a leading, independent provider of proprietary data, analysis, ratings, rankings and forecasts covering 195 countries and 24 industry sectors. It offers a comprehensive range of products and services designed to help senior executives, analysts and researchers assess and better manage operating risks, and exploit business opportunities.
Keep up-to-date with Business Monitor's latest Oil & Gas insights here
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By Steven Kopits, Douglas-Westwood, New York
Alaskan oil production peaked in 1988 at around 2 million bpd and has been falling since, possibly down to 510kbpd this year. Virtually all of this production flows through the 800 mile Trans-Alaska Pipeline (TAPS), to Valdez, in southern Alaska. But TAPS is struggling, operating below a quarter of its capacity, with fears that it will lose its viability below 300kbpd.
In the wake of the run-up in oil prices before the recession, then governor Sarah Palin brought in a 75% tax rate from 2007. This stalled investment and production decline rates increased to nearly 7% from 4% a decade earlier. Alarmed by this, the current governor, Sean Parnell reduced the top tax rate to 35%. This brought promises of investment by BP and ConocoPhillips. However, expectations remain modest, at best to reduce declines to 20kbpd / year from the current 40kbpd pace. If expectations are met, TAPS will reach the 300kbpd threshold in 2024, rather than 2020. Many Alaskans are unimpressed and are forcing a referendum to re-instate the higher tax rates – they see the end of the state’s golden age of oil and want to get all they can, while they can.
On the other hand, Shell has big plans, as much as 1.8 mbpd from Alaska’s Outer Continental Shelf, 40% more than Gulf of Mexico production today. But cost to first oil is in the $40-60 bn range, and one has to wonder whether Shell has the fortitude to hold out until initial production in 2025. Indeed, Goldman Sachs spent much of a recent report berating Shell for “overspending in low return assets and unproductive capital”. Shell’s incoming CEO, Ben van Beurden, comes from the chemicals division, where he managed to increase profitability and lower Capex. Will a downstream manager feel the exotic lure of Alaska as much as the upstream team has? Or will he decide that 2025 is just too long for investors who are looking for cash quarter by quarter? Alaskans have good cause to feel nervous.
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NYC-based PIRA Energy Group reports that Brent crude prices came off their early September highs. On the week, the U.S. had strong product demand trend but a large crude stock build. In Japan, crude stocks built. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
Brent Crude Prices Came Off Their Early September Highs
Brent crude prices came off their early September highs, but the further crude price declines will be limited by tighter near-term supply/demand balances. Supply losses remain huge. Refinery runs bottom in October as maintenance peaks but then runs recover. The WTI-Dated Brent spread is stabilizing near negative $5-6/Bbl. Atlantic Basin gasoline cracks should stay generally weak as inventory coverage remains ample. Middle distillate cracks should move higher over the next few months. Margins will recover in the weeks ahead, led by growing middle distillate strength.
Strong U.S. Product Demand Trend but Large Crude Stock Build
Product inventories declined for the week ending September 27, but this was overwhelmed by a crude inventory build. The resulting 5 million barrel inventory increase is in sharp contrast to last year's inventory decline for the same week last year. This widened the year-on-year inventory excess to 2.2%. Most of the excess is in gasoline.
Japanese Crude Stocks Build; Turnarounds Continue
Crude stocks built due to imports rising following the impacts of the most recent typhoon, while gasoline and gasoil stocks drew. For gasoline, the draw was due to good demand, while for distillate it was driven by low refinery yield and higher incremental exports. The kerosene stock build rate increased, but the 4-week build rate remained about the same. Refining margins continue to slowly improve from poor levels.
Saudi Formula Crude Prices for November Reflect Weak Asian Margins
Saudi’s formula prices for November were recently released. In Asia, differentials were lowered most aggressively on lighter grades, but the differentials for Arab Medium and Heavy were raised, with Heavy being raised the most. Asian margins have been poor, so the more generous terms on the lighter grades were in line with market economics.
Latest Oil Inventory Update: Continued Low Stocks
The final June data and preliminary July data for OECD Europe were released this past Thursday and when combined with U.S. and Japanese estimates continue to point to low inventories in the three major OECD markets. The June stock data were revised lower and the second quarter is now showing an inventory decline compared to last month's increase. Relative to the year earlier, stocks began the year with an excess and ended August with a deficit.
Ethanol Prices and Cash Margins Soar
Ethanol values in Chicago rose during the week ending September 6 because of the scarcity of corn in the Midwest, causing production to fall to a 22-week low and inventories to drop to the lowest level in two months. Cash margins for ethanol production rocketed to the highest level since November 2011.
Ethanol Production Rebounds
U.S. ethanol production rose to a 4-week high of 848 MB/D the week ending September 6 from 819 MB/D in the preceding week. Some plants restarted after routine summer turnarounds. In addition, facilities in the Midwest have been able to secure corn via barge and rail from as far south as Mississippi, where the 2013/2014 harvest has already begun.
Relatively Low Propane Stocks to Start Fourth Quarter
U.S. propane stocks entered the fourth quarter relatively low and are likely to remain so given crop drying activity, petchem feed use and growing exports. Ethane stocks continue relatively high, while butane inventory is dropping as gasoline blending picks up the pace. The contango in Asia has widened helping support winter stock building. Propane continues as a preferred olefin cracker feedstock in Europe, helping sustain demand until winter requirements pick up.
The information above is part of PIRA Energy Group's weekly Energy Market Recap, which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.
Click here for additional information on PIRA’s global energy commodity market research services.
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