Industry Overview

11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’REPORT 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’REPORT (Prepared for inclusion in the Prospectus) Vital Factor Consulting Sdn Bhd o (Company No.: 266797-T)
VITAL FACTOR CONSULTING 75C & 77C Jalan SS22/19 Creating Winning Business Solutions Damansara Jaya 47400 Petaling Jaya Selangor Darul Ehsan. Malaysia Tel: (603) 7728-0248 Fax: (603) 7728-7248 Email: info@vitalfactor.com Website: www.vitalfactor.com 1 7 APR 2007 The Board of Directors Deleum Berhad No. 42, Jalan Bangsar Utama 1 Bangsar Utama 59000 Kuala Lumpur Malaysia
Dear Sirs Independent Assessment of the Supporting Products and Services for the Oil and Gas Industry The following is a summary of the Independent Assessment of the Supporting Products and Services for the Oil and Gas Industry in Malaysia prepared by Vital Factor Consulting Sdn Bhd for inclusion in the Prospectus of Deleum Berhad (herein together with all its subsidiaries will be referred to as Deleum Group) in relation to its listing on the Main Board of Bursa Malaysia Securities Berhad. 1.1 BACKGROUND OF DELEUM GROUP • The principal activity of Deleum Group is in the provIsion of Supporting Specialised Products and Services for the Exploration and Production of Oil and Gas.
• Deleum Group’s principal business activities cover the following areas: Specialised Equipment Services; Oilfield Equipment and Services; Oilfield Chemicals and Services.
• Deleum Group’s other business activities through its associate companies

include: Bulking Services; Independent Power Production. • For the financial year ended 31 December 2006, Deleum Group recorded total revenue of RM432.4 million. Local revenue accounted for 96.7% of Deleum Group’s total revenue. Deleum Berhad 1 Industry Assessment 337 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions 1.2 INDUSTRY OVERVIEW • The Oil and Gas Industry plays a significant role as a major contributor to the growth and development of the Malaysian economy, contributing in terms of domestic production and as a major generator of export earnings.
• The Supporting Products and Services sector plays a critical supporting role in ensuring the effective facilitation of operations in the Oil and Gas Industry.
• In 2006, the sales value of the domestic manufacture of refined petroleum products amounted to RM82.4 billion (Source: Deparlment of Statistics).
• In 2006, export value of major product segments of the Oil and Gas Industry are

as follows: Export value of Crude Petroleum amounted to RM32.6 billion; Export value of Refined Petroleum Products amounted to RM19.2 billion; Export value of Residual Petroleum Products amounted to RM525.7 million; Export value of Liquefied Propane and Butane amounted to RM2.0 billion; Export value of Natural Gas amounted to RM23.3 billion; and Export value of Other Gaseous Hydrocarbons amounted to RM2.9 billion. (Source: Deparlment of Statistics) • In addition to its contribution to the nation’s foreign exchange earnings, the Oil and Gas Industry also contributes towards employment generation, value-added creation and income generation.
1.3 INDUSTRY STRUCTURE 1.3.1 Oil and Gas Industry Segmentation • The structure of the Oil and Gas Industry may be depicted as follows:
Figure 1 Segmentation of the Oil and Gas Industry Deleum Berhad 2 Industry Assessment 338

