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Sustainability in the Oil and Gas

Keynote Plenary at the 29th

Symposium of Malaysian Chemical Engineers, SOMChe, 2

nd December 2016, Marriott Hotel, Miri, Malaysia

By Mohd Azmi Mohd Noor, President of IMM.

Salutations; Chairman of the organising committee, Ladies and Gentlemen, Thank you for inviting me to this Symposium. Appropriate to the theme of the Symposium, I will talk about the sustainability of the oil and gas industry in a low oil price environment. Let’s start by looking at recent global events. Yesterday’s announcement by OPEC was a long awaited event by the World. They have finally agreed to reduce production by 1.2 million barrels, in order to prop up the price. In response oil price has rallied, jumping by 8%, with Brent steadily cruising around USD52 per barrel.(supply demand pic).

Global crude supply has been exceeding demand since the

third quarter of 2013. The gap by third quarter of 2016 is about

a million barrel plus. OPEC command a third of Global supply,

with Saudi Arabia as the leading producer at roughly 10 million

barrels per day. Much of the reduction promised by OPEC will

have to be shouldered by Saudi Arabia. Outside of OPEC,

there are two major producers as well, Russia and the US.

Russia is pretty much behind the OPEC initiative. This beg a

question on the US stand.

In the US, the Shale oil boom continues to grow. The US

government has allowed the exports of oil and gas resources

as it is no longer considered a supply threat. US Shale

operators has been steadily building their capability, reducing

their cost to produce. (pic of Eagle Ford tight oil drilling cost).

So if we take another look at the World supply scenario (pic of Global supply curve), the US Shale oil producers will open up their taps and flood the market as soon as the price of oil meet the US Shale oil break even cost, which is around the USD50 per barrel mark. As a result, the oil price scenario will follow a yo-yo curve of between USD45 - USD55. US Shale oil will definitely benefit at the expense of OPEC. The picture is also the same on the LNG front. Global LNG glut continues to weaken price, as Australian LNG fields coming on stream, eg, Gorgon. Spot LNG cargoes are beginning to rise.

However it is not all that gloom and doom for the Malaysian oil and gas scene. I will try to paint the picture in wide brush strokes by sharing with you a SWOT analysis. Malaysian Oil and Gas SWOT analysis Strength Our main strength are - we produce high grade premium light crude, mostly API 30 and above, - it is estimated that our deep water acreage holds 7 billion Barrel of oil equivalent, half of which has been discovered, - our marginal fields holds 600 million Barrels of oil equivalent, whilst Enhanced Oil Recovery, EOR, can unlock another 750 to 1000 million Barrel of oil equivalent, - Malaysia has the fourth largest reserves in Asia after China, India and Vietnam, - Malaysia is the second largest producer after Indonesia, - The Bintulu LNG complex is the second world's largest LNG facility, after Qatar, - The Malaysian oil and gas industry is well managed and regulated by Petronas, a Fortune 500 company, - Malaysia has a well established market with a strong auxiliary industry support to compliment, - we have strong corporate entrepreneurial talent that has made global impact, eg, PetronasCarigali, SapuraKencana, SCOMI, etc.

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Picture depict first gas for the Petronas Floating LNG on the Kanowit Field, in Sarawak waters. The first of its kind in the world!

The weaknesses are - We have mature fields some of which are beyond 40 years old. There are 320 offshore structures, 7km of subsea pipelines, 70% of which has gone beyond their design life, resulting in rising cost to maintain them, - high capital outlay in Upstream, in fact Petronas has put on hold some RM50 billion capital expenditure on Greenfield projects, most of these are on marginal fields, - R&D, technological innovation, industry-academia collaborations left a lot to be desired for, - a recent study by the Malaysian Petroleum Research Corporation, MPRC, a Corporation in the Prime Minister’s department, revealed that out of 3500 local vendors and contractors, 90% hold agencies of foreign products compared to 70% out of 800 vendors in Norway who developed their own products. We may have good corporate entrepreneurial talent but lacking on the granular pieces.

Opportunities - Deepwater, marginal field development and EOR holds the biggest opportunities moving forward, - Shift of attention by large International Oil Companies to developed markets provide ample opportunities for smaller local-based independents, e.g., Hibiscus buying Shell equities in the North Sabah field, - as fields mature and decline, there will be opportunities in decommissioning, rejuvenation, mothballing and preservation,

