More fuel for oil and gas sector
The Star(StarBiz)
17 February 2007

THE underperforming oil and gas market may just see itself perk up with an increase in demand for rigs. Firstly, it's a known fact that oil and gas exploration and production activities are very much alive due to the discoveries of new oilfields and the re-ignited interest in matured and marginal fields development. 

Industry observers have reason to believe that Petronas is actively “scouting” for several rigs to support its long-term exploration and development activities in Malaysia's oil and gas sector.  

Many of the old rigs, which have been contracted in Malaysian waters since 1996, were not deployed fast enough. The result is that these rigs are floating in other parts of the world when they are severely needed here. 

The situation in the rigs market is that supply is getting tighter. Newly-constructed rigs are unable to meet current demand, resulting in rising rig rates.  

This has been reflected in exploration and production (E&P) companies now committing for longer contract periods than in the past, due to concerns over rig availability in the market. 

Long-term contract periods and above-average rig rates are the current trend.In the Malaysian oil and gas scene, oil majors are more than willing to enter longer-term contracts stretching up to 2010. Such scenarios are unheard of during the 90s; then again, the sector was not as vibrant as today. 

So, here's the situation. Newly constructed rigs are unable to meet current demand. And what does this lead to? Higher daily charter rates. And analyst expects these rates to trend higher over the next few years.  

“While the charter rates on the rigs itself depend on the rigs, with the current busy environment in the oil and gas sector, rates can fetch from US$80,000 per day to US$450,000 per day depending on type of rigs and drilling operations,” says Aseambankers Malaysia Bhd research analyst T.J. Liaw. 

These new revised rates represent about 150% jump from its old rates of the mid-60s range. The substantial rate hike is not surprising as there is currently an acute shortage of rigs worldwide. The utilisation rates of the rigs are also high, at more than 90%. When these rigs are charted out, the duration could be over three years. 

Fundamentally, the need for rigs is real. Liaw explains that the reserves replacement ratio of 1.67 times (x) is at its lowest since 1996. Malaysia’s domestic oil reserves and production level have been on the decline, at between 2.3% and 3.9% p.a. over the last three years.  

“We believe Petronas will aggressively expand its exploration and development drilling activities in new and existing fields in search of a continuous supply of finite hydrocarbon products. 

“Petronas is committed to grow domestic production by 3% per annum over the next five years, with a minimum target of at least maintaining oil output above 600,000 barrels per day while keeping its status as a net oil exporting country,” says Liaw. 

“Furthermore, more than 30 new fields have been identified and are up for review, with growth coming from new shallow, marginal and deepwater projects. As such, there is a need for several new rigs to support the drilling activities in Malaysia. 

“The inability to 'lock-in' rigs at an opportune time and at competitive rates would have an adverse effect on Malaysia's long-term oil and gas production,” says Liaw.  

Currently, there are 20 rigs in operation in Malaysia, which comprise seven jack-ups, six tender-assisted, three semi-submersible, and four platform rigs. Also, the majority of rigs in operation are relatively old, averaging 25 years, and are up for replacement.  

Liaw says that based on the secured drilling programme to date, the number of committed rigs in Malaysia will fall to 18 by December 2007, 10 in 2008 and five by 2009. The situation is further exacerbated as replacements are hard to come by and rates for new rigs are higher than previously. 

Estimates are that there is a need for 15-25 new rigs for the domestic market operations over the next four or five years to undertake the exploration activities in Malaysia. 

The majority of the rig operators are the super oil majors like Shell, Talisman and Murphy Oil. Liaw says that local operators with available rigs for time charter will most likely benefit from new contracts and rising rates. These companies are UMW Holdings Bhd, SapuraCrest Petroleum Bhd and Tanjung Offshore Bhd.  

“These three players will have access to rigs for time charter. The rigs will be partially or fully owned by these players or the companies will act as agents to international rig operators. The chances for additional rigs to be contracted out are very high,” says Liaw. He is not discounting new local entrants into the industry. 

Meanwhile, a possible merger and acquisition twist could further add fuel to the heating oil and gas industry. News of Tan Sri Quek Leng Chan taking a 10% stake in Petra Perdana Bhd via HL Management Co Sdn Bhd could be a prelude to more serious manoeuvres in the sector, and possibilities of him acquiring strategic stakes in other companies cannot be discounted.  

The move is viewed positively for Petra in the long run, although he will not be able to bring in any technical expertise and 2007 earnings will be diluted by 2.1sen.  

The entry of the cash-rich tycoon eases the need for further borrowings as Petra's gross gearing was already at 1.9x as at end-September. From a valuation perspective, analysts feel that Petra appears fully valued at its closing price of RM3.50.