This article first appeared in The Edge Malaysia Weekly on October 14, 2019 - October 20, 2019

EXXONMOBIL Corp has confirmed that it is testing market interest in its upstream offshore assets in Malaysia as part of an ongoing evaluation and its plan to divest US$15 billion of its non-strategic properties by 2021.

However, Sukiman Mohamed, spokesperson for its Malaysian subsidiary, says no agreements have been reached and no buyer has been identified so far for the assets.

“Our operations will continue as usual throughout the marketing process. Our priorities continue to be effectively meeting the expectations of our customers, employees and business partners while maintaining a consistent focus on safe and efficient operations,” he tells The Edge.

“ExxonMobil remains committed to conducting business in Malaysia as we have for more than 125 years now.”

The company will continue to have a strong presence in the country through its global business centres in Kuala Lumpur as well as in the polyethylene market, Sukiman adds.

Last Wednesday, international news agencies reported that ExxonMobil was considering the sale of its upstream offshore assets in Malaysia for between US$2 billion and US$3 billion. It is understood that Bank of America Merrill Lynch has been appointed to manage the sale of the assets.

The news came less than two weeks after the sale of its non-operated upstream assets in Norway to Vår Energi AS for US$4.5 billion.

The oil major has three production-sharing contracts (PSCs) in Malaysia through ExxonMobil Exploration & Production Malaysia Inc (EMEPMI), which at one time accounted for almost a third of the country’s oil and gas production.

In June 2014, EMEPMI sold its interest in the Seligi oilfield and the PM8 PSC to EQ Petroleum Production Malaysia Ltd, a wholly-owned subsidiary of EnQuest plc.

EMEPMI has 50% equity interest in PM5 and non-associated Gas PSC. It also has a 78% stake in a PSC signed in 2008.

PM5 comprises the Larut oilfield while Gas PSC includes Angsi, Lawit, Bintang, Damar, Telok and Jerneh. The 2008 PSC comprises Guntong, Tapis, Semangkok, Irong Barat, Palas, Tabu and the divested Seligi. All these fields are located off the peninsula’s shores.

Speculation about ExxonMobil selling its upstream assets in Malaysia has been around for a while now. In fact, industry observers had expected the American oil giant to exit Malaysia after it sold its downstream and retail businesses here to Petron Corp of the Philippines in 2011.

Industry observers cite ExxonMobil’s global strategy to focus on its assets in the US, especially in the Permian Basin — the shale oil and gas heartland of the country — as the reason for its planned withdrawal from Malaysia after its presence here for more than a century. Moreover, operations in the major shale oil and gas-producing region require massive capital outlay, one of the reasons for the extensive consolidation of the industry since 2009, when the shale revolution began in the US.

ExxonMobil has spent billions of dollars on acquiring exploration and production acreage in the Permian Basin and other major players in the region, such as its 2009 acquisition of XTO Energy Inc for US$41 billion.

“It is essentially a commercial decision. Can I get better returns elsewhere for the same money and technical resources spent?” remarks an industry expert, who has almost four decades of experience in the industry. “There are also other considerations, such as size or reserves and more favourable terms and conditions that they consider when they decide to put their Malaysian assets up for sale.”

Essentially, he says, ExxonMobil is seeking additional and bigger oil and gas reserves than potentially available in Malaysia. “They are essentially putting all their projects worldwide in one basket, so to speak, and ranking them in terms of returns, plus other non-commercial considerations, including geopolitical and ease of technological application and other incentives on offer.”

When ExxonMobil sold its Malaysian assets to Petron in 2011, the shale revolution had just begun in the US. As producers discovered more economical ways to extract the unconventional reserves, coupled with high crude oil prices until 2014, production boomed. The US became a major exporter of crude oil from 2014 with exports consistently staying above one million barrels of oil equivalent per day (boepd) since the week ended Sept 22, 2017, says the Energy Information Administration of the US. According to it, about four million boepd are produced in the Permian Basin today.

ExxonMobil produced about 271,000 boepd in the Permian Basin and targets to produce one million boepd in the region by 2024.

Its competitor Chevron Corp has also been investing in the Permian Basin and currently produces 421,000 boepd there. It aims to increase production to 900,000 boepd by 2023.

“As technology advances, unconventional resources are becoming viable to be extracted. This saw the revival of the Permian Basin, which has yet again become a major oil and gas-producing region in the world.

“Oil majors are investing in the region to tap its large reserves. Apart from ExxonMobil, Chevron, ConocoPhillips, Royal Dutch Shell and Occidental Petroleum Corp also have operations there,” says an industry observer.

The US exploration and production (E&P) industry is fragmented with many small players facing weak free cash flow due to low returns and high capital expenditure, which has led to a consolidation of the industry in the last decade.

Diamondback Energy Corp, Pioneer Natural Resources Corp and Cimarex Energy Corp are some of the E&P companies facing negative free cash flow — a situation where capital expenditure requirements exceed operating cash flow.

Last year, Diamondback Energy’s net operating cash flow stood at US$1.56 billion while its capital expenditure totalled US$1.67 billion. Similarly, Pioneer Natural Resources’ capital expenditure of US$3.78 billion exceeded its net operating cash flow of US$3.23 billion.

These companies have been earmarked by analysts as possible takeover targets for ExxonMobil.

In August, Occidental finalised its US$55 billion acquisition of Anadarko Petroleum Corp, making the merged company among the larger producers in the Permian Basin. Occidental outbid Chevron’s US$48 billion offer for Anadarko.

While ExxonMobil’s reason for deciding to sell its upstream offshore assets in Malaysia is clear, market interest in the assets is not. This is because some of the PSCs are coming to an end. “No one will buy an asset that is near its end unless the reserves are still sizeable. If these PSCs are nearing the end of their term, and if they are not extended, they will have to be relinquished to Petronas,” says an industry observer.

It is worth noting that in March 2008, Petronas signed a 25-year PSC with EMEPMI and Petronas Carigali Sdn Bhd for the development of seven oilfields under the 2008 PSC with a committed investment of US$2.1 billion.

Meanwhile, the PM5 PSC has been in development and production since the early 1990s and it is not clear whether its tenure has been extended. The Gas PSC started production in 2007.

Apart from Petronas Carigali, major oil and gas producers in Malaysia include Royal Dutch Shell with 11 PSCs in Sabah and Sarawak, JX Nippon Oil & Gas Exploration Corp, Hess Corp and PTT Exploration & Production pcl.

Local companies too have been active in the E&P space with the likes of Sapura Energy Bhd, Dialog Group Bhd and Hibiscus Petroleum Bhd being awarded upstream contracts by Petronas in recent years or acquiring existing PSCs.

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