11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • Exploration comprises activities that are related to the prospecting of undiscovered hydrocarbons. Exploration activities include the collection and interpretation of seismic survey data, and exploratory drilling and core analysis.
Deleum Group is involved in providing Exploration Drilling through Offshore Drilling Rig Operations.
• Production comprises activities that are related to the extraction of hydrocarbons from identified hydrocarbon reserves. Production activities directly related to the extraction of hydrocarbons include drilling for hydrocarbons, completion, and production platform engineering and construction.
Deleum Group is involved in the following Production activities: Supply of generator set, compressor set and mechanical drive set Gas Turbine Packages; Subsea Production Systems and Subsea Wellhead Systems; Provision of Gas Turbine Overhaul Services, Parts and Components, and Technical Services; Provision of Wireline Products and Services; Provision of Wellhead Maintenance Services; Provision of Production EqUipment and Storage Vessels; Provision of Offshore Drilling Rig Operations; Provision of Production and Drilling EqUipment and Services; Provision of Oilfield Chemicals and related services.
• Transportation comprises the activities related to the transportation of extracted hydrocarbons from production fields to storage facilities and refineries. Transportation includes the operation of onshore and offshore hydrocarbon pipelines, and the operation of hydrocarbon transport vessels.
Deleum Group is involved in the supply of Drag Reducing Agents, which are chemicals used to increase the efficiency of petroleum transmission through pipelines. The Group is also involved in prOViding fluid transfer lines.
• Refining/Processing comprises activities that are related to the processing of extracted hydrocarbons into a form that may be utilised by intermediate and final users.
• Distribution comprises activities that are related to the transportation and distribution of refined hydrocarbons to end-users.
• Supporting Products and Services are used to facilitate the exploration, production through to the distribution of Oil and Gas. Some examples include, among many others, Oil and Gas power generation equipment, Oil and Gas production equipment, seismic surveying services, wireline services, maintenance of equipment and machinery, pipeline fabrication and offshore platform fabrication and maintenance.

Deleum Berhad 3 Industry Assessment 339 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • Deleum Group is primarily involved in the provision of Supporting Specialised Products and Services for the Exploration and Production of Oil and Gas. 1.4 OPERATORS IN THE UPSTREAM OIL AND GAS INDUSTRY • The operators in the upstream Oil and Gas Industry in Malaysia are segmented into different tiers and this is depicted as follows: (PETRONAS)”-‘)­First Tier .+
….__ …——………_………………__ ……_—–_ ….._-.-..-………——-…….. ­Production Sharing Contract Operator (eg Petronas Carigali, Shell)
Second Tier —————————————–..—–………….-..——-t———–………… ­International Provider  Licensed/Registered Local  of  Supporting  I——‘  Provider of Supporting  Products and SeNices  Products and Services
i Non·Licensed/Non-Registered Local Provider of Supporting Third Tier Products and Services Figure 2 Operators in the Upstream Oil and Gas Industry in Malaysia • Operators in the upstream Oil and Gas Industry in Malaysia is segmented in the following manner: First tier operators, comprising the principal; Second tier operators, comprising of Production Sharing Contract Operators; Third tier operators, comprising local and international providers of Supporting Products and Services. First Tier • The first tier operator in the Oil and Gas Industry in Malaysia is Petroliam Nasional Bhd (PETRONAS), the national petroleum corporation.
• PETRONAS is the primary regulator of the Oil and Gas Industry in Malaysia and the licensing body that is responsible for the industry’s long-term development.
• PETRONAS is involved in a wide range of Oil and Gas Industry activities, including upstream exploration and production, oil and gas refining and processing, gas transmission pipeline network operations and marketing and distribution of petroleum products.

Deleum Berhad 4 Industry Assessmenl 340 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • PETRONAS also participates in the international Oil and Gas Industry. As at 31 March 2006, PETRONAS had interests in 62 upstream (exploration and production) ventures in 23 overseas countries. (Source: PETRONAS) Second Tier • The second tier operators in the Oil and Gas Industry in Malaysia are the Production Sharing Contract (PSC) operators.
• PSC operators are typically international Oil and Gas companies that have entered into a Production Sharing Contract with PETRONAS. These international Oil and Gas companies have the financial and technical ability to bear the cost and risk of undertaking Oil and Gas exploration, development and production. Petronas Carigali Sdn Bhd, a wholly owned subsidiary of PETRONAS, is also a PSC operator.
• There were 60 active PSC between PETRONAS and PSC operators as at 31 March 2006 (Source: PETRONAS).
• Normally, a PSC operator is given permissIon to explore, develop and produce hydrocarbons in a specified area for a specified period of time. Revenue from the sale of any produced hydrocarbons first goes towards covering a specified proportion of the costs involved in (including Exploration and Development), and any revenue in excess of this is shared between the PSC operator and PETRONAS.
• The PSC operator bears all of the risks and initial costs involved in initiating hydrocarbon production in the area granted by PETRONAS under the terms of the Production Sharing Contract.
• In addition to the involvement in the upstream segment of the Oil and Gas Industry, some PSC operators are also involved in transportation, refining and distribution.

