Price for faster ‘justice’: Sky-high lawyer fees!

By RASHVINJEET S.BEDI rashvin@thestar.com.my

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There was public outcry at the Bar Council’s announcement of a 300% to 400% increase in legal fees. Are the lawyers’ demands for the increase justified?

LAWYERS are not exactly the most popular people around and they are often the butt of jokes. In many cases, it has to do with the fees they charge.

Most of us would have heard this universal joke comparing a lawyer to a leech.

Q: What is the difference between a lawyer and a leech?
A: A leech stops sucking your blood after you die. 

Jokes aside, consumers often complain about having to pay steep legal fees if they have to go to court, more so if the cases take a long time to settle. Thus, when Bar Council President Ragunath Kesavan announced last week that legal fees might go up by 300% to 400%, there was, not surprisingly, a public outcry.

Saying there is a price to pay for everything, Ragunath justified the rising costs to the better efficiency of the court system in disposing of cases. He also claimed that lawyers would have more responsibilities, spending more hours on cases and taking up fewer cases.

For consumers, this is certainly no laughing matter. Other than matters based on the Solicitors Remuneration Order (SRO) such as conveyancing, all other legal matters are based on market forces.

 

»It will only go up if there is not enough supply of lawyers« EDMUND BON

Engineer P. Sivarajah is still bitter over his experience with his lawyer several years ago, complaining that he had to spend RM200,000 to get custody of one of his two children.

“They strike you in dire times,” he recounts, adding that his lawyer would demand payment just before a court hearing.

The lawyer, he adds, showed little concern for his children’s welfare and he believes the case had dragged longer than necessary.

*Siew Boon Hiew, who is undergoing a messy divorce, can relate to Sivarajah’s predicament. His case has dragged on for five years and he has forked out almost RM90,000 in legal fees. He has been to court five times and seen his lawyers about 30 times.

“I don’t understand why the legal fees are so high. They are in court for 15 minutes, sometimes for a submission and charge so much,” he laments.

Lawyer *Yaw Koo Lin, however, believes that Ragunath was only expressing his frustration with the Key Performance Index (KPI) system introduced by Chief Justice Tun Zaki Tun Azmi more than a year ago.
Because of the KPI, many lawyers claim judges are harder to work with.

As N. Surendran claims, lawyers are not able to take on as many cases and the ability to make ends meet is reduced.

“So, naturally, they will charge more,” he says, adding that he cannot take up as many pro-bono cases now as a result.

However, Zaki has reportedly said that while the courts struggle to settle cases, individual lawyers are to blame for taking on too many cases and then seeking postponements. To illustrate his point, he mentioned a lawyer who had 93 cases in one day.

He also said it was unfair to accuse the judiciary of being obsessed with disposing cases and judges of fulfilling their KPIs rather than serving justice by refusing to adjourn cases.

The Federation of Malaysian Consumers Association (Fomca) is all for speedier cases as this will benefit consumers.

Its president Datuk Marimuthu Nadeson notes that in the past, some cases would drag on for years and the consumer had to bear the increased cost of litigation.

“If there are fewer postponements, then it is only logical that legal fees will also reduce accordingly, as the lawyer’s appearance in courts will be less,” he adds.

He believes it is a win-win situation as the lawyer gets to complete his case faster and collect his fees while the consumer gets the case settled promptly without incurring any extra cost.

“The lawyer might even be able to serve even more clients, thus boosting his income,” says Marimuthu.
Consumers Association of Penang (CAP) president S.M. Mohd Idris says those worried about skyrocketing fees can go to another lawyer and if there is excessive overcharging, they can complain to the Advocates and Solicitors Disciplinary Board.

Idris notes that a common complaint among lawyers now is that court cases are hurried along and dates are fixed without consultation. “As a result, lawyers are saying they are under tremendous pressure,” he says.

But Yaw, who does both litigation and contract law work, believes lawyers would hesitate to take on new cases when their “plate” is full, although he believes the quantum of increase mentioned by Ragunath is absurd.
“I have assured my clients that my fees won’t shoot up. There is some unhappiness and we have had to clarify the situation,” says Yaw.

