CHAPTER 1 INTRODUCTION 1.1 An Overview of Malaysia Upstream Oil and Gas Industry Malaysia has increasingly becoming important to world energy markets because of its oil and natural gas reserves. Malaysia’s current oil reserves are estimated at approximately 3 billion barrels. These reserves quantity is declining due to lack of oil discoveries in the last few years. On the other hand, its natural gas production has been rising steadily. In year 2000, Malaysia accounted for approximately 15% of total liquefied natural gas exports and is estimated to contain a 75 million cubic feet natural gas resort. Main importers of Malaysia’s natural gases are Japan, South Korea and Taiwan. In Malaysia, the oil, gas and other petroleum natural resources are governed by the Petrolium Development Act (1974). Under the Act, Petroliam Nasional Malaysia Sdn. Bhd. or PETRONAS in short, is entrusted to manage the country’s petroleum resources. PETRONAS carries out the exploration, development and production activities in Malaysia through the Production Sharing Contracts (PSCs) with international oil and gas production companies. At present, there are more than five international oil companies operating in Malaysia. The companies include Shell, ExxonMobil, Murphy Oil, Nippon Oil, Talisman Energy, Amerada Hess and 2 Petronas Carigali. These companies are collectively known as Production Sharing Contractors (PSC Contractors). Under the Production Sharing Contracts, the PSC Contractors are obliged to provide all the financing and bear all the risks of exploration, development and production activities in exchange for a share of the total production. By and large, Malaysia hydrocarbon reserves are found offshore, mainly in the east cost of Peninsular Malaysia and also offshore of Sarawak and Sabah. In order to realise the values of the hydrocarbon underneath the oceans, the hydrocarbon need be extracted, processed and eventually transported to end users. These offshore operations of extracting, processing and transporting to onshore can be broken into three main phases, namely, exploration, development and production. Brief explanations of these upstream phases are found in Chapter 2. This research study will essentially focus on the development phase. During this phase Oil Companies would be involved in the planning, designing, procurement of materials, construction, transportation and installation, and commissioning of permanent offshore platforms for extracting, processing and transporting the producible hydrocarbon onshore. These permanent offshore platforms are huge, fixed structures, large enough to contain the necessary drilling and production equipment, storage space for the supplies and living quarters for the crew. The various types and construction of offshore platforms, commonly found in Malaysia, are discussed in Chapter 3. Like all development projects, the offshore development projects are inevitably subjected to various risks. All the risks at all stages of the development must be identified and managed, in order to ensure that the projects are profitable. 3 1.2 Problem Statement The most common approach of project delivery system used in the offshore oil and gas development projects in Malaysia, is the traditional method. The traditional method is most suitable from the Client’s point of view if the overall project schedule is not critical. Under this method, owners are able to obtain a lump sum tender price and can be certain of his financial commitment from the outset. However, if the overall project schedule is critical, the traditional method will no longer be suitable, as the method normally requires longer time for completion. In the last ten years, it has been observed that there is an inclination for Oil Companies to accelerate the overall development and production of their oil and gas reserves. This may be due to the need to generate quick revenues from oil and gas to support the country’s economic growth. Nevertheless, such acceleration will result in the reduction of the overall development schedule and thus time becomes critical. As such, a more appropriate approach need be adopted in the project for delivery of the offshore platforms. From author’s involvements and observations, in the near future the choice of appropriate contracting strategy will become more critical for oil companies, as they are ready to develop new oil and gas fields in Malaysian deeper waters, which involves more complex and specialise platforms. 1.3 Objectives of the study Given the above scenario, it is therefore necessary to study the alternatives project delivery systems available and to suggest the most appropriate system suitable for used in the offshore oil and gas development projects. In fulfilling the aim, this research project was carried out with the following objectives: - 4 1. To identify and study the current and most common approach of project delivery system used in the offshore oil and gas development projects in Malaysia 2. To determine the limitations of the most common approach. 3. To suggest and evaluate alternative approaches which focus on ‘Package Deal’ and ‘Bills of Quantities’ methods of contracting 1.4 Scope and Limitation of Study The scope of this research project is based on the following scope and limitations: - Focused on Clients i.e. Oil and Gas Companies and their consultants perspectives. This research project was based primarily on the offshore oil and gas development projects in Malaysia, which is governed by Petroleum Development Act (1974) PETRONAS procedural and policies. 1.5 Methodology / Study Approach The methodology adopted in gathering information for this research project comprises literature review, unstructured interviews and questionnaire survey. The literature review provides an overview of the subject matters. 5 The questionnaire survey were carried out to collect industry’s opinions, lessons learnt and suggestions from practitioners from oil companies and consultants who have directly involved in the development and implementation of contracting strategies for offshore oil and gas development projects. Information gathered from the above methods are analysed, discussed, organised and formed a structured report. Based on the discussions, suggestions of improvement are then put forward for consideration.