The producing fields of Malaysia, Brunei and Thailand share one unpleasant commonality: they are mostly either mature or maturing, and require increasing expenditure and care to produce profitably. Malaysia's state-owned Petronas Carigali and foreign operators in the region face a challenge in their goal to maintain Malaysian oil output at at least 600,000 to 630,000 barrels per day. This requires them to find substantial new reserves, yet recent experience shows that the majority of new reserves are coming from incremental growth in existing fields, while virgin oil discoveries are becoming smaller and smaller. Deepwater exploration is likely to play a large part in the future of the upstream industry in Malaysia. In Brunei, Champion Field already has 260 wells, drilled from 40 platforms. South West Ampa Field has 212 wells. Fairley Field has close to 50 wells, while Magpie has 32 and counting. The Petroleum Economist estimates an annual expenditure of $300 million is necessary to merely maintain current levels of production. The situation is analogous in Thailand, where Unocal alone operates more than 100 platforms in the Gulf of Thailand. Given the diversity of concessions and operators, one can guess the number of wells in the Gulf to be significant. Randy Howard, president of Unocal Thailand, says, "We spend about $400 million a year just to upgrade and maintain wellheads." The reason is quite simple. As fields mature, new pockets need to be explored, requiring new wells to be dug routinely. Some pockets are difficult to access, and require specific angles of drilling. This tends to mean expensive wellheads. Yet many reservoirs are believed to hold substantial reserves. Marginal recovery costs therefore provide somewhat of a dilemma. While the overall situation is not dramatic, it is certainly costly. One can argue that, second to sound geological assessment, new technologies are the single most important variable for the profitability of these mature fields. Necessity being the mother of invention, new technologies have benefited greatly from this cost-conscious state of affairs. A good example is found in Brunei, where Brunei Shell Petroleum (BSP) was the first company to build a "snakehead" well. This special well is five kilometers long, and literally "snakes" its way through the numerous pockets of a large field. This project was a veritable engineering feat, and while presumably rather costly, it is certainly cheaper than drilling five new wells. Moreover, this new design allows excellent operational freedom-each pocket can be operated individually or together in any combination. Unocal has gone so far as to create its own joint venture to secure new, cost-efficient technology. Enter CUEL, the new generation of service provider that is likely to cause profound changes in this segment of the industry. CUEL calls itself a "new breed of professional service provider." This new company was created in an effort to address the thorny issue of cost-efficient marginal recovery. Its raison d'etre is low development cost per barrel of oil equivalent (BOE) and that will be good news to most operators in the region and beyond. Created in 2000 by Unocal and Unithai, a Thai conglomerate which owns and operates Thailand's largest shipyard, CUEL has unique experience in designing platforms that are aimed at marginal recoveries. But its edge comes from strategic alliances with suppliers and subcontractors, and these enable it to keep costs low. Aligning the strategic overlaps and interests of designers, suppliers and subcontractors, CUEL boasts total control of supply-chain management. This is a more targeted approach: it reduces the ambiguous pricing methods dear to suppliers and subcontractors, and any unnecessary outsourcing, which can frequently result in delays and a lack of flexibility. CUEL's approach is expected to yield enormous benefits to customers, and potentially to their host government, insofar as low development costs will enable operators to commercialize oil and gas fields that would previously have been considered unprofitable. Effectively, from an operator's point of view, this approach can also help to diversify a portfolio, thus diversifying the risk approach. Yet beyond its technical and visionary qualities, CUEL's local solution may be brought to a global issue, enabling Southeast Asia to potentially export its know-how, and in time, to enrich Western counterparts by applying the lessons learned. The access to low-cost development is also key in ensuring that independents continue to drill where others do not and that majors stick around when reserves diminish beyond what would have been deemed too little some years ago. The integrated construction and management team of the UCU Alliance has carried out the design, procurement, fabrication and installation of wellhead platforms, submarine pipelines and offshore facilities, for Unocal's fields in the Gulf of Thailand. Deeper water As the potential for further significant offshore discoveries diminishes in shallow waters, operators are looking at deeper waters off the coast of Sabah for the next generation of upstream production. Murphy Oil's recent discovery at Kikeh in August 2002 at a depth of 1,400 meters with estimated oil reserves of 400- to 700 million barrels has provided added incentive. Its significance is huge, boosting Malaysia's estimated reserves by 7% to 4.54 billion barrels. Murphy Oil has since signed further production-sharing contracts (PSCs) in neighboring blocks L and M where it hopes to replicate its success. Deepwater drilling is a new and challenging development for the region, but brings opportunities that may rejuvenate the entire area. That Murphy Oil made a significant discovery in many ways confirmed what many geologists had been suspecting for some time: that the deep waters of the South China Sea present appealing E&P prospects. Deepwater drilling, however, presents many challenges, not least of which is the climate in this particular region. Tropical storms, monsoons and scorching heat take turns to punish the intrepid. Commercial ships dare not pass these routes for several months of the year. But the Kikeh Field is proof that the risks are well worth the trouble. Geophysical appraisals and seismic surveys are being carried out with renewed fervor, both onshore and offshore. As we shall see, a number of independents have stepped up their activities during the past few years in an effort to focus on previously disregarded basins. Many of these companies are made up primarily of geologists with vast experience, who are united in their belief that this region offers very real prospects. Another indication of the high hopes for new discoveries is the recent acquisition (2002) of a license for E&P offshore Brunei by Total, in conjunction with BHP Billiton and Amerada Hess. The lease concerns