Third Tier • Third tier operators in the Oil and Gas Industry in Malaysia comprised local providers of Supporting Products and Services, and international providers of Supporting Product and Services.
• Some of the Supporting Products for upstream activities include the provision of power generating equipment, drilling consumables such as drill bits, and oilfield chemicals. Some examples of Supporting Services for upstream activities include equipment maintenance and servicing, wireline services, seismic survey services, and production platform operation and management.

Deleum Berhad 5 Industry Assessment 341 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • Both local and international providers of Supporting Products and Services are required to obtain the appropriate licences or registration for a particular product or service from PETRONAS before they are allowed to service first and second tier operators.
• International providers of Supporting Products and Services are generally required to establish partnership arrangements with a Malaysian party before they are able to provide Supporting Products and Services to first tier and second tier operators.
• Local providers that are not licensed or registered with PETRONAS can only provide products and service to the Principals and PSC in the Oil and Gas Industry by working together with a licensed or registered operator.
• Deleum Group is a local licensed and registered provider of Supporting Products and Services to the upstream Oil and Gas Industry.

1.5 INDUSTRY L1FE·CYCLE • The life-cycle of the Oil and Gas Industry in Malaysia is in the early part of the mature phase. This is because most of the Oilfields in Malaysia are already explored. However the industry is still experiencing growth at least for the medium term. Growth in the Oil and Gas Industry will create the need and demand for Supporting Products and Services.
• The growth of the Oil and Gas Industry may be reflected in two ways: Growth in investment in Exploration and Production; Growth in Oil and Gas production and export; Growth in the demand for Supporting Products and Services for the Oil and Gas Industry.

Investment In Exploration and Production The level of investment made by PETRONAS and PSC operators in the Exploration and Production of Oil and Gas Industry in Malaysia increased at an average annual rate of 21.7% between the financial years ended 31 March 2000 and 31 March 2006. (Source: PETRONAS).
Local Production and Export of Oil and Gas Daily Crude Oil and Condensates production increased at an average annual growth rate of 1.0% between the financial years ended 31 March 2002 and 2006. Deleum Berhad 6 Indust/y Assessment 342

 

11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions Daily Natural Gas Production increased at an average annual growth rate of 0.9% between the financial years ended 31 March 2002 and 2006. (Source: PETRONAS) The sales value of the manufacture of Refined Petroleum Products grew at an average annual growth rate of 39.1 % between 2002 and 2006. (Source: Department of Statistics). Exports The export value of Crude Oil increased at an average annual rate of 28.8% between 2002 and 2006; The export value of Refined Petroleum Products increased at an average annual rate of 29.8% between 2002 and 2006; The export value of Natural Gas, whether or not Liquefied increased at an average annual rate of 23.9% between 2002 and 2006. (Source: Department of Statistics)
Supporting Products and Services Gas Turbines and gas compressors are widely used in the Oil and Gas Industry for power generation on onshore and offshore facilities. The import value of Gas Turbines declined at an average annual rate of 8.4% between 2002 and 2006. In 2006, provisional data indicated that import value of Gas Turbines declined by 23.2%; The import value of Gas Compressors for Hydrocarbon Drilling declined at an average annual rate of 26.9% between 2002 and 2006. In 2006, provisional data indicated that the import value of Gas Compressors for Hydrocarbon Drilling declined by 72.8% compared to the previous year. (Source: Department of Statistics) 1.6 GOVERNMENT LEGISLATION, POLICIES AND INCENTIVES 1.6.1 Government Regulations • All rights related to the exploration and extraction of petroleum in Malaysia is vested in Petroliam Nasional Berhad (PETRONAS) under the Petroleum Development Act 1974. PETRONAS was also granted control over the carrying out of downstream activities and development relating to petroleum and its products under the Petroleum Development Act 1974. Deleum Berhad 7 Industry Assessment 343 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • All operators wishing to participate in the Oil and Gas Industry are required to obtain the necessary licences, or successfully register with PETRONAS before they are allowed to participate in these activities.
• Operators who wish to tender for contracts from the Government are also required to register as contractors with the Ministry of Finance (MOF), and the Construction Industry Development Board (CIDB).
• All companies that are in the manufacturing of petrochemical products have to apply for a manufacturing licence from Ministry of Industrial Development Authority or Ministry of International Trade and Industry.
• According to the Industrial Coordination Act, 1975 which mandates all companies with shareholders’ funds of RM2.5 million or above, or engaging 75 or more full-t!me employees to attain a manufacturing licence (Source: Malaysian Industrial Development Authority).

