Coastal Energy Set To Extend Its Small Fields Expertise To Malaysia Through Risk Contract With Petronas
oilbarrel.com
In 2005 Coastal Energy’s forerunner took on ex-Premier Oil acreage in the Gulf of Thailand, where the London-listed company had walked away from a series of marginal oil discoveries. Coastal saw the opportunity to develop these discoveries and tap into the significant undrilled upside across the acreage and set about building a low-overhead, highly flexible offshore E&P business. It has been a highly successful business model: today the Houston-headquartered company has three offshore fields in production, 2P reserves of 109 million barrels of oil equivalent, production of over 22,000 boepd and a market cap approaching £1 billion.
What’s more, there is plenty of scope to increase all these numbers as the TSX and AIM-quoted company continues to drill up its Gulf of Thailand acreage. Coastal has proven adept at identifying prospects on the seismic, drilling them up and then quickly monetising the finds using low cost mobile production units. This is shallow water drilling, with wells coming in at around US$2.5 million each. Even the regular political upheavals in Thailand have failed to dent Coastal’s progress, with the company reporting business-as-usual whenever coups swept Bangkok.
The one issue to blot the business plan, however, is the high tax take in Thailand. While Coastal has forged a profitable business – it reported EBITDAX if US$128.4 million in Q1 2012 – there is no mistaking the fact that Thailand has one of the more stringent fiscal regimes in Asia, a region not known for favourable fiscal terms.
Last week Coastal announced its first diversification outside Thailand with the signing of a small field risk service contract in Malaysia, where terms are easier than in Thailand. However, here Coastal will operate under a different regime, signing a risk service contract rather than owning the asset. Under the terms of the contract signed with Malaysian state oil company Petronas, Coastal will develop the Kapal, Banang and Meranti cluster of small fields offshore Peninsular Malaysia. Coastal will have 100 per cent but will bring in a Malaysian company to hold 30-40 per cent of the equity as per the terms of the contract.
Coastal will provide the upfront development capital and undertake the drilling work while Petronas will remain the owner of the project. In return, Coastal will recover its capital and operating costs from the production revenues and be paid an undisclosed remuneration fee which will be based on key performance indicators, including delivering the project on time and to budget. The fields lie within 20 km of each other in waters around 60 metres deep. As on its Thai acreage, the main oil reservoirs are Miocene.
Timelines are fairly tight – one year to first oil from the Kapal field, involving ten wells, with Banang, with four wells, coming onstream a year later. But then this is Coastal, which has a proven track record in Thailand of developing clusters of shallow water oilfields using mobile offshore production units and floating storage and offloading tankers to keep capital costs and lead times down.
Chief executive Randy Bartley said there was additional appraisal and step-out potential, which the company plans to exploit during the development programme. “We expect that this project will generate a rate of return approaching that of our existing assets," he said.
It certainly looks a good deal, exposing Coastal to a low risk near-term cash-generator and adding some much-needed diversity to the portfolio. There’s cost exposure to seventeen wells and the offshore hardware but this won’t be expensive as Coastal is used to keeping a lid on costs and building in drilling efficiencies. Investors will probably want to see more clarity on the terms of the deal, particularly the scale of the remuneration fee and the split on any upside uncovered by Coastal as these could be key to the return on investment. As its Thai fields continue to throw off cash, this looks like a good use of resources to add an extra dimension to the business and leverage its proven expertise in developing small fields.
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