1. RH Petrogas is an upstream oil and gas company. Could you elaborate on the key aspects of your business?
RH Petrogas (RHP), an independent upstream oil and gas company headquartered in Singapore, operates two production sharing contracts (PSCs) — Kepala Burung and Salawati — in West Papua, Indonesia. RHP, whose chairman is Tiong Ik King, holds a 70% participating interest in both PSCs, with Indonesia’s state-owned oil company Pertamina holding the remaining 30%. The new 20-year terms for both PSCs commenced in 2020 and will expire in 2040.
The Kepala Burung PSC covers an onshore area of 1,030km2. It has been produced since the 1970s, with cumulative oil production exceeding 360 million barrels. This block has consistently contributed around 80% of our annual oil and gas production in recent years. The Salawati PSC covers both onshore and offshore areas totalling 1,137km2.
Both blocks hold a large inventory of exploration prospects and leads, and we are working to identify areas with potential resource upside that could be matured and developed shortly. Crude oil produced from the two PSCs can be sold to the domestic or international markets, and the gas produced is sold by pipeline to the surrounding areas. The neighbouring Sorong City relies on gas supplied by the group for its power generation. Gas produced is also used as fuel for our power plants for field operations.
2. What is RHP’s competitive edge over industry peers?
Cost and operational synergies: As the operator of the two contiguous blocks, we lead, manage and execute strategies for the blocks. We can optimise operations and pursue cost synergies through sharing infrastructure, facilities, equipment and resources.
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Operational expertise: With an experienced operations team, we can counter the natural production decline of mature oil fields and have maintained relatively stable production over the years through a continuous programme of optimisation strategies, including well workovers and well services, enhanced oil recovery (EOR) techniques as well as innovative approaches developed in-house.
Impactful exploration upside: In addition to existing production, the two blocks remain highly prospective, and we will seek to unlock their upside potential through a series of development and exploration programmes, working closely with the Indonesian government and its partner to develop and deliver on its plans.
Long reserves life: Based on the most recent independent third-party audit, the total proved plus probable reserves (2P reserves) for the two blocks was around 32.2 million barrels of oil equivalent (MMBOE) as of Jan 1 net to our effective working interests implying reserves to production ratio of over 18 years. These reserve numbers include the Indonesian government’s production share under the respective terms of the PSCs.
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3. Are there any plans to enhance the group’s geographical reach to generate greater revenue?
RHP always considers diversifying its asset portfolio geographically in the mid to long term. We are currently focused on organic growth from its inventory of prospects and leads through an intensive exploration programme, which fulfils its work commitments for the two PSCs. We continue to evaluate farm-in and merger and acquisition opportunities when they come to its attention and are open to opportunities that are a good fit, especially within Asean. Developing new assets is capital-intensive and challenging in the current environment where banks are reluctant to lend to companies involved in fossil fuel production.
4. Could you elaborate on the future direction for RHP’s various business segments?
Currently, crude oil sales make up over 80% of the revenue. In the longer term, we expect gas will make up an increasingly larger share if its exploration efforts pay off.
Looking forward, RHP is focused on increasing gas exploration and production. This aligns with expectations that natural gas will be a transition fuel as the world moves towards cleaner energy, consistent with scenarios modelled by organisations like the International Energy Agency.
Natural gas is expected to make up still a significant portion of the global energy mix under all its scenarios, including the most aggressive assumptions of a rapid take-up of renewable energy. In early 2023, RHP’s subsidiaries signed memorandums of understanding for using natural gas from our assets to meet the energy needs of an upcoming project, the Ignite (Indonesia Green Nickel Technology) Ecopark. This project is a proposed integrated class 1 nickel processing park to be constructed in the locale of the Kepala Burung PSC.
Our 2023 exploration plan includes drilling one high-impact deep gas prospect. If successful, we will have enough gas production capacity to supply the needs of Ignite Ecopark. We will maintain steady production by managing the existing fields while working to identify and mature exploration prospects within these two PSCs.
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5. What notable developments can shareholders anticipate in the near to medium term?
In July, we embarked on its plans to unlock the upside potential of its two PSCs and announced the commencement of 100km2 of 3D marine seismic survey in the South Walio Offshore area of the Salawati PSC, to identify prospective hydrocarbon-bearing targets for drilling. The spudding of the Riam-1 exploration well lies 3km west of the analogous Walio field. The Walio field is the largest oil field in the Group’s adjoining Kepala Burung PSC, which accounts for more than 50% of the block’s oil production. It is the first exploration well drilled in the Kepala Burung PSC in almost a decade and aims to extend the highly prolific Walio field to the west.
