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Interview

with Keith Collins, General Manager, Petrofac Malaysia

01.03.2010 / Energyboardroom

For Petrofac as a group, the year to year order book increased by more than hundred per cent, revenues and net profits have been increasing as well, but what has been the situation in Malaysia?

The company in its global activities was very successful during 2009 and had a record year gaining new projects, especially in the Middle East therefore increasing our order book substantially. Outside of Malaysia, Petrofac is mostly a service provider, but in Malaysia we operate as a production sharing contractor to PETRONAS, which can be seen as an extension of our service offering as we are bound by a fairly well defined contract and have to perform just like a normal contractor. The Energy Development’s division within Petrofac is where the Malaysian office fits into the overall company structure and is the part of the company where we co-invest with our partners; in Malaysia’s case the partners being PETRONAS Carigali, Kufpec and PetroVietnam . During 2009 I’m pleased to report that we met all our production targets without any HSE related incidents so combined with close to one hundred per cent uptime on our offshore facilities it was a tremendous year. The performance of the offshore team was recognized by PETRONAS through an award at an Offshore Production Improvement conference held last October in KL. Not content with achieving good production we also drilled some near field appraisal wells in our offshore block that found additional hurdocarbon resources. We are now evaluating data from these wells to determine how best to proceed with development and tie them into our new infrastructure. Malaysia is a core area for Petrofac, and we anticipate investing a substantial amount of money over the next three to five years to fully exploit the hydrocarbon resources in our block. This investment should enable us to expand our production capacity by over 2.5 times hence increasing the importance of our Malaysian operation to the Petrofac group as a whole.

As you said Petrofac is internationally known as a service provider to the industry, so why did you decide to move up the value chain in Malaysia and what competitive advantage made you become a PSC contractor to PETRONAS?

It allows us to utilize our service orientated capability – a core skill of the company – on the projects we undertake here. We have over 13,000 employees outside of Malaysia, a large part of which is focused on onshore EPC projects, offshore platform management and a fast developing offshore engineering capability. We also have an appetite for taking risk that we believe we can mitigate using these capabilities. This means that we can become comfortable making these types of investments and as a consequence get a higher return on investment than some of our competitors. The opportunity that we have seized on is to choose technically challenging and marginal projects that we can deliver using the capabilities of the wider company and adopting a service providers approach focusing on cost management and project execution. That is how Petrofac can create enterprise value out of projects that other companies would not do! Let’s take the example of three projects that the Energy Developments division has undertaken and successfully delivered in the upstream sector. In Malaysia the Cendor field had sat on the inventory books for over thirty years but had not been developed because it was deemed to be too marginal. Implementing a phased development solution has enabled over eighteen million barrels to be produced from this field to-date. In Tunisia Petrofac operates a small gas field lwith the production plant located on an island 15 km offshore. For a variety of reasons the previous operator was unable to complete the project after spending three years f effort. Petrofac came along and by using the expertise of our Engineering and Construction division delivered the project within eighteen months of taking over and it is now producing at over 50% of the original design rate.. In the North Sea we invested over $400 million dollars to develop a series of fields that had been half heartedly developed by the previous operator.. We came in with a different approach using a combination of subsea wells and a floating production unit with temporary offloading before it was tied into the main Brent pipeline system. The field is on-stream and producing at it’s design rates As you can see we don’t tackle easy projects, tending to target the more difficult ones, and have an appetite for taking manageable risks that a classical service company might shy away from through our co-investment business model. So far this approach has served the company quite well.

Richard Hall was saying in his interview with us in 2005 that Petrofac wanted to establish strong links with PETRONAs and the other PSC contractors, in order to become a strong player in Malaysia. Where do you stand today on the path towards becoming an important player: are you far from reaching this goal, or have you surpassed it already?

Of course there is always room for improvement! However we have been concentrating a lot of our time and efforts on finding more hydrocarbon resources in our own block, thus demonstrating that we are prepared to invest some of the money that we are making through our current oil production to find and extract more. At the end of the day this investment works not only for our benefit but also for PETRONAS’ and the Malaysian economy. We are in the process of increasing the number of development opportunities in Malaysia to be able to bring some small tougher fields to development status, instead of leaving them on hold. Over the past four years on the back of our successful project delivery, safety record, operational performance and the investment we have made, our relationship with PETRONAS is very solid though we continue to seek ways to improve it even further.

What all independent E&P players – such as Talisman, Newfield or Murphy – usually say is that they are smaller, have a different technical knowledge and therefore can develop smaller and more challenging fields that are not of much importance to the major players. How is Petrofac really different from the other independents and where exactly can the company bring added value?