1.6.2 PETRONAS Licenses and Registration • Applicants are required to specify the scope of work for which the licence or registration is being applied for, based on a set of Standardised Work & Equipment Categories (SWEC). An individual licence or registration must be obtained for each SWEC.
• Companies that have obtained a license for a SWEC are allowed to participate in the upstream sector, downstream sector, and maritime sector of the Oil and Gas Industry.
• In contrast to a licence, companies that are registered in a SWEC are allowed to only participate in the downstream sector and maritime sector of the Oil and Gas Industry. Registered companies are not allowed to participate in the upstream sector or in the offshore sector.
• Generally, licenses and registration are effective for a period of 1 year. However, licenses and registration that are effective for a period of more than 1 year, can be considered.
• Deleum Group currently holds the PETRONAS licences and registrations that are relevant to its business.

·1.7 ENVIRONMENTAL REGULATIONS • Turboservices, a subsidiary of Deleum Group has obtained a written certificate of approval for the Erection of Fuel Burning EqUipment, and the Erection etc. of Chimney under the rules and regulations of the Department of Environment’s Environmental Quality (Clean Air) Regulations 1978. Under the terms of this certificate, Turboservices is allowed to install and operate fuel burning equipment and chimneys, including six gas turbine units and four chimneys. Deleum Berhad 8 Industry Assessment 344 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • Turboservices is licensed to operate this equipment at the contract facility. This certificate was obtained in relation to the Test Cell facility operated by Turboservices that is used to test and verify the power output of overhauled gas turbines before they are returned to customers.
1.8 SUPPLY DEPENDENCIES • There are no raw material purchases per se as Deleum Group is in the provision of Supporting Specialised Products and Services.
• The Group’s purchases primarily comprise equipment, systems and spare parts, which are used to facilitate the provision of products and services to the Oil and Gas Industry. Some of the purchases include:
Gas turbine packages and spare parts; Wellhead and Christmas Tree spare parts; Oilfield chemicals including drag reducing agents; Wirelinetools and spare parts; Seamless stainless steel pipes and drill bits.

• The Group’s purchases of these types of equipment, systems and spare parts
are primarily imported for the following reasons: Malaysia is a net importer of these types of specialised equipment, systems and spare parts for the Oil and Gas Industry as there are no local producers available. Due to the stringent requirements and specifications of the Oil and Gas Industry, the customer usually specifies the source of purchases of these types of equipment and systems.
• The import value of Gas Turbines declined at an average annual rate of 8.4% between 2002 and 2006. In 2006, provisional data indicated that the import value of Gas Turbines declined by 23.2%, to RM274.0 million.
• The import value of Gas Compressors for Hydrocarbon Drilling declined at an average annual rate of 26.9% between 2002 and 2006. In 2006, provisional data indicated that the import value of Gas Compressors for Hydrocarbon Drilling declined by 72.8% to RM16.4 million.
• The import value of Parts and Accessories for Drilling Rigs increased at an average annual rate of 23.4% between 2002 and 2006. In 2006, provisional data indicated that the import value of Parts and Accessories for Drilling Rigs increased by 109.1 %, to reach RM258.1 million.

(Source: Department of Statistics) Deleum Berhad 9 Industry Assessment 345 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions 1.9 DEMAND • The level of Investment made by PETRONAS and Petroleum Sharing Contract (PSC) operators in the Exploration and Production segment of the Oil and Gas Industry in Malaysia increased at an average annual rate of 21.7% between the financial years ended 31 March 2000 and 31 March 2006. Investment during the financial year ended 31 March 2006 increased by 30.9% to RM16.1 billion.
• The number of Exploration Wells Drilled increased at an average annual rate of 14.3% between the financial years ended 31 March 2002 to 31 March 2006. During the financial year ended 31 March 2006, a total of 53 Exploration Wells were drilled.

