Royal Dutch Shell plc (RDS.A) has entered into two production sharing contracts (PSCs) with the Malaysian state run company Petroliam Nasional Berhad or PETRONAS. Per the agreement, the companies will aim to boost the oil recovery techniques at projects offshore Sarawak and Sabah.
The Heads of Agreement (HOA) states that both contracts are valid for 30 years. Shell and its partner will also develop nine oil fields in the Baram Delta offshore Sarawak and four in the North Sabah development area.
Shell expects to increase the average recovery factor in the Baram Delta and North Sabah fields to about 50% from the current level of 36%. With an enhanced recovery mechanism, the two projects are expected to generate an incremental 90,000 barrels to 100,000 barrels of oil per day and extend field life beyond 2040.
The oil fields constituting the Baram Delta recovery development are Bokor, Bakau, Baram, Baronia, Betty, Fairley Baram, Siwa, Tukau and West Lutong, while the North Sabah development comprise St Joseph, South Furious, SF30 and Barton fields. Together, these two oil grounds will create the world’s biggest recovery enhancement opportunities in an offshore environment.
Shell controls 40% interest in the Baram Delta PCS, while PERRONAS holds the remaining 60% stake and acts as an operator. For the North Sabah PSC, both the companies have equal stakes although Shell is the operator.
The latest deal strengthens Shell’s association with PETRONAS that goes back a long way. In 2009, the two companies had signed a 20-year contract with the Iraqi Ministry of Oil to provide technical support for the development of the Majnoon oilfield.
Royal Dutch Shell is one of the largest integrated energy firms in the world with a strong and diversified portfolio of development projects that offer attractive long-term opportunities. However, Shell’s upside potential is restricted by a volatile macro backdrop, weak demand for fuel and international business risks.
Hence, we are maintaining our long-term Neutral recommendation on the stock. Shell operates in the industry with big players such as BP plc (BP) and Total SA (TOT). The stock currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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