Shell squeezed in Brunei-Malaysia offshore oil dispute

Shell squeezed in Brunei-Malaysia offshore oil dispute

Dow Jones, Singapore

Royal Dutch Shell Deepwater Borneo is expected to follow Total
S.A.S's footsteps in shelving oil and gas exploration plans
offshore Brunei, at least for the time being, due to sovereignty
wrangles between Malaysia and Brunei, sources close to Shell
said.

The disputed deep offshore site is part of an exploration area
both countries are trying to develop. But while Shell and other
oil majors have, or are planning to shelve exploration in the
Brunei-claimed areas, Malaysia is pushing ahead in the areas its
claims to own.

Total froze all offshore work recently at Brunei's "Block J" -
one of four disputed exploration blocks - after a Malaysian
patrol boat chased away one of the French company's vessels.

French sources say that Total believes the area is "extremely
promising", although the company hadn't had time to confirm the
scale of reserves in the sector.

Block J overlaps Block L, exploration rights to which the
Malaysian government has awarded to Murphy Oil and Petronas
Carigali. Petronas Carigali is the exploration arm of Malaysian
state-owned Petronas.

The two sites are located next to the oil-rich Kikeh Block,
which is already operated by Murphy Oil and Petronas Carigali and
which is estimated to have recoverable reserves of 400 to 700
million bbl of crude.

The Malaysia-Brunei dispute is likely to affect other oil and
gas exploration projects in the area.

The Brunei government is expected soon to rubber-stamp
explorations rights it has agreed to with a Shell Deepwater-led
consortium in "Block K", in what it claims to be its Exclusive
Economic Zone.

This zone stretches 200 nautical miles out from Brunei's shore
in a northwesterly direction.

The consortium is made up of Shell, with 50 percent, Conoco
(COP) and Mitsubishi, each with 25 percent.

"Shell Deepwater will not begin work in Block K until there is
clarity in this territorial issue," a source close to the company
said.

Also, sources said that Royal Dutch/Shell Group, which has
various subsidiaries in Brunei and Malaysia, is unlikely to start
operations in the disputed area because it may not want to
antagonize both the Malaysian and Brunei governments.

"Shell may not want to rock the boat. If Shell Deepwater
begins operation in the disputed area, it might endanger the
relationship between Shell Malaysia and the Malaysian
government," another industry source said.

Shell Malaysia is the main exploration and production player
in Sabah and Sarawak, operating in both continental shelf and
deepwater concessions.

Shell Brunei, which is operating four concessions - three in
production phases and one in exploration - in Brunei's offshore
shallow waters, will not be involved in the controversial
deepwater project, a source said.

Block K overlaps with Block M, which the Malaysian government
has also awarded to Murphy Oil and Petronas Carigali.

"More than half of the two Malaysian blocks overlap the blocks
awarded by Brunei government," an industry source in Brunei said.
"The four blocks with different names are essentially the same
two blocks."

Murphy Oil has completed spud drilling in Block L, the source
said. Murphy Oil officials in Kuala Lumpur declined to comment on
its Malaysian operations.

The US oil and gas exploration company and Petronas Carigali
have yet to begin offshore exploration work in Block M.

"We're doing research and studies now for Block M, and the
plan is go ahead with the offshore work once the ground work is
done," a Petronas Carigali official said.

Both Brunei and Malaysian governments are keen to avoid a
lengthy tussle and possible international arbitration, sources
said.

"It is in everyone's best interest to cut a deal on this issue
as soon as possible," a second source said.

If the issue goes to the International Court for arbitration
it could take between 10 to 20 years to resolve.

Disputes over sovereignty claims in the region are common,
especially in potential exploration and production areas.

In December, Malaysia won an International Court of
Arbitration ruling over Indonesia on the ownership of Sipidan and
Ligitan islands off Sabah, on the other side of Borneo island
from the area it disputes with Brunei.

Malaysia and Singapore are also currently in legal wrangles
over the sovereignty of the tiny Pedra Blanca island, northeast
of Singapore.