Fees other than SRO are agreed upon by the lawyer and client by way of an agreement, whether oral or written, and depend on various factors. These include the amount of the claim, the complexity of the matter and the seniority of the lawyer who handles the case.

“If there is a lot of hand-holding and lots of time spent, they will charge more. There is no clear rule or basis on how lawyers charge their fees,” explains Yaw, adding that a lawyer could do a case pro-bono for instance.

Another lawyer, Edmund Bon, believes fees would not increase due to competition as there are many lawyers who will charge cheaper fees. “It will only go up if there is not enough supply of lawyers,” he adds.

Bon acknowledges the stress faced by litigation lawyers. Nowadays when he submits a case on Monday, the court would get back to him within a week for hearing. Previously, if he filed a case, he would have to wait a month before the the court got back to him and the date of hearing could take another two months. “It’s good but at the same time, it is moving too fast that it compromises justice and our preparations,” says Bon.

He explains that if cases move too quickly, the judges do not have time to read the submissions and consider the cases properly.

“Judges have said this off-the-record,” he claims, adding that there are cases where lawyers come ill-prepared because they do not have time to do full research.

Another common complaint is that adjournments are always refused, even on seemingly reasonable grounds.
A few weeks ago, it was reported that lawyer Datuk Jagjit Singh collapsed in court after the magistrate decided to go on with the case even after he produced a medical certificate.

A former Court of Appeal judge, Datuk Shaikh Daud Shaikh Mohd Ismail supports the court’s decision to implement the KPI but feel they must exercise discretion on hearing dates, citing Jagjit’s case as an example. Blogger Azhar Harun, better known as ArtHarun (artharun.blogspot.com) says some lawyers have made their name and have a good track record. But not all can charge what they want.

Azhar, who specialises in corporate law, is annoyed that some courts would fix hearing dates even when the lawyers have other pending hearings or are not free.

Azhar cites the case of a lawyer who was having labour pains while arguing her appeal because the court registrar had turned down her request to fix another date.

Azhar also claims there are judges who insist that cross-examinations are limited to within a certain scope in order to “save time” while some insist that cross-examinations must be done in writing.

Idris claims that courts have also started to require lawyers to perform tasks outside of their duties, such as transcribing.

Previously, judges would note down the evidence or submissions in a case, and this would be typed out and given to the various parties involved in the case.

“Now, courts are equipped with recording devices and lawyers are expected to collect the recordings and transcribe the notes themselves,” says Idris.

Senior lawyer *S. Balram notes that previously, everything used to move slowly but now everyone – from lawyers and judges to the prosecutors – no longer have an easy time.

He also believes that previously, lawyers were taking on more files instead of working on them. “They took it easy before, so now they are not used to the fast pace. It is their fault for not being prepared,” he says.

Yaw admits that cases are being cleared much quicker and this is good for the clients. He believes that everyone is still adjusting to the changes.

“People are now working outside of their comfort zones. If cases are disposed off quicker, clients are happier,” he says.

In an interview last year, Zaki said that strategies taken by the judiciary to expedite the disposal of civil and commercial cases have resulted in a drastic drop in backlog cases.

In Dec 2008, there were 93,523 pending civil cases at all High courts in the country, but the number was reduced to 36,526 by the end of October last year. The number of pending civil cases at Sessions courts dropped from 94,554 to 49,528 cases over the same period, while those in magistrate courts dropped from 156,053 to 82,835 cases.

Lawyer Mak Lin Kum is glad that cases are settled faster these days, as he can bill and collect payment from his clients much earlier.

“We always hear of cases languishing in courts for 15 to 20 years,” says Mak who deals with corporate law and restructuring of companies. He adds that speedier cases are good for big companies as it helps them in their planning.

“The new system forces discpline as lawyers have to prepare their case adequately before filing in court. We see things moving forward. I don’t see how speeding things up can be disastrous although the workload for some lawyers will increase,” says Mak.

