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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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This Is Only The 3rd Oil Project Of Its Kind, Ever

The petroleum world witnessed a historic event this week. With a new type of oil production project becoming operational for just the third time in history.

That's a type of operation known as a "risk service contract" or RSC. Which is becoming a go-to vehicle in Malaysia, for the development of that country's offshore regime.

This month Malaysia's state oil firm Petronas said that the Banang offshore oil field has gone to production under a risk service contract. Part of a larger field development known simply as the "KBM" cluster. A project that was being advanced by U.S. outfit Coastal Energy, which was purchased last year by the government of Abu Dhabi.

Related: Malaysian National Energy Company to Invest $35 Billion in Canadian LNG

The risk service contract is unique because of the way operators get paid for their oil. Instead of owning and selling each barrel, the field developer effectively acts as a development agent for government. Building and running the field equipment, and receiving a negotiated fee for each barrel sold.

The benefit for developers is cost containment. Under the RSC structure, developers don't pay any of the capital cost for offshore platforms, drilling and other equipment for production. Instead, being reimbursed for these expenses by the Malaysian government.

That means there's no risk of cost overruns. A big benefit in today's sector, where cost inflation has been running high in many parts of the world.

The other benefit is that commodity price risk is removed from the equation. RSC operators get paid the same for their barrels whether oil is selling for $100 or $10. They simply stream the oil through to the government--and get a fee for their efforts.

Related: Too Many Coincidences

The structure is a very new one for Malaysia. Only used at two other producing fields to date.

But the government recently awarded another slate of three RSC projects--mainly to junior firms.

For such small companies, this could prove to be a successful development mechanism. Removing the risk that can destroy a junior developer. But still allowing for substantial profits on fee-based revenue.

Watch the financials of other RSC-holders like Australia's Roc Oil to see how the RSC strategy is working out in terms of profits.

Here's to risk and service,

Dave Forest

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