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5 Things To Know About RH Petrogas (SGX Code: T13), The Company That Operates Two Oil Production Sharing Contracts In Indonesia

A proxy to (higher) oil prices.

The war between Russia and Ukraine, which began in February 2022, has exacerbated the rise in energy (fossil fuel) costs. Unsurprisingly, the impact has been felt at every stratum of the economy in Singapore, which generates 95% of its electricity from natural gas and depends on neighbouring countries like Malaysia and Indonesia to meet its growing energy demand.

One company that has been listed on the Singapore Exchange (SGX) since June 1993 and benefits from the higher oil prices is RH Petrogas (SGX Code: T13). The independent upstream oil and gas company has undergone asset rationalisation over the past five years to currently operate two oil onshore producing assets in Indonesia: Kepala Burung PSC and the Salawati PSC.

Here are 5 things to know about RH Petrogas if you’re interested in oil and gas businesses.

RH Petrogas is an upstream oil and gas company, could you elaborate on the key aspects of your business?

RH Petrogas (RHP) is an independent upstream oil and gas company and is the operator of 2 production sharing contracts (PSCs) – the Kepala Burung PSC and the Salawati PSC. The Group 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 1,030 km2. The block has been producing oil since the 1970s with total cumulative oil production to date exceeding 360 million barrels. This block has consistently contributed around 80% of the Group’s annual oil and gas production in recent years.

The Salawati PSC covers both onshore and offshore areas totaling 1,137 km2. Both the Kepala Burung and Salawati blocks hold a large inventory of exploration prospects and leads, and the Group is working to identify areas with potential resource upside that could be matured and developed in the near future.

Crude oil produced from the Group’s 2 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 the city’s power generation. Gas produced is also used as fuel for the Group’s own power plants for field operations.

Kepala Burung PSC & Salawati PSC in Indonesia

With many economists predicting a slowing economy and a possible recession in the near term, how is the Group preparing itself to ride out this storm?

The Group has already come through previous down cycles, namely the oil price crash in 2014 which kept crude prices depressed for the ensuing years, and the beginning of the COVID-19 pandemic when oil demand plummeted due to lockdowns and restrictions.

The Group’s controlling shareholder had previously extended interest-free shareholder loans for the Group to meet its funding shortfall and working capital requirements in years of crisis. In December 2021, the Group capitalised a significant portion of these loans into new ordinary shares. Consequently, as at the end of FY2021, the Group had zero external debt.

During the height of the recent COVID-19 pandemic, the Group was able to implement significant cuts in its budget and expenses, and deferred non-essential projects. These measures resulted in reductions in the Group’s cost of production per barrel of oil from US$31.50 in 2019 to US$27 in 2020. These cost cutting measures enabled the Group to conserve cash, retain its staff and maintain production while awaiting the eventual recovery in oil prices. The Group has since experienced increases in prices of materials and contracts due to the recovery in the global economy and oil markets, but with the knowledge and experience gained from the previous crisis, the Group would be able to re-implement cost cutting measures if the need arises. Together with a strong balance sheet and zero debt, this puts the Group in a better position to ride out economic turbulence.

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With the oil and gas industry being associated with high carbon emissions, will RH Petrogas be affected by the ongoing energy transition and related ESG considerations?

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 has 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 the Group operates, the government has set a target of reaching net zero emissions by 2060, or by 2055 if it receives financial and technology support. The country has also passed carbon tax legislation, although it has yet to be implemented. Overall, the Group expects that 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, the Group believes that its operations are not a significant contributor to global carbon emissions. Nonetheless, the Group has 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, the Group also aims to focus on exploring for and developing natural gas resources, which is a cleaner alternative to other fossil fuels and has a key role in the global energy mix, as a key transition fuel as the world continues to ramp up its clean energy capacity. The Group has been using natural gas to generate power at its own power generation facilities for field operations, which results in lower emissions compared to coal-fired power.

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There has been a rise in trade wars and geopolitical tensions in recent times, leading to more countries favouring protectionist policies. What are some of the Group’s challenges with international trade and how is it overcoming them?

The Group prioritises the sale and supply of its produced oil and gas to local buyers in order to meet the domestic needs in Indonesia, as the country’s oil and gas production has been declining over the years.

The Group had previously exported its crude oil to buyers outside of Indonesia. This remains a possibility in the event that the Group needs to find alternative buyers.

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What is RH Petrogas’s value proposition to potential investors and what do you think investors might have overlooked?

The Group has a track record of maintaining steady production from its 2 assets despite the natural decline of mature fields. The Group currently has no debt, with cash holdings of US$64.4 million as at 30 June 2023.

At the same time, the Group has recently embarked on exploration activities to unlock the upside potential of the 2 PSCs. Any discoveries from these exploration wells will add to the Group’s level of production and reserves.

Developments in areas close to where the Group operates, particularly the IGNITE Ecopark, would require significant amounts of energy. In line with this, the Group has plans to drill 2 deep exploration wells which, if successful, has transformative potential for the Group as it would be the closest and natural choice for supply of piped gas to the Ecopark.

Editor’s Note: Some answers for this article were extracted from the SGX 10 in 10 series published on 15 August 2023 and have been republished with permission. You can read more on RH Petrogas (SGX Code: T13) on the SGX website.