He believes that there were abuses in the past and adjournments were sometimes given easily. But he agrees that some judges could use more discretion when fixing hearing dates.

While the KPI system seems to have pros and cons, many are saying a balance needs to be struck between speed and quality, as the ultimate aim of courts is for justice to be served.

Yaw understands the objective of the KPI, but feels there should be more flexibility. “I know judges are going through a lot of stress but we need one another,” he says.

He also hopes that people would be more appreciative of laywers. “People have to understand that behind the five-minute appearance in court is five months of work.”

*Names have been changed. 

 Thursday February 17, 2011

Sky-high lawyer fees! Bar Council: Legal services set to cost 400% more

KUALA LUMPUR: The Bar Council expects lawyer fees for court cases to increase between 300% and 400% this year.

This means that cases which previously cost around RM2,000 would now cost RM8,000 to RM10,000.
Bar Council president Ragunath Kesavan said this was due to lawyers having more responsibilities since cases could not be postponed easily.

“Furthermore, cases need to be settled in three months,” he said after launching the distribution of a comprehensive guide on how a lawyer’s office should be managed.

Know the law: Ragunath meeting with participants who attended the launch of the MyConstitution campaign at Help University College in Petaling Jaya, Selangor yesterday.

 

“Previously, filing civil cases at the magistrate’s court costs only RM2,000 but it may rise to RM8,000 or RM10,000.

“This does not include cases filed in the High Court, which has a bigger responsibility,” he told Bernama.
On the manual, he said the Bar Council was duty-bound to assist new lawyers because the number of lawyers who faced disciplinary action has increased.

“Statistics show that the Bar Council’s disciplinary board penalises or takes disciplinary action against 30 to 40 lawyers a year for cheating clients, partners and other offences,” Ragunath said.

In another development, the Kuala Lumpur Bar Committee has written to the Education Ministry to include the teaching of the Federal Constitution in the school syllabus.

Chairman Anand Ponnudurai said it highlighted the need to educate students on the existence and basics of the Constitution.

“The officials seemed positive and the Education Ministry is currently restructuring the teaching content and syllabus of several subjects,” he said after the launch of the MyConstitution campaign at Help University College in Petaling Jaya.

He added that the Constitution might not be a standalone subject but introduced as a topic in other subjects.
“It is sufficient as long as students are educated on the content, structure and true nature of the Constitution,” Anand said, adding that the committee is currently waiting for the ministry to respond to the proposal.

Sick of the same old mantra

On The Beat By WONG CHUN WAI

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Gaddafi has to go very soon so Libya and the world can move on. But he must not have the last laugh in this high stakes’ fight.

THE world can always count on Col Muammar al-Gaddafi to provide political comic relief even before his people finally gathered enough courage to decide they want him kicked out of Libya.

Despite having ruled Libya with an iron fist for over 40 years, he is still telling the world that the country needs him.

Like many politicians who aspire to die with their boots on, Gaddafi has repeatedly told his people – from a balcony and, more recently and bizarrely, over a telephone press conference – that the country would be destroyed if he has to go.

It is the tired mantra of most politicians: He can’t go because he still can’t find a successor; the possible successors are not ready; if he names them, they will end up killing themselves; and, of course, he will call it a day one day. That day, of course, will not be tomorrow or the day after. You do not have to be in Libya, or other parts of the Middle East and North Africa, to hear such empty political gibberish. Even at home, we are quite familiar with such ludicrous lines from our own ageing politicians.

Usually, the search for a successor will end at their home. The chosen one is often the eldest son. But if the eldest one has an incurable obsession with visits to Disneyland, Macau casinos or Eric Clapton concerts, then Plan B would be to choose the other sons or even a nephew.

Hosni Mubarak, the recently deposed president of Egypt, was trying to hatch dynastic ambitions by grooming his son Gamal to succeed him. Gaddafi shares the same ambition, as does Kim Jong-II, who certainly still thinks his family owns North Korea.