(Source: PETRONASj 1.10 DEMAND DEPENDENCIES • The demand for Supporting Products and Services will be primarily dependent on the performance of the Oil and Gas Industry in Malaysia.
• Production of Oil and Gas in Malaysia may be classified into two broad
categories: Production of Crude Oil and Condensates; Production of Natural Gas.
• The demand for supporting products and services, particularly those related to Exploration and Production, is also dependent on the number of recently­signed Production Sharing Contracts.
• In addition, the increase in the investment on Exploration and Production activity by PETRONAS and PSC operators will have a direct impact on the demand for Supporting Products and Services.
• The following is the performance of the Oil and Gas Industry in Malaysia, including the level of investment and activity in upstream Exploration and Production, and downstream activities such as petroleum products, which may have impact on the demand for Supporting Products and Services:

The level of Investment made by PETRONAS and PSC operators in the Exploration and Production of Oil and Gas Industry in Malaysia increased at an average annual rate of 21.7% between the financial years ended 31 March 2000 and 31 March 2006. During the financial year ended 31 March 2006, investment increased by approximately 30.9% to RM16.1 billion; Deleum Berhad 10 Industry Assessment 346 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions Offshore Seismic Survey data recovered declined at an average annual rate of 6.4%· between 2002 and 2004. The amount of Offshore Seismic Survey data recovered in 2006 was 14.3% higher compared to 2004. A total of 439,182 line kilometres of seismic data were recovered in 2006; Between 2000 and 2006, a total of 28 Production Sharing Contracts were signed between PETRONAS and PSC operators. The number of Production Sharing Contracts in operation between PETRONAS and PSC operators increased from 41 in 2002, to a historic high of 60 in 2006. Of these, 18 of the PSC in operation are in deepwater and ultra­deepwater areas. In 2006, a total of 9 PSC were signed; Daily Crude Oil and Condensates production increased at an average annual growth rate of 1.0% between the financial years ended 31 March 2002 and 2006. During the financial year ended 31 March 2006, production of Crude Oil and Condensates declined by 5.0% to 699,100 Barrels of Oil EqUivalent (BOE) per day; Daily Natural Gas Production increased at an average annual growth rate of 0.9% between the financial years ended 31 March 2002 and 2006. During the financial year ended 31 March 2006, production of Natural Gas increased by 0.2% to 957,000 BOE per day; (Source: PETRONAS) Between 2002 and 2006, sales value of the manufacture of Refined Petroleum Products grew at an average annual rate of 39.1 %. In 2006, sales value increased by 14.1 % to reach RM82.4 billion; The sales value of the Retail and wholesale trade of Petrol, diesel, lubricants and others grew at an average annual rate of 6.0% between 2000 and 2004. In 2004, the sales value of the retail and wholesale trade of Petrol, diesel, lubricants and others grew by 6.7% to reach the value of RM6.9 billion. (Source.· Department of Statistics) • The continuing growth in the production of Oil and Gas and investment on Exploration activities will inadvertently create demand for Supporting Products and Services. In addition, the number of PSC operators will also increase the potential customer base for operators such as Deleum Group. Deleum Berhad II Industry Assessment 347 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions
1.11 COMPETITIVE NATURE AND INTENSITY IN MALAYSIA 1.11.1 Competitive Conditions • Supporting Product and Service Providers in the Oil and Gas Industry face normal competitive conditions, in that operators normally have to compete with each other for business.
• However, there are some conditions as follows:

Only operators that are licensed or registered by PETRONAS are allowed to bid directly for work provided by PETRONAS and Production Sharing Contract operators in the Oil and Gas Industry. Operators who wish to carry out construction work in Malaysia are required to register with the Construction Industry Development Board (CIOB) under the Construction Industry Development Board Act 1994. All builders, contractors and sub-contractors (including operators carrying our civil engineering, mechanical and electrical works) who wish to tender for Government projects must also register with Pusat Khidmat Kontraktor (PKK) of the Ministry of Entrepreneur Development. All operators who wish to obtain contracts from the Government or to bid directly for work provided by PETRONAS and Production Sharing Contract operators in the Oil and Gas Industry are required to register as contractors with the Ministry of Finance (MoF). • Thus, although operators within the Supporting Product and Services in the Oil and Gas Industry operate under normal competitive conditions, it is imperfect due to the requirements for licensing and registration that partly inhibits free competition.
• As with most free enterprise environments, once all the licensing and registration requirements are complied, competition is based on a number of factors, including:
Technical compliance to customers’ specifications and requirements; Quality products and services Cost competitiveness; Prompt delivery/completion.

• An additional competitive factor that concerns Supporting Products and Service Providers is the ability to demonstrate a good safely record, typically measured by work time between work-related fatalities and losI time accidents or incidents. PETRONAS and other major Oil and Gas Industry operators typically require that their suppliers provide proof that they have a good health and safety record when submitting bids for contracts.

Deleum Berhad /2 Industry Assessment 348 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions 1.11.2 Basis of Competition • The basis of Competition within the Supporting Product and Service Providers in the Oil and Gas Industry is mainly as follows: Most work contracts are based on open tender. This system creates a normal competitive environment; In virtually all open tender situations, once the technical specifications are fUlly complied, the bid with the lowest price wins; For large, complex and high value jobs, in many situations, international firms with highly reputable track records are involved in the bidding process; In many situations there are many bidders with the relevant credentials for tender and non-tender jobs; However, competition is restricted to companies with the relevant licences and registrations from PETRONAS and various Government bodies. 1.12 OPERATORS IN THE INDUSTRY 1.12.1 Gas Turbine Sector • The total number of Gas Turbine manufacturers is limited, as a high degree of technical expertise is required to successfully design, develop, and manufacture Gas Turbines. Virtually all Gas Turbines used in Malaysia are imported.
• The principal global manufacturers of Gas Turbines that may be suitable for use