It is not just the technology, but the philosophy and the methodology that flows through our work that sets us apart. Among all the projects where we have been successful, there has not been one technological niche that we have applied but the use of appropriate and available technology. We always try to find the most appropriate development solution to enable the project to happen, taking into account the technical as well as the commercial aspects. At the end of the day everything is driven by the economics of the project: upfront Capex profile, cost structure, willingness to mitigate some of the risks and it’s materiality within the overall portfolio. Some of the small companies that you mention – that are not that small anymore – as they get bigger will tend to have opportunities with higher values and projects that they would have done five to ten years before are not material to them. The majors have all the technical smarts to undertake the type of oilfield developments that we do, but they are simply not material to them. Basically we get excited about a five to ten million barrel field, and look forward to making something out of it. For major players it represents a tiny part of their portfolio, and they can use their resources elsewhere on hundred million barrel plus fields… Because of these factors we find smaller fields not being developed by bigger companies, and today Petrofac is still quite small and these opportunities represent an important element of our portfolio.

In a Petrofac internal interview you said you wanted, in Cendor field, to move the project forward in 2010. What are you key objectives for this year?

We want to get sanction for our new infrastructure in block PM304, which will be close to a one billion dollar investment. We are still in the front end engineering design stage but expect to get the green light for the field development plan by September. Once we have this we will start to make capital equipment commitments in order to secure the schedule and achieve first oil early 2013. Our second focus is to find more oil resources in our existing block, and for that we are planning another appraisal program to further define these resources. The third thing we are doing is to look at developing small accumulations outside of our existing block using the new infrastructure as the key enabler. These near field developments will use a combination of innovative – at least for shallow waters in Malaysia – subsea technology and the more conventional wellhead platform type of technology.

Malaysia is a mature market with a lot of marginal fields’ development, but there is also a massive move towards deepwater in the region. Where do you see the most opportunities for Petrofac?

We do not do deep water as it is too expensive and too high a risk profile for us. We wish those who undertake it every success!
As an international service company, but a development operator in Malaysia, you are both an insider and an outsider to the service providers’ scene in the country. How would you assess the service base and the ambitions of Malaysia to become a service hub for the region?
Service providers in Malaysia have a lot of capabilities to serve the local and regional market. I think the service companies should move into the higher end of the market, providing high value engineering work such as engineering design, , high end manufacturing and develop innovative technologies. I think this is very important area as –the development of new technology by Malaysian companies rather than the application of technology developed outside of Malaysia is where the real “value add” is. The Malaysian service industry should be moving away from the agency type of business and establish itself as a true innovator in the world oil & gas business. From the people I have met I believe they have the potential to transform.

How do you think Petrofac can push its service suppliers to be more innovative in Malaysia?

We try to work with local service providers, and are keen to support the development of the Malaysian oil & gas industry. We expose them the problems that we face in extracting resources in the country, and push them to come up with innovative solutions for us. We can also transfer our culture of project execution and delivery excellence to the service sector. As a multinational organization we can bring our international expertise. Moreover as PETRONAS itself expands internationally, particularly in the Middle East and Central Asia, Petrofac can leverage on its strength in these regions and the familiarity between the two organizations to help PETRONAS develop its oil and gas resources outside of Malaysia. We are also putting together Petrofac companies outside of Malaysia with Malaysian services providers who have the desire to work internationally so we are putting into place knowledge transfer mechanisms.

Given that Malaysia is one of your core areas for offshore development projects, what can Petrofac as an organization learn from your activities here?

Given the knowledge that we have gained over the years, we can explain to our colleagues the flavour and culture of Malaysian companies, and we provide them with a reference and an in-depth understanding of their capabilities. Petrofac can learn how to deal with large NOCs such as PETRONAS and see how our broad capabilities enable the fulfillment of the national objectives particularly associated with capability development and knowledge transfer. We have also learnt how to enter a country and develop the local capabilities to create a viable fully functioning business that can stand up on its own within the wider Petrofac organization and on the international stage.

What are your personal goals for the company in Malaysia?

I want to increase our oil production threefold from our current level . I would like to see the number of development opportunities increase with two or three more fields coming into production. My goal is also to position Malaysia as Petrofac’s regional headquarters for Petrofac businesses within South East Asia, using capabilities that we have developed here. We have a very capable and loyal staff base who are keen to be involved with our regional expansion plans.

If you had to sum up your achievements, contribution in the country to send a message to the Malaysian oil & gas community, what would you say?

The message I would send is that Petrofac Malaysia’s story is a big success in a number of different ways, and we want to emulate this within the region. We have the capabilities, the talent and the desire to achieve that, and I look forward to working with the Malaysian oil and gas community to achieve our goals.

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