PETRONAS, Partners Gain from Malaysia's Production Sharing Contracts

Sweden’s Lundin Petroleum AB, when announcing the sale of upstream oil and gas assets in Indonesia to PT Medco Energi Internasional Tbk (Medco) last month, reiterated the importance of Malaysia to the firm’s growth strategy in Southeast Asia. Lundin after all operates several production sharing contracts (PSCs) in the country.

“We remain committed to our growth strategy in Southeast Asia where Malaysia continues to be one of Lundin Petroleum’s core areas,” Alex Schneiter, president and CEO of Lundin Petroleum said in an Oct. 9 press release.

The Swedish firm, which currently operates six PSCs in Malaysia – PM307, PM319, PM308A, PM308B, PM328 and SB307/308 – mainly in partnership with PETRONAS Carigali Sdn Bhd discovered gas at Mengkuang-1 exploration well in Block PM307 offshore Malaysia Oct. 26.

PETRONAS Carigali is the upstream division of Malaysia’s national oil company Petroliam Nasional Berhad (PETRONAS).

The PSC scheme has been a significant pillar in the growth of Malaysia’s oil and gas industry since its introduction almost 40 years ago. PSCs set out the arrangements for cooperation between PETRONAS, which assumes the role of a regulator, with qualified oil companies as contractors for the exploration, development and production of petroleum in a contract area for a specific duration.

PSCs are used to engage competent oil and gas firms to participate in the development of Malaysia’s petroleum blocks, across the entire upstream value chain.

Prior to 1974, the Malaysian government, under a concession system, collected tax from oil  companies which were granted rights to explore and develop petroleum resources with leases of up to 40 years or more.

This changed in 1974 with the passage of the Petroleum Development Act (PDA), which vested PETRONAS with ownership and control of all hydrocarbon resources in Malaysia. As a result, PSCs were adopted to replace the Concession Agreement in 1976 to enable the country to play a more direct role in controlling and managing its petroleum resources. The first PSC was awarded in 1976 to Esso for the Duyong oil field in Terengganu.

Unlike the old concession system, the key advantage of the PSC is that it allows PETRONAS to have input in strategic and operational decisions, ensuring that the operations are aligned with the group’s business objectives and nation building agenda.

Malaysia has awarded over 150 PSCs since the inception of the scheme, of which more than 100 are currently managed actively by the Malaysia Petroleum Management organization in PETRONAS.

Since its inception in 1976, the PSC scheme has contributed to the discovery of 22.2 billion barrels of oil equivalent (Bboe) of oil and gas resources in Malaysia, of which 14 Bboe of oil and gas were produced from 132 fields, data from PETRONAS indicated. The scheme also attracted $75.4 billion (MYR 330 billion) in total upstream investment, including the construction of 10 terminals, 320 offshore platforms and 4,350 miles (7,000 kilometers) of upstream pipeline.

Economically, the PSC scheme generated around 20 percent of Malaysia’s gross domestic product in 2012. The 27 PSC Contractors in the country created jobs for 20,000 people, while the scheme created business opportunities for more than 4,000 oil and gas services companies in Malaysia.

Malaysia’s PSC scheme has evolved in accordance with the needs of the field operators. PETRONAS has introduced a variety of PSCs for different operating environments and this includes contracts for deepwater, revenue-over-cost (R/C), high pressure/high temperature (HPHT) and progressive volume based (PVB).

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