in the Oil and Gas Industry include: Solar Turbines Inc.; General Electric Corp.; Rolls-Royce pic; SiemensAG; Kawasaki Heavy Industries, Inc. Hitachi; Mitsubishi Power Systems MTU Aero Engines.
(Source: Market Research undertaken by Vital Factor Consulting Sdn Bhd) • Global Gas Turbine manufacturers operating in Malaysia are typically supported by local partners. 1.13 BARRIERS TO ENTRY • Barriers to entry as a provider of Supporting Products and Services to the Oil and Gas Industry in Malaysia are high. Deleum Berhad 13 Industry Assessment 349 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • Some of the key barriers to entry are as follows: Government Policies Under the Petroleum Development Act, 1974 and related legislation, activities within the Oil and Gas Industry in Malaysia are regulated by PETRONAS. Companies wishing to participate in a particular area of the Oil and Gas Industry are required to either obtain the corresponding licenses from PETRONAS, or successfully register as a service or product provider. Licensing or registration is required for both the provision of products and services. This is due to the critical nature of the Oil and Gas Industry particularly in adherence to safety standards, product and service quality, and the high technical skill requirements. As a result of these stringent requirements, not many operators are able to qualify as an approved vendor of PETRONAS. As such, Government policies would pose as a barrier to entry for new entrants. High Technical Skills The Oil and Gas Industry, including the prOVISion of Supporting Products and Services, is highly technical in nature involving a certain degree of specialisation and substantial specialist knowledge. Due to the hazardous nature of Oil and Gas exploration and production, there are stringent requirements in safety compliance and standards in every aspect from the use of equipment, systems and structures through to the services and maintenance of equipment. The level of technical skill and knowledge required is generally high. Some of the Supporting Products and Services that require a high degree of technical skill and specialisation includes: design and manufacture of sub-sea production systems, including subsea trees, subsea manifolds, umbilicals, and surface control systems; servicing and maintenance of equipment and systems for example gas turbines and subsea well head systems The high degree of technical skill and/or technological know-how, including the use of proprietary or patented technology, effectively creates a high barrier to entry into certain sectors of the Oil and Gas Industry. Deleum Berhad 14 Industry Assessment 350 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions Although a high degree of technical skill and/or technological know-how may not be required for entry into other sectors of the Oil and Gas Industry, the possession of such skills and know-how is a distinct competitive advantage. New entrants with no skills or know-how are likely to be excluded from winning all but the simplest contracts. Although technology may be purchased or licensed, technical skill and experience are required. Track Record Track record also forms a high barrier to entry for new entrants. New entrants without any track record will be at a disadvantaged when competing for contracts in the Oil and Gas Industry. Track record is important, as products and services demanded by the Oil and Gas Industry tend to be critical in nature, and as such a customer typically requires some assurance that an operator is able to properly fulfil the contract. Having established a proven track record goes a long way in providing this assurance. In this respect, established operators with a proven track record have a distinct advantage over new entrants. Access to Technology Access to technology is a high barrier to entry for new entrants. The range of supporting products and services offered will probably be limited unless the new entrant has access to technology, either developed in-house or through strategic alliances. As the requirements of the Oil and Gas Industry are very stringent, any untested technologies or untested supplier/operator of technologies would need to undergo stringent testing over a period of time before the technologies or the operators are accepted. As most principals owning tested technologies have formed partnerships with local operators, there are few technologies left for new entrants to form technology and service partnerships for deployment. Capital Cost Start-up costs are generally a high barrier to entry for new entrants. Participation in a large number of Oil and Gas Industry niches requires substantial capital investment, particularly in terms of specialised equipment and technology. For example, a new entrant wishing to offer offshore drilling services will have to fabricate or lease an offshore drilling platform. Deleum Berhad 15 Industry Assessment 351 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions A new entrant that is unable to make a substantial capital investment is likely to be restricted to dealing in generic product and services, where the new entrant is likely to face competition from a large number of incumbent operators.

1.14 BARRIERS TO EXIT • Barriers to exit from the Oil and Gas Industry are moderate to high.
• Some machinery and equipment utilised in the Oil and Gas Industry may be sold to other industrial users. For example, gas turbine packages may also be utilised for industrial power generation. However, it should be noted that the cost associated with decommissioning and transporting equipment from production, particUlarly those located offshore or in remote areas, may be high.
• It may be more difficult to convert more specialised equipment for other industrial uses. However, this equipment may be sold to other operators in the Oil and Gas Industry.

 

1.15 INDUSTRY OUTLOOK AND GROWTH FORECAST 1.15.1 Outlook and Growth Forecast of the Supporting Products and Services for the Oil and Gas Industry • The outlook for the Supporting Products and Services for the Oil and Gas Industry in Malaysia is favourable.
• The Supporting Products and Services for the Oil and Gas Industry in Malaysia is forecasted to grow by 5% to 8% per annum for the next five years.
• The outlook for the Supporting Products and Services for the Oil and Gas Industry as a whole is dependent on the outlook of the overall Oil and Gas Industry. As such, the favourable outlook of the Supporting Products and Services for the Oil and Gas Industry in Malaysia is based on the following observations and analyses:

