Last year was a significant one for deep-water oil and gas development in South-east Asia. The year 2002 brought the first commercial deepwater production from Malampaya in the Philippines and an upsurge in deepwater exploration success, most notably the Kikeh discovery in Malaysia.
The year also saw drilling carried out by several relatively new entrants to the sector. That these companies were successful suggests that deepwater exploration in the region may be about to enter a period of growth, spurred by the lack of availability of acreage in more established global deepwater markets.
From 1998 to 2001, the number of deepwater wells drilled in Southeast Asia declined. In 2002, however, 28 deepwater wells were completed, representing a 100% increase from 2001. Of these, 10 were appraisal wells, including the first such wells outside East Kalimantan, Indonesia, since 1994. The finding rate also improved, with four discoveries in 2002, against one successful wildcat completed in 2001.
Following its entry into the sector in 1996, Unocal has dominated the deepwater market in Southeast Asia. Since 2000, it has made three gas discoveries on its Ganal production sharing contract (PSC) (Gendalo, Gada, and Gula), and also discovered the Ranggas oil and gas field on its Rapak PSC. Both PSCs are located in deepwater East Kalimantan. Two successful appraisal wells were completed on Ranggas in 2001 and these were followed by a further three in 2002. Unocal puts reserve estimates for Ranggas at 200-350 MMboe, and the field is undergoing engineering and development studies.
Location of Murphy's Kikeh oil discovery.
Also in Indonesia, Inpex Corp. has had recent exploration success on its Masela PSC in the Timor Sea. The Abadi field was discovered in 2000 and was the subject of two successful appraisal wells in 2002. This multi-tcf gas discovery lies in acreage adjacent to the boundary between Indonesia and Australia.
The four new discoveries across the region in 2002 were Maha, Halimun, Papandayan, and Kikeh.
The first three are all in East Kal-imantan, with Unocal drilling Maha and Amerada Hess drilling Halimun and Papandayan. All three are understood to be relatively small gas fields. There are numerous other undeveloped gas fields in East Kalimantan, hence significant competition for commercialization.
Murphy Oil drilled the remaining discovery made in 2002, Kikeh, which is located off Sabah, Malaysia. Kikeh is an oil discovery, and potentially one of the largest and most important in the region for several years. Also off Sabah, in water depths of around 300 m, Shell encountered a potentially significant oil field beneath its existing Kebabangan gas field in 2002. The two finds indicate a high level of prospectivity in the Baram Delta basin.
The prize catch
Kikeh, the name of a fish native to Malay waters, was discovered last July, when the Kikeh-1 well encountered several hundred feet of high quality oil reservoirs. The field lies in the southwestern corner of Sabah block SB K (Murphy 80%, Petronas Carigali 20%), around 150 km off the Sabah coast in around 1,340 m of water. The location is understood to be around 40 km off the continental shelf.
Following an appraisal program comprising two wells and two sidetracks, Murphy announced that Kikeh had preliminary recoverable reserves of 400-700 MMbbl of oil. While extensive logging and formation testing of the structure has been completed, no flow tests have been performed. Further appraisal of the structure is expected later this year, at which time first flow testing will be carried out.
Following further appraisal, Murphy will likely submit a development plan, with first production planned for around 2006.
Kikeh is the first deepwater oil discovery off the northwest coast of Borneo, where there is scope for significant deepwater drilling over the next few years. As such, the discovery is also of significance to Malaysia and participants in acreage in neighboring countries.
Wood Mackenzie understands that the Kikeh structure extends potentially across the SB K block boundary into acreage currently disputed by Malaysia and Brunei. In January, Petronas licensed deepwater blocks SB L (Murphy Oil 60%, Petronas Carigali 40%) and SB M (Murphy Oil 70%, Petronas Carigali 30%), which are understood to include at least a portion of acreage under negotiation as Brunei deepwater blocks J and K. Exclusive negotiations for licensing of blocks J and K, which lie directly to the southwest of SB K in water depths ranging from 1,000 to 2,750 m, have been in progress for over a year, with equity participation having been determined in early 2002. Block J was awarded to a consortium led by TotalFinaElf (TFE 60%, BHP Billiton 25%, Amerada Hess 15%), while block K went to a Shell-led consortium (Shell 50%, ConocoPhillips 25%, Mitsu-bishi Corp. 25%).