We intend to drill two more exploration wells and one development well for the remainder of this year. Our exploration commitments under the two PSCs include seven exploration wells, with the current plans targeting the drilling of five oil prospects and two high-impact deep gas plays. Any commercial oil discovery would provide incremental oil production gains for RHP, while a deep gas discovery could provide the required capacity to supply the Ignite Ecopark with transformative potential for us. Oil and gas exploration is inherently risky, and discovery or commercial success is not guaranteed.
6. Describe RHP’s recent financial performance.
RHP’s revenue is derived from selling oil and gas from its two PSCs. With the strong recovery in crude oil benchmark prices that began in 2021, we recorded significant increases in revenue from FY2020 to FY2022. With an average realised oil price of US$95 ($128) per barrel in FY2022, ended Dec 31, 2022, we achieved record revenue of US$104.9 million and ebitdax (earnings before interest, tax, depreciation, amortisation, exploration expenses, impairment and other non-recurring items) of US$95 million.
We recorded revenue of US$43 million for the half-year period that ended June 30 this year (1H 2023), down 24.1% y-o-y, due to a 25.5% decrease in the average realised oil price per barrel over the same period. Our cost of sales increased by 17.1% y-o-y due to higher operating costs. We recorded a net profit of US$3.1 million and an ebitdax of US$7.6 million for 1HFY2023. Additionally, we recorded positive operating cash flows of US$11.6 million for 1H 2023 and had cash and cash balances of US$64.4 million as at June 30 this year. We expect oil demand and prices to remain supported by the expected easing of interest rate hikes and improving global economic prospects.
7. Can shareholders expect any dividends to be paid in future?
The upstream oil and gas business is capital-intensive, and under the current market climate, there are challenges in obtaining external financing due to sustainability considerations. Therefore, the group needs to ensure sufficient internal resources to fund its near-term commitments, as this programme is in the best interests of its shareholders and stakeholders. Nonetheless, we stand committed to delivering sustainable value to its shareholders, and the board and management continue to discuss the possibility of a future dividend payment.
8. What are some key drivers or trends for the oil and gas market?
The oil and gas market is cyclical. While we have off-takers nearby, selling prices ultimately correlate to global benchmark prices. Our oil and gas production is currently sold within Indonesia, which has targeted increasing domestic oil lifting to one million barrels per day by 2030.
Against this backdrop, we expect resilient demand for energy to power the nation’s growing economy. Selling oil prices may experience periods of volatility due to short-term supply-demand imbalances, geopolitical tensions and economic uncertainties. Excess global production capacity remains limited due to the prolonged underinvestment in exploration and production since 2015. OPEC’s most recent forecast is for oil demand to continue to grow for the rest of 2023 and into 2024, despite economic headwinds. We believe these factors will help to underpin global oil prices.
9. Will RHP be impacted by the energy transition and environmental, social, and corporate governance (ESG) concerns due to its association with high carbon emissions in the oil and gas sector?
Notwithstanding climate accords and targets, many developed nations have recently affirmed their intentions to continue exploring for and producing fossil fuels in the near term, as energy security and affordability have become a more pressing concern in the wake of the Russia-Ukraine conflict and chronic underinvestment in the sector over the last decade.
In Indonesia, where we operate, the government has set a target of reaching net zero emissions by 2060 or 2055 if it receives financial and technology support. The country has passed carbon tax legislation, although it has yet to be implemented. Overall, we expect energy security and affordability will continue to take priority in Indonesia’s policy approach in the near term. As a small independent oil and gas company, we believe our operations do not significantly contribute to global carbon emissions.
Nonetheless, we have taken steps to measure its Scope 1 and Scope 2 emissions and to identify ways to address emissions while balancing them against generating shareholder returns. In the mid to long term, we aim to explore and develop natural gas resources, a cleaner alternative and a key transition fuel as the world continues ramping up its clean energy capacity. We have been using natural gas to generate power for field operations at its own power generation facilities, resulting in lower emissions than coal-fired power.
10. What is RHP’s value proposition to potential investors, and what do you think investors might have overlooked?
We have a track record of maintaining steady production from its two assets despite the natural decline of mature fields. We are debt-free; we hold cash of US$64.4 million as at June 30. Selling oil prices may experience periods of volatility. Excess global production capacity remains limited due to the prolonged underinvestment in exploration and production since 2015. OPEC’s most recent forecast is for oil demand to continue to grow for the rest of this year and into 2024, despite economic headwinds. We believe these factors will help to underpin global oil prices. Any discoveries from these exploration wells in our two PSCs will add to our production and reserves. Developments in areas near where we operate, particularly the Ignite Ecopark, would require significant energy. We have plans to drill two deep exploration wells, which — if successful —has transformative potential for us as it would be the closest and natural choice to supply piped gas to the Ecopark.
Emelia Tan is a research analyst with the Singapore Exchange