But even the North Korean generals must be shaking their heads in disbelief at the exploits of Gaddafi, or for that matter Osama bin Laden. We won’t be surprised if Osama is now making another poor quality, inaudible tape for the CIA to decipher.

Osama has always taken the trouble to call Al-Jazeera to claim responsibility for his exploits against the West. But we are certain he won’t claim credit for the anarchy in Libya.

He has been blamed for every terrorist act committed in the world but to accuse al-Qaeda of lacing the coffee and alcohol of Libyans with drugs, which Gaddafi has done, is certainly icing on the cake. The best part is that Gaddafi expects his people and the world to believe him. He has either been high on drugs himself or he wants the world to love him for his morbid sense of humour.

After failing to convince the world, particularly the United States, that the rebellion is the evil work of Osama, Gaddafi then blamed the Islamists, accusing them of wanting to turn Libya into a satellite state of Iran.

But the Americans are still not impressed. Obviously, the 68-year-old loony leader will need to rewrite his script. For example, he could blame his team of four voluptuous blonde Ukrainian nurses or female bodyguards for the civil unrest. They were probably jealous and were fighting over him!

There’s a sub-plot, however. He plans to blow up the oil plants. Now, that’s a terrifying prospect because Libya has the largest reserves of oil in Africa. The chaos in North Africa and the Middle East is already causing mayhem around the world with prices of crude oil skyrocketing. It means we will have to pay more for our petrol and travelling would for sure be more expensive.

The cost of production will shoot up with food items, now already expensive, becoming more pricey and the economy of countries will be adversely affected.

The message from Gaddafi seems to be: “If I go, I am dragging everyone with me.” That includes hurting us where it hurts most – our pockets. Soon, our electricity bills will shoot up. And before you know it, most of us might have to learn to live in tents. Well, it could be a case of “You can take Gaddafi out of Libya but you can’t take out what Gaddafi will do to our lives.”

The game is just beginning in Libya but let’s hope it will end speedily. He has to go very soon so Libya and the world can move on.  One thing is for sure, Gaddafi must not have the last laugh in this high stakes’ fight.

Petronas needs to tell more,Drilling for future opportunities

Petronas needs to tell more

A QUESTION OF BUSINESS By P. GUNASEGARAM

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More relevant info from the national oil company will help dispel suspicion.

THE question of whether the national oil corporation, Petronas, is giving away too much to local oil field services company in the exploitation of marginal oil and gas fields can only be answered if Petronas reveals much more than what it already has.

On our part, we can only raise some of the burning questions surrounding the emergence, for the first time, of other Malaysian companies besides Petronas, effectively as joint venture partners in the mining of oil and gas in the country.

The new arrangement that Petronas has come up with for marginal oil fields, those which have less than 30 million barrels of oil equivalent (BOE), is called a risk service contract or RSC against the previous production sharing contract (PSC).

First, the PSC. After Petronas was set up to own and manage all the country’s oil and gas resources on behalf of the Government in 1974, it negotiated with the oil majors who eventually became Petronas’ contractors under PSCs.

Under these, a certain proportion of oil produced was deducted as costs of exploration and exploitation once oil was found and the remainder was shared between Petronas and the oil majors on an agreed proportion depending on oil prices. That proportion is at least 80% in favour of Petronas, going up to 90% or higher as the oil price rose.

Conceptually, this is a scheme which is easy to understand and has since been emulated by countries around the world in their dealings with the oil companies. Basically, the oil companies do the exploration. If they hit oil, they get to recover their costs and the remainder of the oil is shared on an agreed proportion.

Petronas bears hardly any risk as the owner of the concession, basically merely sharing profits with someone who has the expertise and the capital to extract the oil.

It is different with the marginal oil fields. Here, no exploration is needed but oil majors are not interested in recovering this oil because it is not economical enough for them although there are specialised companies which engage in this activity. What is reasonably certain is there is oil. The question is how to extract it.

For reasons it has not fully explained, Petronas is now putting the emphasis on local operations instead of building upon its overseas operations which account for 45% of total revenue and some 37% of total production. Petronas does not say how much profit comes from overseas though.

