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Financial Times: Malaysia oil fears prompt Petronas to buy into Russian producer

By John Burton in Singapore
Published: August 8 2006 03:00 | Last updated: August 8 2006 03:00

Concerns about Malaysia’s dwindling oil reserves have been underscored by a recent decision by Petronas, the state energy group, to take a stake in Rosneft, the Russian oil producer.

The $1.1bn (€855m, £575m) deal to gain access to Russia’s oil fields comes after Petronas recently reported that domestic oil production last year had fallen by nearly 5 per cent to 700,000 barrels a day. Malaysia is south-east Asia’s largest oil producer after Indonesia.

Petronas blamed the decline on shutdowns for “major maintenance and repair works in several fields” operated by joint venture partners, which include ExxonMobil and Royal Dutch Shell.

But it expressed confidence that proved and probable crude oil reserves of 5.25bn barrels meant that Malaysia still had 20 years of oil reserves at current rates of production.

Independent analysts estimate that Malaysia has about 14 years of oil production left, if only proved reserves of 4.2bn barrels are taken into account.

“Mature fields are declining faster than new fields coming on stream,” said a London-based energy analyst with an international bank. “They are definitely not replacing reserves with new discoveries too well. In 1995, the [proved] reserve figure was 5.2bn barrels.”

The decline in Malaysian oil production could affect future economic growth, since oil represents about 9 per cent of Malaysian exports. The oil industry accounts for about 30 per cent of government revenues when the country is struggling to cut a budget deficit.

Najib Razak, the deputy prime minister, warned last year that Malaysia could become a net oil importer by 2009 if it did not find new oil reserves and domestic demand continued to surge. “This means we cannot continue to lean on the oil sector,” he said.

Declining oil production in Malaysia and Indonesia and Brunei means that east Asia will rely more on the Middle East, Russia and Africa for future supplies.

Indonesia’s proved oil reserves of 4.4bn barrels are only slightly larger than those of Malaysia.

Malaysia’s main overseas oil markets include Japan, South Korea, Thailand and Singapore, while it is expanding exports to the US, Australia, New Zealand and Chile.

Hassan Marican, Petronas chief executive, said the group had spent M$12bn ($3.3bn, €2.5bn, £1.7bn) last year to make new discoveries for oil and gas.

Although higher oil prices mean Petronas and its partners have more money to spend on oil exploration, inflation in the oil service sector is also rising rapidly.

“Costs to find, develop and produce oil and gas have increased by an average of 50 per cent over the past two years,” Mr Hassan recently told an energy conference in Kuala Lumpur. “The increase in capital expenditures and shortage in capacity in contracting services may result in the deferment and delay of some projects.”

In addition, most of the new oil fields are located in deep water or ultra-deep water areas, which makes production more expensive. Most recent finds areoff Malaysia’s Sabah stateon the island of Borneo.

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