Brunei: Building blocks of cooperation

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Brunei and Malaysia have agreed that joint demarcation and survey activities can begin next year on previously disputed offshore oil and gas blocks. The move draws a clearer picture of the role international companies will play in a development expected to significantly boost the Sultanate’s reserves.

The dispute had centred around two blocks lying some 100 km offshore from Brunei, which the Sultanate referred to as J and K while Malaysia called L and M. The Sultanate claims an exclusive economic zone stretching 374 km from its coast.

Petronas and Petroleum Brunei announced on September 22 that they had signed a new deed of agreement (DOA) for a Production Sharing Agreement (PSA) for the first of the blocks, Block J, which has been renamed CA1. An agreement on the second block, renamed CA2, was said to be imminent.

Malaysia had awarded development of the blocks in 2003 to state oil and gas firm Petronas and the US’s Murphy Oil, while Brunei had awarded Block J to a Total-BHP Billiton-Amerada Hess consortium and Block K to a consortium of Shell Deepwater Borneo (with a 50% stake), Mitsubishi (with 25%), and ConocoPhillips (with 25%).

Total began exploration of its block, but this led to a confrontation between Malaysian ships and a Total exploration vessel in 2004. At this time the prospective value of the blocks was given a boost as the neighbouring, Kikeh field in Malaysian waters begun to yield good results.

In March 2009, a breakthrough in the dispute was achieved when letters of exchange were passed between Brunei and Malaysia. Although the contents of these letters were not made public, a joint press conference at the time revealed that in general terms the maritime boundaries between Malaysia and Brunei had been settled, with a joint petroleum development zone – the Commercial Arrangement Area – established. The press conference also referred to a frontier survey to determine land boundaries around Limbang, and gave assurances of the transit rights of both states’ nationals through the inshore area north of Limbang.

The implications of this were fully felt the following year, when in April, Murphy Oil announced that its PSA with Petronas for the blocks had been cancelled, as Petronas had informed Murphy that the blocks in question were no longer in Malaysian waters.

The DOA allows the original consortium developing Block J to resume work, while the consortium itself is expanded to include Petronas Carigali Overseas and Canam Brunei, a wholly-owned subsidiary of Murphy Oil.

The expansion of the consortium does mean a change in the relative stakes, yet Total remains the largest party, with 54% – down from the original 60%. BHP Billiton’s stake shrinks from 25% to 22.5%, and Hess’ stake goes down from 15% to 13.5%. This frees up a 10% stake, which is to be taken by Petronas and Canam Brunei.

While the stakes may have been reduced, the block itself has been expanded. According to a Reuters report the block will be enlarged from 5000 sq km to 5850 sq km.

A statement from Total Exploration and Production’s (E&P) senior vice-president of geosciences, Marc Blaizot, said that the French major was “very satisfied with the signature of this agreement, which will enable exploration operations to resume on this promising block and a drilling campaign to start within a short period of time based on the seismic studies already performed”.

A 3-D seismic examination of the region before the dispute was one of the most extensive for its time, and there is much optimism surrounding the region. Kikeh currently produces some 110,000-150,000 barrels of light, sweet crude per day. The blocks will also benefit from Total’s considerable experience in drilling in deep water with depth ranges from 1 km to 2.75 km within the zone.

At the same time, the new deal may also herald closer cooperation in oil and gas exploration and production (E&P) between Brunei and Malaysia. The DOA signing ceremony also saw mention of good progress by the Joint Brunei Darussalam-Malaysia Land Boundary Technical Committee, with its members urged to complete their tasks by the end of 2010.

There was also some suggestion that Brunei and Malaysia might cooperate further in E&P with a third country in future, although no details were given. Certainly, in an area such as the South China Sea, where there are many competing boundary claims, such cooperation will likely be widely welcomed.


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