As part of this new emphasis to concentrate on the domestic sector, it has embarked on a programme to develop marginal fields involving some 106 fields and 580 million BOEs. It has also stated its intention of getting foreign oil companies to partner with local oil field services companies to extract oil (and gas) from the marginal fields.

It says that this is to help develop local expertise so that they become sort of oil explorers and extractors in their own right and are able to compete in the international market place for contracts. Some 15 local companies are reported to be involved in oil field services currently.

However, it is difficult to see how any of the local companies will become internationally competitive even with this leg up. That they became successful in the first place as oil field service providers was because of Petronas’ insistence that the oil majors used local companies. Even if their services were more expensive, Petronas, as the owner of the concession eventually bore this cost.

However, extraction is a different business altogether and even if we call the relevant fields marginal ones, there is still a lot of money to be made and the amount increases as oil prices rise. There is a lot of expertise involved and those who extract marginal oil are not going to be sharing their expertise readily with local partners they are forced to take.

At 580 million BOE, and using an oil price of US$80 per barrel, the oil is worth nearly RM140bil! Thus, it is important to ensure that Petronas does not lose out in this and extracts the best deal for itself.

The method it is employing is the RSC but it does not give sufficient details about the RSC to independently determine whether it is a fair arrangement. It says that the model strikes a balance in “sharing of risks with fair returns” for development and production of discovered marginal fields.

It adds that it shares risks as the project owners while contractors receive a “reasonable return with limited upside” while it says key performance indicators or KPIs will be in place with incentives or penalties triggered depending on performance.

However, there is no disclosure of what is a reasonable rate of return for the project or the KPI, or the kind of risk that contractors undertake because they are paid a service fee. Can the contractors share in the upside with no evidence of downside sharing? How much of a free ride are our local oil service companies getting in such a deal?

Let’s look at the first such contract. Petronas has awarded this to Petrofac Energy Developments Sdn Bhd, Kencana Energy Sdn Bhd and Sapura Energy Ventures Sdn Bhd for the development and production of the Berantai field, offshore Peninsular Malaysia.

Under the terms of the contract Petrofac with a 50% equity interest will be the operator of the field. The two local partners, Kencana and Sapura, will own the remaining 50% interest on an equal basis.

“The RSC model strikes a balance in sharing of risks with fair returns for development and production of already discovered fields. In this arrangement, Petronas remains the project owner while contractors are the service provider. Upfront capital investment will be contributed by the contractors who will receive payment commencing from first production and throughout the duration of the contract,” Petronas said.

“The new arrangement facilitates direct participation of Malaysian companies in the country’s upstream oil and gas activities, in line with Petronas’ efforts to leverage on their existing capacity while fast-tracking their capability in development and production in a structured manner,” it added.

There was nothing more material than that from Petronas’ official statement.

In separate announcements, Sapura Crest and Kencana Petroleum, because they are listed companies, announced that the total development costs would be US$800mil which meant each of them had to raise US$200mil. That is a huge amount for these relatively small companies which are still among the larger oil players in the country.

While they are scrambling to raise the funds for this, it is by no means certain that they will acquire expertise in extracting oil from marginal fields as their partners will be committing commercial suicide if they just passed this knowledge on to them.

The question is, are Kencana and Sapura, and the others who follow them, merely equity partners who provide some amount of oil field services? If that is so, why could not Petronas itself have become an equity partner? After all it has the funds and more capability and capacity than all the oil field companies put together.

Petronas has to remain cognisant that it is the guardian and keeper of the nation’s oil and gas wealth and it needs to guard that position jealously against both foreign as well as local companies so that maximum benefit is obtained by the Malaysian public from its oil and gas wealth.

Any other agenda is secondary to that. The only way to have done this without raising any controversy is for Petronas to have set up a subsidiary to undertake production from marginal oil fields, in the same way that it set up Petronas Carigali for its exploration activities.

Then this subsidiary can enter into joint ventures with the various world-renowned names who are engaged in exploiting oil from marginal wells and after many years, it would have gained enough expertise and size to venture out into the world much the way that Petronas itself has for oil exploration.

