KIKEH FIELD TO DOUBLE MURPHY OIL'S GLOBAL CRUDE PRODUCTION

UNCLAS SECTION 01 OF 02 KUALA LUMPUR 001215 SIPDIS STATE PASS USTR - WEISEL AND BELL STATE PASS FEDERAL RESERVE AND EXIMBANK STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN USDOC FOR 4430/MAC/EAP/J.BAKER TREASURY FOR OASIA AND IRS GENEVA FOR USTR SIPDIS E.O. 12958: N/A TAGS: ECON EPET EFIN EINV ENRG MY BX SUBJECT: KIKEH FIELD TO DOUBLE MURPHY OIL'S GLOBAL CRUDE PRODUCTION Ref: BANDAR SERI BEGAWAN 194 ¶1. (U) Summary: Murphy Oil Corporation's deepwater operation at Kikeh field off the coast of Sabah, Malaysia, is expected to begin producing light sweet crude by the end of the third quarter of this year, barring unforeseen delays, according to Kuala Lumpur-based Murphy Oil executives. The Kikeh field output is expected to be 40,000 barrels per day at the outset, with a ramp-up to 120,000 barrels per day after one year. Kikeh is an 80:20 joint venture between Murphy and Malaysia's national oil company, Petronas. Murphy's current global output is between 95,000 and 100,000 barrels per day. The estimated 700 million barrel Kikeh field is suspected of extending into disputed territory with Brunei (reftel). End summary. ¶2. (SBU) On July 25 Econoff met with Ted Botner, Murphy Sarawak Oil Company General Manager for Malaysia, and Paul Vaughan, Finance and Administration Manager. Neither Botner nor Vaughan could provide an update on the disputed territory being claimed by both Brunei and Malaysia; however, Vaughan said the solution was to craft an agreement whereby no one lost face, which he did not see as an insurmountable obstacle. He also expressed concern that the solution might come in the form of a unified concession involving Total or Shell -- since both companies operate in both countries -- leaving Murphy out of the deal. It is unclear how such an agreement would affect Murphy's contract for the Kikeh field. ¶3. (SBU) Botner and Vaughan described their working relationship with Malaysia's national oil company Petronas as "transparent" if not entirely efficient. For example, Petronas provides a list of "licensed" vendors from which Murphy is required to choose. In some cases, Petronas selects a specific vendor that it has decided to "mentor" and requires Murphy to work solely with that company. While products and services might be a better deal elsewhere, Botner and Vaughan both expressed satisfaction that the Malaysian vendors they had worked with had been reliable, pointing out happily that the Kikeh field was right on schedule. Nearly everything for the Kikeh operation had been built in Malaysia. The Kikeh Floating Production Storage and Offloading (FPSO) vessel was built by Petronas-owned Malaysia Shipyard Engineering in Pasir Gudang in the state of Johor. ¶4. (SBU) Botner shrugged off the less-than-competitive government-mandated procedures and vendor lists as not being unique to Malaysia, adding, "You have to get used to that when you operate overseas." He then countered that all foreign oil companies had to work from the same lists and procedures, giving no foreign oil company an unfair advantage. Vaughan expressed satisfaction with Petronas' adherence to its contracts, and stated that the production sharing contracts were standardized - one for shallow water and one for deep -- with very little room for negotiation, hence very little scope for an unfair advantage to one foreign partner over another. ¶5. (SBU) Botner estimated that Malaysia would remain a net exporter of oil for another five to ten years. He had not seen the recent press report quoting Petronas' CEO who claimed the country would be a net importer of oil by 2010 if the current 4 per cent annual increase in domestic demand remains constant. Botner found the three-year time frame unlikely, pointing out that when the Kikeh field began production, this would increase Malaysia's oil output by about 40,000 barrels per day in the beginning, and then up to 120,000 barrels per day after the first year - and this was just one new well. However, he did say that as the larger wells began to dry up, it no longer would be profitable to go after smaller or more difficult to reach wells unless the standard production sharing contracts were re-negotiated. Since it takes five years or more from discovery to production, Malaysia would have to begin re-negotiating those contracts now to prevent a decline in production. ¶6. (U) Murphy Oil's output from Malaysia comes from the West Patricia and surrounding fields offshore Sarawak, producing about 20,000 barrels per day. The company also is developing several confirmed gas fields in two blocks offshore Sarawak. The company also operates in the Gulf of Mexico, Canada, and the North Sea. In 2003 it acquired an 85 per cent working interest in two blocks in the Lower Congo Basin. Development and analysis in these two fields is ongoing. KUALA LUMP 00001215 002 OF 002 ¶7. (U) Comment: The longer-term outlook for Malaysian oil production is not good news, but right now Murphy Oil is not focusing on that. At this moment, Murphy executives are all smiles as they see their own production ready to shoot upwards, just as the price of oil continues to break records. LAFLEUR