Redressing the balance
Southeast Asia has proved to be the exception to the burgeoning international deepwater oil and gas market. The main reason is a lack of proven commercial prospectivity. Wood Mackenzie estimates that over $1 billion has been spent on deepwater exploration in the region up to end-2002, yet only one field is onstream. Much of the deepwater drilling to date has reinforced perceptions that Southeast Asia is gas prone, and the fiscal terms on offer have generally failed to attract significant new investment in acreage signing. For example, despite a genuine belief in the prospectivity of the Brunei deepwater blocks offered in 2001, only two consortia submitted bids.
Drilling statistics suggest that this situation is changing. Global levels of deepwater drilling activity, historically dominated by activity in the Gulf of Mexico, would seem to have peaked. With limited new exploration acreage available in the key deepwater markets of Angola, Brazil, Nigeria, and Gulf of Mexico, companies are now more prepared to consider opportunities in other regions and Southeast Asia is benefiting from this. While there was a peak in activity in 1998 due to intensive drilling by one operator (Unocal), last year's upturn is a result of drilling by several players. The pool of participants in the Southeast Asia deepwater market has been growing since 2000, with the entrance of several international deepwater players including TFE, Amerada Hess, ConocoPhillips, and BHP.
Total acreage held in Southeast Asia by company.
In general, Southeast Asia deepwater corporate activity has reflected a strategy of using proven geological competence in the area to minimize risk. Unocal was already a key player in East Kalimantan when it embarked on its Saturation Exploration (SX) campaign in 1996. In Eastern Malaysia, Shell leveraged its shallow water experience to develop its deepwater campaign from 1998 onwards, and incumbents TFE and Shell led the two bidding consortia in the 2001 Brunei licensing round.
For the most part, the deepwater strategies of new players have been less about developing new expertise and more about aligning themselves behind the regionally experienced operator. This was evident with Eni's entry into East Kalimantan, ConocoPhillips into Malaysia, and BHP Billiton into Brunei. A notable exception has been Murphy in Malaysia.
Murphy entered Malaysia in 1999, acquiring both shallow and deepwater acreage on an operated basis with high equity stakes. Initially, its exploration focus was on low-cost shallow water operations in Sarawak. It gained familiarity with the upstream industry in Malaysia before embarking on its deepwater drilling campaign in Sabah. With the discovery of Kikeh, this strategy of incremental organic growth appears to be paying off.
Prospective deepwater exploration areas.
First exploration was undertaken in 2000 on blocks SK 309 and SK 311, where the company was seeking to exploit multiple marginal field developments, including previous discoveries, maximizing benefit from Malaysia's R/C terms. This strategy remains to be fully realized, although the West Patricia oil and gas field is currently under development. In addition, Murphy has since acquired acreage in Peninsular Malaysia (PM311 and PM312), also under R/C terms.
In 2001, the company picked up deepwater block SB H from ExxonMobil, adding to its existing deepwater acreage of block SB K. Wood Mackenzie understands that Murphy sought to farm-out some of its deepwater equity prior to embarking on its 2002 drilling campaign. However, interested parties failed to meet Murphy's financial expectations. Following the success of Kikeh, the company has added further deepwater acreage to its Malaysian portfolio with the recent award of SB L and SB M. This aggressive acquisition program has led to the company becoming the largest acreage holder in Southeast Asia.
Corporately, Murphy has demonstrated an increasing commitment to Malaysia and this looks set to continue. In 2002, it spent over US $100 million – 50% of its global exploration budget – in the country, and will likely allocate up to $270 million to operations here in 2003. Deepwater Sabah saw the bulk of Murphy's Malaysian activity through 2002. This trend should continue, with exploration of new prospects considered likely (in addition to further appraisal of Kikeh).
To quantify the importance of Kikeh to Murphy, Wood Mackenzie has carried out an economic analysis of the field. This, based on Murphy's preliminary reserve estimates, is based on scenarios of 400 MMbbl and 700 MMbbl of recoverable oil, with peak production of 120,000 b/d and 200,000 b/d, respectively. There are, however, potential barriers to commercialization.