The RSC with its explicit agenda of promoting local companies will do just that probably at the cost of Petronas itself because international companies can be expected to extract concessions for the profits they forego to local companies, who will be too small and too diverse to ever become a force internationally.
If Petronas still insists that this arrangement is best, than it has to reveal all. As a national oil corporation, the more transparent it becomes, the more the public will see its workings and the less suspicions it will have. Let’s see if the numbers are forthcoming.

Managing Editor P Gunasegaram believes that one major oil company – Petronas – is enough for Malaysia. 

Related Stories:

Petrofac explains key performance indicators
Mokhzani: Kencana’s committed to the project
SapuraCrest willing to take the risk
Potential beneficiaries

Drilling for future opportunities

By JEEVA ARULAMPALAM  jeeva@thestar.com.my 

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For the first time local oil and gas players have a chance to play a major role in the production and development of marginal oil fields. However there are risks involved. Will the local companies step up to the challenge?

THE recent US$800mil risk-service contract (RSC) awarded by Petroliam Nasional Bhd (Petronas) to a consortium formed by two local parties and a foreign player for the development and production of the Berantai marginal oil field, located 150km offshore Terengganu, has drawn enormous interest for more than one reason.

Firstly, it marks the adoption of a new contract, RSC, for development and production of local marginal oilfields (as oppose to the production-sharing contract used for exploration and production works).

As the bidding for many more local marginal oilfields are to be carried out, local oil and gas service providers stand to reap benefits either by way of being a bidder or as a beneficiary of sub-contracts.

Although there is certainty that marginal fields have petroleum resources, there is no certainty how much can eventually be exploited from these fields.
 

But this also gives rise to questions on how local contractors are chosen, why Petronas has not chosen to undertake development of these fields through its own unit, and will local oil and gas service providers learn quickly enough to go it alone in marginal oil field development in the coming years?

The art of the field

National oil company Petronas president and chief executive officer Datuk Shamsul Azhar Abbas says Malaysia has 106 marginal oil fields containing 580 million barrels of oil, with Petronas having firm plans to develop 25% of the total marginal oil fields to replenish its oil reserves and generate new revenue.

A marginal oil field is defined as a field that can produce 30 million barrels of oil equivalent (BOE) or less.

“For the remaining 75% of marginal oil fields, we don't have plans yet as they require further assessment. We have been working with the Government to come up with another method as the PSC (arrangement) does not encourage the development of marginal oil fields,” Shamsul told a media briefing held late last month.

Shamsul says that two more marginal field contracts will be awarded by April.

Datuk Shamsul Azhar Abbas says two more marginal field contracts will be awarded in April.

The first RSC was awarded to a consortium formed by Kencana Petroleum Bhd, SapuraCrest Petroleum Bhd and Petrofac Energy Developments Sdn Bhd (PED) in January to develop and produce petroleum resources in Berantai over a nine-year period starting from Jan 31 this year.

The joint operating agreement will be 50% owned and led by PED, part of the London-listed Petrofac Ltd group of companies, while Kencana's wholly-owned Kencana Energy Sdn Bhd and SapuraCrest's wholly-owned Sapura Energy Ventures Sdn Bhd would each hold a 25% interest.

Bids for marginal oil fields are called roughly every quarter, with the bid for the Berantai oil field having taken place last October and the next bidding expected to take place in March. As Petronas will cluster four to five marginal oil fields to make it more attractive in drawing bidders, the 26-odd marginal fields earmarked for development will likely be awarded in the next one to two years, says an industry source.

While the estimated cost of development for the Berantai marginal field is pegged at US$800mil, an industry player projects that development cost for the other marginal fields could vary between US$500mil and US$1bil, with the RSCs tenure ranging from three to nine years accordingly.

Although there is certainty that these marginal fields will have petroleum resources, there is no certainty how much can eventually be exploited from these fields.