Block J, which is immediately adjacent to the Kikeh Field. But the hottest basins are also the most contested: parts of Kikeh Field could well be in Brunei's waters, ostensibly included in what is known as the Brunei Exclusive Economic Zone (EEZ), which stretches 200 nautical miles from the coast of Brunei. Unfortunately, Total was forced to stop its activities in 2003 after Malaysia sent warships to dislodge them. Malaysia and Brunei are currently involved in high-level negotiations to resolve the matter, both parties being acutely aware that political skirmishes tend to be extremely costly when it comes to oil. Students of recent economic history will point out that Association of Southeast Asian Nations (ASEAN) members have a good track record for settling territorial disputes and working in tandem to resolve matters equitably. A case in point is the joint development area (JDA) between Malaysia and Thailand. Placed under a special joint authority in 1991, the site (which holds substantial natural gas basins) has become the theater of considerable investments by both Malaysia-owned Petronas and Thailand-owned PTT. Natural gas is expected to be produced as of 2005. Malaysia has hinted that a similar scheme may be desirable to settle the contested offshore area with Brunei. While it is clear that Malaysia enjoys greater reserves than Brunei, the latter may be more eager to break new ground. Its economy is highly dependent on oil and gas revenues, and new discoveries would certainly bring a welcome extension to the vast annual income Brunei derives from its hydrocarbon exports. Moreover, the hitherto conspicuous lack of a national oil company is being remedied: Sultan Hassan Bolkiah signed a law creating a national oil company in 2001, which signals a certain amount of confidence in the yet-to-be found reserves. And even if the contested Block J area presents the most immediate prospects, one should not rule out other areas. Mark Carne, BSP managing director, thinks Brunei presents a lot of exploration opportunities. This bodes well for everybody. But most of all, it bodes well for independents and new ventures, for whom a potential discovery need not equal hundreds of millions of barrels to be deemed successful. Southeast Asia is fertile ground for a new breed of independents. The economic climate is sound and investors are once again looking for overseas opportunities. This new breed of independent company tends to be headed by geologists and other industry veterans who have spent many years in the region with some of the major companies. They are united in their confidence that the region has yet to bear significant finds. Clearly, the Kikeh discovery has focused attention on deepwater potential and rekindled investor interest. But independents are working the entire region, and onshore basins have also attracted renewed scrutiny. In Malaysia, for instance, Talisman and Amerada Hess are challenging the majors. Talisman Malaysia Ltd. is one of Canada's largest independent oil and gas producers. Talisman began operating in Malaysia through the acquisition of Lundin Malaysia Ltd. and is currently the operator of the PM-3 CAA production-sharing contract and the PM-305 contract offshore the eastern coast of Peninsular Malaysia. PM-3 CAA is the largest petroleum development undertaken by a Canadian company in Asia, extracting oil and gas from six different offshore fields located throughout a 1,350-square-kilometer area in the overlapping zone between Malaysia and Vietnam. With the completion of PM-3 CAA development in Malaysia and Vietnam in 2003, on schedule and on budget, production from the region is expected to quadruple in 2004. Current production in the region is approximately 40,000 BOE. Amerada Hess The entry of Amerada Hess into Malaysia occurred in 1998, when new PSCs were signed for two blocks. In partnership with Petronas Carigali, Amerada Hess holds operatorships in blocks SK 306 (80%) and PM 304 (70%). Both blocks contain oil and gas discoveries with established oil reserves. The firm has an initial five-year exploration period for the blocks. What prompted Amerada Hess to get involved in Malaysia was the company's identification of Southeast Asia as a growth area. The firm already had offices in Bangkok and Jakarta, as well as production in Thailand and Indonesia. What also helped the company decide to enter Malaysia was the depth of information available on both blocks. Michael Hugues, Amerada Hess general manager, says, "As a new entrant and a medium-size company, we are looking for rewarding opportunities. Actually, we are quite happy, for instance, to drill for 10- to 20 million BOE, while big companies cannot do it, as it doesn't impact their bottom line." Pacific Tiger Small independent E&P company Pacific Tiger Energy Inc., a Canadian publicly listed company that is currently headquartered in Singapore, is active in north-central Thailand. Michael Cvetanovic, chief executive, says, "We like to tell our story on results. Each well we have drilled has produced, sometimes marginally, but it has produced. We think that maybe some of the old maps weren't correct, and each well has provided us with more information." Apparently that extra information has been correct: independent auditing firm Gaffney, Cline & Associates (Singapore) has recently upgraded Pacific Tiger's audited proved, probable and possible reserves by 25 million barrels. Of that, 4 million were added after the latest drilling round. In less than 10 years of activity, Pacific Tiger has acquired proved reserves of 1.17 million barrels, and has a total audited estimate of 49.1 million barrels of reserves. While much has been made of offshore potential, Pacific Tiger has good reasons to focus on its SW-1 onshore concession. This acreage is found in a geological province known as the Phatchubun Basin. It is one of the largest petroliferous basins in Thailand, and as Cvetanovic believes it is perhaps the least explored, with a mere well per 800 square kilometers. He says, "We're excited about our work, and excited about the future. This is a great acreage." Pacific Tiger has recently begun to drill horizontal wells. This approach has confirmed that the basin contains "stacked" reservoirs, and is a further indication that the Pacific Tiger team was correct in its basic assumption-that prior understanding of this dynamic basin was incorrect. Says Cvetanovic, "We realized that we had to drill differently, and we have really changed our approach to drilling. Now we are drilling horizontal wells." By changing its approach, Pacific Tiger has intersected a huge amount of oil pay-400 meters and 90 meters on the two most recent wells. "I think we have a huge competitive advantage in Thailand. We have excellent relationships with local communities, and government support, and we will be applying for further licenses."