- integrated Upstream and Downstream development, eg. PFLNG, Pengerang integrated complex, Samur fertilizer plant/Sabah Oil and Gas Terminal, SOGT/Sabah Gas Pipeline Project, SGPP. - By far the biggest opportunities lies in innovation and technology implementation. These helps on two front. First, it can raise short term production gains, a key denominator in the cost per barrel equation. Eg, automated gaslift optimisation and remotely operated fields can improve production efficiency translating into decreasing unit per barrel or Unit Production Cost, UPC, of between USD3 to USD11 per barrel. Second, technology can improve economics of field developments. Eg. integrating digital technology application has been proven to increase reservoir limits resulting in decrease Capex by up to 20%. The Oil and Gas UK Technology Leadership Board commissioned a study by Lockheed Martin on Asset Integrity technologies. The North Sea fields are similar in age as the Malaysian Fields and hence rising maintenance costs is an issue there as it is here. The study is meant to unlock one billion Pound Sterling of revenue through improved efficiency and cost reduction in the UK Continental Shelf targeting technologies in process vessel inspection, managing corrosion under insulation onshore, offshore and subsea areas. The Cost Reduction Alliance, CORAL 2.0, initiative by Petronas Upstream has a similar target here in Malaysia. The Technology Replication Thrust, one of the many workstream under CORAL 2.0 targets a RM 500 million savings per annum on asset integrity through the replication of proven technologies. Eg, the use of Drones for flare inspection has translated savings of RM 15 Million via the avoidance of shutdown. Another example is the work done by the Institute of Materials, Malaysia on Coatings Fingerprinting using Fourier Transform Infrared (FTIR), spectroscopy technology. It was borne from an industry need to ensure the quality of paint. It is a world’s first and gaining recognition amongst international paint manufacturers, as a method of quality control, providing certification similar to the Mill Certification of the steel industry.

Courtesy of PETRONAS CORAL 2.0

In a recent report, McKinsey reported that “we are now poised for a second digital age that could further reduce costs, unleash unparallel productivity and boost performance significantly”. The new buzz words in the industry is that of “Internet Of Things”, IOT, cloud computing and advanced analytics.

The Internet of Things, IOT.

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These digital technologies give engineers unprecedented granular views into operations, increasing agility and support better strategic decision making. The report mentioned 3 user cases; “Operations of the future” – unmanned and remotely controlled, Drones and equipment sensors. Potential impact of using advanced analytics for predictive maintenance can translate to decrease maintenance cost by 27% with increase uptime and reliability. Adding time lapse dimension to an already in place 3-D seismic enable accurate prediction of reservoir fluid changes, increasing recovery rates by 40%. DNVGL technology outlook came to the same conclusion, with fully automated drilling operations, autonomous inspection of subsea pipelines and fully subsea systems. In fact in a study by BP in the Gulf of Mexico, designing complete subsea systems as opposed to topside platform can reduce Capex by 30%. It is time for the industry to reinvent itself. Collaboration is key to it all. Industry, academia, government and Non-Governmental Organisations, NGO’s, must come together to harness their resources if these opportunities are to be exploited. Here in Malaysia, MPRC has set up a collaborative environment involving Operators, Universities, the Malaysian Oil and Gas Services Council, MOGSC, (a group representing the vendors and contractors), and investment bankers together. Called OGITEC, or Oil and Gas Technology Council, its main objective is to provide an ecosystem in which to springboard Malaysian based technology, accelerating their development and commercialisation. IOT is the first technology that OGITEC is spearheading. The University of Malaya has set up an IOT laboratory, called “Makers Space” under the OGITEC banner back by funding from local investment banks. Makers Space will target “Remote Operations” as a theme and this was a problem statement expressed by many of the Operators here in Malaysia that they want to improve upon. Threats - The biggest threat to the industry is a prolonged low oil price environment. Many of the Greenfield projects are on hold. Attrition rates in the industry are increasing and we might lose talent and capabilities in a prolonged low oil price environment. Already the industry is besieged with talent shortage, 70% of the demographics are made up of engineers of 35 years and below.

- Another threat is the mindset on reducing cost. Especially with ageing facilities where cost is spiralling. Maintenance cost reduction is an easy target for Operating companies. “Rust never sleep” and deferring maintenance might lead to a process safety incident to such magnitude as the “Deepwater Horizon”. In summary, my message is this - We are in a prolonged low oil cost environment and it will be here for quite awhile - The industry need to reinvent itself if we are to sustain our relevancy - Innovation and technology is key to turn this industry around - And in order to achieve a good technological ecosystem, collaboration on all front is required. In ending I would like to express my gratitude to the organising committee in allowing me here to deliver this plenary. Thank you. References

1) Oil and Gas in Malaysia: Exploring growth in a dynamic

market place - Price Water House, April 2015, 2) CORAL 2.0 initiative – Malaysian Petroleum Management,

MPM, September 2016 3) Oil and Gas Technological Council, OGITEC – Malaysian

Petroleum Development Corporation, 2016 4) Technology, innovation key to cost reduction, capital

efficiency, says analyst – Offshore Magazine, 12/1/2015 5) The next frontier for digital technologies in the oil and gas

– Harsh Choudhry, Azam Mohammad, Khoon Tee Tan, and Richard Ward, Mckensy&Company insights August, 2016

6) Asset Integrity Theme Landscaping Study – Lockheed Martin, a study for the Oil & Gas UK Technology Leadership Board, May 2016

7) Capital Productivity for Oil and Gas in a Low-Price Environment – Lodewijk de Graauw, John McCreery and Brian Murphy, Bain & Company, November 2015

8) Technology Outlook – BP November 2015 9) How Oil and Gas Companies can optimize technology

performance and costs during oil price volatility – Brian Meenagh, January 2015, Al-Mirsal

10) Deploying technologically innovative solutions to lower costs in the oil industry – HIS Energy Blog, July 2015

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