“For any field under the ground, you are using probability from high up utilising the seismic (method). The chances of misjudgement are high for marginal oil fields, which are smaller in nature compared with bigger (developed) oil fields,” says Dialog Group Bhd executive chairman Ngau Boon Keat. Dialog is an engineering company in the oil, gas, petrochemical and chemical industries and is widely speculated by research houses as one of the front-runners for the RSC job to be awarded down the road.

The seismic method is used for exploration of oil and gas, involving field acquisition, data processing and geologic interpretation.

Kencana Petroleum chief executive officer Datuk Mokhzani Mahathir says each marginal field is unique as its geology and geophysics would vary, thus the business model for each field may differ.

Simply put, if a field is estimated to produce say, 30 million barrels, then development cost would be derived based on that. However, if the field eventually only produces 15 million barrels, the higher development cost will have to be absorbed by the contractor. Therein lies the risk.

Ngau Boon Keat ... ‘The chances of misjudgement are high for marginal oil fields.’ 

“A marginal field needs to be studied very carefully before anybody submits a bid. It is not as simple as people think it is,” says Mokhzani.

However, sceptics point out that the risks faced by the consortium partners are limited and that the players are more likely to recoup their investments, hence make a guaranteed profit as the discovery of petroleum resources is a sure bet in marginal fields, which are essentially discovered fields. Noteworthy is that Petronas will own all the oil and gas extracted and produced from these marginal fields.

There is a concern that the fee structure of the RSC may result in less net income for the national oil company as opposed to if Petronas were to develop these marginal oil fields on its own or together with a niche foreign player.

The foreign player, in the consortium, will act as the main contractor to develop and operate the marginal oil fields. Given that the foreign player will not want to see its margin squeezed through the presence of a local partner (which it is required to tie up with under the RSC), there is concern that Petronas may end up paying out more than it really needs to under these contracts.

These concerns have arisen in the absence of furher details on the RSC. Petronas declined to response to queries by StarBizWeek, specifically on the RSCs, as they are deemed confidential.

But this much, Petronas has made known. The project cost will be forked out by the contractors based on their equity portion and that contractors will receive payment only upon first production, which involves a reasonable return with limited upside.

The contractors also have to meet key performance indicators such as the development cost, production rate and time-frame that have been agreed upon by both Petronas and the consortium, with incentives or penalties triggered depending on the consortium's performance.

In defence

The local players are quick to defend their role in the consortium, stressing that they have been chosen solely on the merits of their technical and financial capabilities.

“These are very credible and serious players getting together to provide a service to the client (Petronas). There are (also) other companies in Malaysia which can chip in to do different things. The client will have to vet these companies based on their criteria, which are extremely high, such as technical expertise,
competencies, the track record of having delivered projects on time within cost and the balance sheet to take on such big projects,” says Mokhzani.

Sapura Group president and chief executive officer Datuk Shahril Shamsuddin says that one way of ensuring the local partners carry their weight in the consortium is the investment that will be pumped in according to their equity portions.

“To ensure that the locals can execute the job, Petronas has asked us to put in our own money so that if we make a mistake, we'll get burnt. US$200mil is like half of our cash reserve, so the motivation to do things right is very high!” says Shahril.

Both Mokhzani and Shahril emphasise that Petrofac chose them as its partners due to their respective long-standing working relationships.

“This is a fast-track project, so they need someone with competencies and in our case it was in laying the pipes to do subsea infrastructure installation to manufacturing subsea equipment. They wanted to look for a partner that will not drop the ball it is about risk mitigation as well as sharing of risk,” says Shahril.

While the foreign player is at liberty to choose its local partner, the buck does not stop there. According to an industry source, Petronas would also need to sign off on the local partners selected by the foreign companies.

“There are some people who just want to be agents ... they want to get the job and then outsource the work. But Petronas will not allow these agents to be bidders. The bidders will have to be real oil and gas service providers that are listed,” the source adds.

Although there may be some 15 local companies involved in the oil service presently, only half may have the financial muscle to pull off the financing involved as a partner in marginal oil field development.

Thus, it can be expected that the remaining local companies to be awarded the RSCs will continue to draw much attention and scrutiny from the public.

