After reading few articles about about RSC introduced recently in Malaysia's oil and gas industry with the end in mind to develop small and marginal fields in Malaysia, my view is that it is the right things to do. What I deduce from my reading is that, the RSC contract is very similar with the " Buy Back Contract or Services" which is common practices in Iran and Iraq to certain extent oil and gas industry. As for Iraq, the contractors are paid certain amount of money for every barrels produced from the fields as the remuneration.
How it works ? The contractors [ oil and gas companies] will be paid back in the form of entitlement [ lifting ] from the oil/gas produce for a certain period, and it depends on the agreement. All the cost for the development of the oil/gas fields. However, the contractor shall fork out the money based on the equity participating interest .
The contractor not only compensate for the cost that they have incurred, but the remuneration do include profit margin. The cost incurred shall be audited by the authority which is done every quarter in any given year. It is essential to read the terms and conditions of the agreement and thoroughly understand what are recoverable and what are not recoverable. The field development shall be approved oil & gas authority of the host country, and the phasing of the budget for the whole development projects shall be approved during the annual WP&B [ Work Program & Budget]. After the WP&B has been approved, Authorisation for Expenditure [AFE] documents shall be approved, again depending on the terms and conditions stipulated in the Accounting Procedure of the agreements. Another controls in place, that the award of contracts shall also be approved by the authority base on the award value. In essence, doesn't mean that if the field development concept is approved by the authority, it is not to assume that the contractors have the blanket cheque to spend on the development project. All these iteration of process, shall be audited by the authority.
In many occasions, the host government would like the contractors to identify areas for cost savings and cost optimization. Due care shall be given to the allocated cost from the Head Offices. In many of Service Contracts that I am familiar with, depending on the Accounting Procedures of the agreements the authority would want the basis of allocation to receive approval from the authority and sometimes, it requires the cost to be certified by third party [ normally the accounting firms- Big 4] to provide assurances that the allocated cost do not have "profit elements" and being charged on fair and equitable basis.
Still, on top of what I have mentioned above, the tax law of the country shall be taken into consideration - be it Withholding Tax, Value Added Tax and Corporate Income Tax. The total project cost shall take into consideration of these 3 elements, to avoid cost overrun due to this. Again, in many occasion, the tax authority will audit the the project and expenditure cost, and compliance to the tax law is very critical.
From tax perspective, from what I read for RSC Petroleum Income Tax [PITA] is 25 % as compared to normal Production Sharing Contract of 38 %.
Why not Petronas ? Why award to independent unknown contractors ?
The answer to that , that the initiative is very much aligned with the government strategy plus the big giants such as Petronas, Exxon, Shell, Total, Chevron, Conoco and Eni do have high overhead and resource constraint this develop the small and marginal fields. They would prefer to invest in giant field such as Kebabangan, Malikai which give them much more return at at the same time fully utilizing the resources. Basically, putting the resources to more attractive portfolios.
Knowledge and technological transfer- Petrofac do have the technology, and hopefully local players such as Sapura and Kencana will learn and eventually becoming a global players, with know how and capability to develop similar small and marginal fields elsewhere around the globe.
There is no issue about the ownership of the small and marginal fields. The fields is still belong to Petronas as the guardian and custodian of oil and gas reserves in Malaysia. Petronas through its voting rights in the Management Committee that manage the projects, will have the final say about the development concept and production philosophy of the small and marginal fields. After the first oil and gas, the small and marginal fields will be handed over to Petronas, for the latter to own and manage the small and marginal fields.
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