Oil & Gas

(1) What is the outlook of Malaysia oil and gas industry?

Malaysia is Southeast Asia’s second-biggest oil and natural-gas producer and the world’s second-largest liquefied natural gas exporter. Malaysia has not been spared the consequence of the dramatic decline in oil prices at the end of 2014-beginning 2015. The most prominent effect was the announcement by the national oil company of Malaysia, Petroliam NasionalBerhad (“PETRONAS”) that it would be looking to target a reduction in its capital expenditure by at least 15% and operational expenditure by 20%. In connection thereto, PETRONAS has introduced and led the Cost Reduction Alliance (known better as CORAL 2.0), an industry wide initiative involving 25 PSC Contractors with the stated aim of inculcating a “cost-conscious” mindset that will ultimately embrace a structural change of the upstream business environment of Malaysia, to benchmark efficiency with best-in-class performance and to increase collaboration and innovation as well as to infuse global best practices.
Pursuant to domestic legislation, PETRONAS exercises regulatory powers in respect of the upstream sector. All functions relating to upstream regulation and governance relating to domestic oil and gas is exercised by a division within PETRONAS known as the Malaysia Petroleum Management.

(2) What are the regulatory framework and commercial agreements applicable to the oil and gas industry of Malaysia?

Pursuant to the Petroleum Development Act 1974 (“PDA”), the entire ownership in, and the exclusive rights, powers, liberties, privileges of exploring, winning and obtaining petroleum onshore and offshore Malaysia were vested in PETRONAS. The PDA and the Petroleum Regulation 1974 (Petroleum Regulation) enacted pursuant to the PDA represent the key legislative enactments that govern oil and gas exploration and production activities both onshore and offshore in Malaysia.
There are other laws and regulations that make up the general framework governing the oil and gas exploration and production industry in Malaysia. They include the Petroleum (Safety Measures) Act 1984 (PSMA) and the regulations made thereunder, which govern the transportation, storage and handling of oil and oil products, and the Environmental Quality Act 1974 (EQA), which is the main legislation governing the protection of the environment and the prevention of oil spills and pollutants on land and in Malaysian waters. As many of Malaysia’s oilfields are situated in its exclusive economic zone, the Exclusive Economic Zone Act 1984 (EEZA), which governs activities in Malaysia’s exclusive economic zone also plays a key part in regulating oil activities in Malaysia.

Typical Commercial Agreements:
Apart from the above listed legislations, typically there is a number of contractual documents involved in the exploration and production industry business. These documents include the following:-

Granting Instruments

(a) Production Sharing Contracts (“PSC”); and
(b) Risk Service Contract (“RSC”).

Commercial Agreements for Petroleum Operations:

(a) Production Handling and Operating Support Agreement;
(b) Construction and Tie-In Agreement;
(c) Oil Nomination, Allocation and Lifting Agreement;
(d) Petroleum Facilities Operation and Maintenance Agreement; and
(e) Floating Production Storage Offloading Leasing Agreements.

Commercial Agreements for Products Monetization:

(a) Gas Sales Agreement;
(b) Condensate Sales Agreement; and
(c) Crude Oil Sales Agreement.

Service Contracts between PSC Contractors and Services Providers/Suppliers:

(a) Seismic Acquisition Contract;
(b) Seismic Reprocessing Contract;
(c) Drilling Rig Contract;
(d) Ancillary Agreements related to drilling activities;
(e) Front-End Engineering Design contracts;
(f) Engineering, Procurement, Construction, Installation and Commissioning Contracts;
(g) Major Equipment & Parts Procurement and Supply Agreements;
(h) Major Equipment & parts Long Term Maintenance Agreements;
(i) Bareboat Charters Agreement;
(j) Manpower Supply Agreement;
(k) Project Development and Management Agreement;
(l) Operations and Maintenance Agreement;
(m) Technical Service Agreement;
(n) Air and Sea Logistic Agreements; and
(o) Offshore Catering Agreements.

The list above is by no means exhaustive, and differs from project to project and the contracting out of the above contracts by the PSC/RSC Operator to third party contractor will normally require the prior approval of PETRONAS.

(3) What are the fiscal terms applicable to Production Sharing Contracts?

The State derives value from the exploration and production of oil and natural gas in a number of ways:

(a) Direct participation in the PSC
Every PSC awarded shall include PETRONAS Carigali as a PSC Contractor which allows the State a direct interest in the PSC awarded.

(b) Royalties
Under the PSC framework, 10 per cent of all petroleum won and saved by PSC Contractors is paid to PETRONAS in order to satisfy payment of royalties under the PDA.

(c) PETRONAS’s share of Petroleum under the PSC
Under the PSC framework, PETRONAS is entitled to a certain proportion of profit oil/profit gas from crude oil and natural gas produced based on a pre-determined formula.

(d) Supplemental Payment
Under the PSC framework, PSC Contractors are required to make supplemental cash payments to PETRONAS for such portion of the PSC Contractor’s portion of the profit oil/profit gas which exceeds the specified base price agreed in the PSC.

(e) Income Tax revenue
Petroleum income tax is chargeable for income derived from upstream exploration and production operations under the Petroleum (Income Tax) Act 1967 (PITA).

(f) Export Duty

Export duty is levied on the portion of the contractor’s share of profit oil exported out of Malaysia.