A sweet deal

If an average marginal oil field produces 30 million BOE and is sold at an average crude oil price of US$80 per barrel minus the development cost of US$800mil, Petronas would make US$1.6bil without taking into account the “reasonable return” paid to the consortium partners.

An industry source says that potential return on marginal oil field development for the contractors can be as high as 15%, in line with returns seen for upstream works.

For illustration, a 15% return on the Berantai field development works out to be US$120mil (RM360mil). This means that local players Kencana and SapuraCrest could see gross profits of up to RM90mil respectively based on their equity portion, which breaks down further to RM10mil yearly per company over the contract period.

OSK Research Sdn Bhd says it expects potential revenue and earnings for Kencana to comprise a combination of fabrication of oil and gas structures as well as some installation revenue.

“We understand that the net fabrication margin for this project is about 15%. Going forward, margins are expected to improve, especially when the company starts to manage the oilfield in 2012, by which time margins could well exceed 50%,” its report on Kencana last month said.

However, both Kencana's Mokhzani and Sapura's Shahril remain mum when asked on their expected returns from the Berantai project.

Industry observers have also wondered why Petronas has not formed its own unit for the development and production of marginal oil fields, especially since it is the custodian of the country's oil and gas reserves.

While it is a question best left answered by Petronas, chiefs of the local oil and gas companies offer a few possibilities.

Shahril says that it makes more sense for Petronas to deploy larger investments and its human capital for larger exploration and production projects that bring in higher returns.

“Take two companies Company A with RM10bil assets invests RM300mil to make annual returns of RM1bil while Company B with RM100bil assets invests RM3bil to make RM10bil annually. Company B, which has a larger asset base, would represent Petronas,” he explains.

Ngau says that Petronas would typically focus its manpower to develop larger fields as opposed to operating marginal oil fields.

Another corporate head agrees, saying that Petronas has to focus its limited manpower, especially with many of its engineers being sought after by Middle Eastern oil and gas companies.

“Many Petronas engineers were offered salaries that were four to eight times higher by the Arabs, several years ago. So the manpower now has to be used for bigger projects,” he adds.

Big boys don't try

Petronas' Shamsul had mentioned that oil majors, such as Shell and ExxonMobil, are not keen to develop marginal fields as they are considered “sub-economic”. While marginal fields may be part of their local PSCs, some of these foreign majors have chosen to relinquish them, passing them back to Petronas largely owing to lack of interest.

Shamsul adds that a key motivation in getting the foreign players to tie up with the locals is to allow the latter to broaden their technical expertise and knowledge.

Acknowledging that local oil and gas service providers cannot become exploration and production players, Shamsul says that local service providers could become development and production players.

“The local guys can't do it themselves, so we need to bring in the teachers and upgrade the capability of local players,” says Shamsul.

There are many foreign oil companies in the world which focus largely on marginal oilfields. They include London-based Petrofac, US-based Newfield Exploration Co, UK-based Salamander Energy Plc, Abu Dhabi's Mubadala Oil & Gas, Australia's Roc Oil Co Ltd, French-founded Perenco Group and Swedish Lundin Petroleum AB.

If these projects take off as planned, it will have a multiplier effect on the economy such as job creation while retaining the wealth within the economy (as opposed to awarding all of it to foreign players who are likely to expatriate their profits to their respective home base).

In addition, it could also increase the possibility of local companies, one day, venturing into the development of marginal oil fields overseas.

While industry players hope to acquire the relevant skills to become the main contractor of marginal oil fields in the next five to seven years, Shahril is gunning for his company to do it within three to four years.

“We need to learn to complete our value chain now. What happens to the local oil and gas industry when all the oil here runs out? So we've gotta start developing our capabilities now to get the jobs out there in future,” he says.

All of that, of course, will depend on whether the plan to award local players a stab at developing marginal oil fields in the country and its aim to allow them to tap the skills and know-how of foreign oil companies to better compete for jobs abroad, will work out as planned. Until then, the process will be closely scrutinised by market watchers.

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