23 November 2011

 BMI View: Petronas' Sabah discovery is the latest indication that efforts to boost domestic offshore exploration are bearing fruit. New discoveries, and a recent agreement with Royal Dutch Shell to boost recovery rates from existing fields, could raise upside risks to our production forecasts.

State-owned Petronas has made what it described as a 'significant' oil discovery at its offshore Sabah prospect, 100km northwest of Kota Kinabalu, in offshore Block 2G-2J. The Wakid-1 well was drilled to a depth of 3,330 meters (m), intersecting significant oil and gas-bearing reservoirs. According to a statement by Petronas, preliminary estimates point to in-place reserves of 227mn barrels of oil equivalent (boe), 'with expected upside potential'. The company confirmed that further appraisal work is set to be conducted on the prospect in the near future.

Trio Of Tests

Petronas has carried out three production tests since making the Wakid-1 discovery. The tests targeted three different reservoirs and flowed at a combined rate of 8,200 barrels a day (b/d). Wakid-1 is the second well Petronas has drilled on Block 2G-2J since it obtained the production sharing contract (PSC) for the block in October 2010. The first well, Tambuku-1, was drilled earlier this year, but yielded only minor gas shows.


Wakid-1 is Petronas' third significant hydrocarbon hit offshore Borneo this year, after the company discovered two gas plays in the region in July 2011. Initial estimates for those discoveries put in-place reserves at up to 34bn cubic metres (bcm). These prospects are very encouraging for Petronas as it seeks to slow declining oil production and increase gas output in line with booming domestic demand and growing regional export opportunities.

Central to the company's strategy is an effort to rejuvenate mature domestic fields and push exploration out into deeper waters. In particular, the company is targeting the Sabah region as a nexus for new developments, following large-scale investment in the Sabah Oil & Gas Terminal and the Sabah-Sarawak Pipeline. The latest discoveries are an indication that these efforts are paying off and that offshore Malaysian acreage still holds plenty of untapped oil and gas reserves. Our estimates point to reserves of 5.7bn barrels (bbl) of oil and 2.38trn cubic metres (tcm) of gas.

Upside Risks

Petronas secured a key ally in its bid to reverse declining oil output through a landmark Heads of Agreement (HoA) accord with Royal Dutch Shell on November 11 2011. The agreement relates to two 30-year production sharing contracts (PSCs) for enhanced oil recovery (EOR) projects at the offshore Baram Delta (BDO) and North Sabah fields. Shell indicated that the US$12bn project could help bring an additional 90,000-100,000 barrels per day (b/d) of oil output onstream, and extend field life beyond 2040. Shell added that it projected a rise in the fields' recovery rates from 36% to 50%.

This agreement, combined with recent exploration success at Wakid-1, could raise upside risks to our long-term forecasts. Currently, we anticipate that crude oil output in Southeast Asia's second-biggest oil and gas producer will fall 2.9% this year, to 645,270b/d, with oil volumes likely to remain flat in 2012. Beyond 2012, we forecast production rising to as much as 831,200b/d by 2015, before slipping back into a gradual decline over the latter half of the decade.