Historically, some oil development in Malaysia has been delayed both by the National Depletion Policy and also the country's insistence on optimum use of associated gas. The NDP gives Petronas the right to dictate the country's level of production by restricting development timing and production levels of oil fields with in-place reserves exceeding 400 MMbbl. Nevertheless, Petronas is likely to be supportive of an early development of Kikeh. Also, the apparent absence of gas in the Kikeh wells drilled thus far indicates that gas commercialization issues, which could potentially hinder development, may be avoided.
In light of recent licensing activity, there is the possibility that the territorial dispute between Malaysia and Brunei could affect development timing. Should the Kikeh structure prove to extend across the SB K boundary, it is possible that faulting within the Kikeh structure may enable field development to progress prior to resolution of the dispute.
For the purposes of this analysis, we have assumed that first production will begin in the second half of 2006. Discounting at 10% from Jan. 1, 2003, we estimate the total net present value (NPV) of Kikeh to be $1-1.3 billion. Murphy's stake represents up to some 27% of the company's market capitalization at Jan. 30, 2003.
Wood Mackenzie has estimated that capex required for the development of Kikeh could be between $960 million and $1.68 billion. With an 80% stake in SB K, this would represent a very significant investment to a company of Murphy's size and Murphy would have a high exposure to risk associated with a development. From a seller's point of view, this may be considered an opportune time to divest some equity.
The discovery of oil in deepwater Malaysia undoubtedly raises the prospectivity of the immediate surrounding area; however, there is also the potential that it may have ramifications for other deepwater provinces in the region. Wood Mac-kenzie anticipates that the principal areas with potential for deepwater drilling activity in the near future are Sabah/Brunei/Sarawak; the Pearl River Mouth basin, China; the Northwest Palawan basin, Philippines and the Kutei basin, East Kali-mantan. These areas can be seen on the accompanying map. Not only are the provinces geo- graphically distinct, the opportunities are diverse.
Recent licensing activity of the deepwater acreage off the northwest coast of Borneo (Sabah, Brunei, Sarawak) has resulted in several new companies entering the sector and much of the available acreage has now been awarded. As such, a number of blocks have commitments attached and we anticipate that over 15 exploration wells could be drilled in the area over the next few years.
Historically, only limited exploration has been carried out in the deeper water acreage in this area, and there has been a general perception that the area is gas prone. The recent discoveries of oil at the Kikeh and Kebabangan fields, however, indicate potential oil prospectivity in the area. In light of recent successes, existing players, such as Shell, ConocoPhillips, TFE, Amerada Hess, and Mitsubishi – as well as Murphy – may look to accelerate exploration activity in the area.
While East Kalimantan is the most densely drilled deepwater province in Southeast Asia, the first deepwater development in the area – Unocal's West Seno – is only due to come onstream later in 2003. This may provide a boost for exploration in the province, where several open blocks currently exist. Since 2001, five new deepwater blocks have been licensed, one of which – the Donggala PSC – attracted a signature fee of around $19 million – the highest in Indonesia in recent years, indicating a high level of prospectivity. We do not anticipate a revival to the level of activity seen during the peak of Unocal's SX campaign, but the commitment wells associated with the recent license awards should see exploration continue at levels of around 10 wells per year for the next few years. Deepwater East Kalimantan exploration has confirmed the area as principally gas prone and gas monetization presents a major barrier to commercialization.
As the location of Southeast Asia's only onstream deepwater field, the Philippines may see an increase in interest over coming years. In November 2002, Unocal increased its standing in the country, committing to carry out development studies of a field which was previously considered marginal. In addition, Shell is considering developing the oil rim on its deepwater Malampaya field.
Deepwater China is, as yet an unknown quantity. Twelve new blocks, totalling 76,000 sq km, in the Pearl River Mouth basin of the South China Sea were offered for license in September 2002. Only one block has been awarded to date, with block 40/30 having been awarded to Husky Energy. Shallow water exploration has discovered both oil and gas fields, so there are no strong indicators of which will dominate in the deepwater acreage.
Although deepwater exploration in Southeast Asia has historically been a small contributor to the global market and has been dominated by one operator, 2002 was a significant year with drilling carried out by several relatively new entrants to the sector. That these companies were successful suggests that deepwater exploration in the region may be about to enter a period of growth, spurred on by the lack of availability of acreage in more established global deepwater markets.