Local Exploration Activity Between the financial years ended 31 March 2000 and 31 March 2006, Investment in the Exploration and Production sectors of the Malaysian Oil and Gas Industry by PETRONAS and PSC operators increased at an average annual rate of 21.7%. In 2006, investment increased by 30.9% to RM16.1 billion; Deleum Berhad 16 Industry Assessment 352 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions Between the years ended 31 March 2001 and 31 March 2006, a total of 28 Production Sharing Contracts were signed between PETRONAS and PSC operators. During the financial year ended 31 March 2006, 9 PSC were signed and a record 60 PSC were in operation; Offshore Seismic Survey activity declined at an average annual rate of 6.4% between the years ended 31 March 2002 to 31 March 2004. During the year ended 31 March 2004, Offshore Seismic Survey data recovered increased by 9.3% to 384,247 line kilometres. The amount of Offshore Seismic Survey data recovered in 2006 was 14.3% higher compared to 2004. A total of 439,182 line kilometres of seismic data were recovered in 2006; The number of Exploration Wells drilled increased at an average annual rate of 14.3% between the years ended 31 March 2002 to 31 March 2006. During the year ended 31 March 2006, a total of 53 Exploration Wells were drilled; (Source: PETRONAS) Local Production Between the financial years ended 31 March 2002 and 2006, daily Crude Oil and Condensates production increased at an average annual growth rate of 1.0%. During the financial year ended 31 March 2006, production of Crude Oil and Condensates declined by 5.0% to 699,100 BOE per day; Between the financial years ended 31 March 2002 and 2006, daily Natural Gas Production increased at an average annual growth rate of 0.9%. During the financial year ended 31 March 2006, production of Natural Gas increased by 0.2% to reach 957,000 BOE per day; (Source: PETRONAS) Exports Between 2002 and 2006, the export value of Crude Petroleum increased at an average annual rate of 28.8%. In 2006, export value increased by 7.7% to reach RM32.6 billion; Between 2002 and 2006, the export value of Refined Petroleum Products increased at an average annual rate of 29.8%. In 2006, export value increased by 26.2% to reach RM19.2 billion; Between 2002 and 2006, the export value of Natural Gas increased at an average annual rate of 23.9%. In 2006, export value increased by 12.0% to reach RM23.3 billion; (Source: Department of Statistics) Deleum Berhad 17 Industry Assessment 353 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions Imports Between 2002 and 2006, the import value of Gas Turbines, which comprises “Gas Turbines of Power Not Exceeding 5,000 kW” and “Gas Turbines of Power Exceeding 5,000 kW’, declined at an average annual rate of 8.4%. In 2006, provisional data indicated that import value declined by 23.2% to RM274.0 million; Between 2002 and 2006, the import value of “Gas Turbines of Power Not Exceeding 5,000 kW” increased at an average annual rate of 10.0%. In 2006, provisional data indicated that import value declined by 15.0% to RM52.8 million; Between 2002 and 2006, the import value of “Gas Turbines of Power Exceeding 5,000 kW” declined at an average annual rate of 11.0%. In 2006, provisional data indicated that import value declined by 25.0% to RM221.2 million; Between 2002 and 2006, the import value of “Gas Compressors for Hydrocarbon Drilling” declined at an average annual rate of 26.9%. In 2006, provisional data indicated that import value declined by 72.8% to RM16.4 million; Between 2002 and 2006, the import value of “Parts and Accessories for Drilling Rigs” increased at an average annual rate of 23.4%. In 2006, provisional data indicated that import value increased by 109.1% to reach RM258.1 million. (Source: Department of Statistics) 1.16 DRIVERS OF GROWTH • Some of the drivers of growth for the Oil and Gas Industry, and Supporting Products and Services for the Oil and Gas Industry are as follows: Market Price of Hydrocarbons Sustained at a High Level Sustained high market price for hydrocarbons is likely to encourage hydrocarbon producers to maintain production at a high level, or even to increase production. In turn, a high level of production is likely to drive growth in the demand for Supporting Products and Services to increase the efficiency and/or production capacity of existing production facilities. In addition, a sustained high market price for hydrocarbons may lead to the development of marginal or preViously commercially unviable deposits. The development of these hydrocarbon deposits will drive growth in the Oil and Gas Industry, and of Supporting Products and Services. Deleum Berhad 18 Industry Assessment 354 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions PETRONAS reported that during the year ended 31 March 2006, operators intensified exploration, development and production activities to capitalise on the high oil price scenario. The market prices of hydrocarbons are continued to be relatively high (in nominal terms) in early 2007, after increasing in 2005 and 2006. This in turn has driven high level of activity in the Oil and Gas Industry, including in the provision of Supporting Products and Services. Technological Advances Technological Advances that enhance production efficiency, lower Production cost, or enable Production to take place in previously inaccessible areas are likely to increase demand for Supporting Product and Service Providers, particularly for providers with access to these Technological Advances. Existing hydrocarbon producers may be inclined to apply these technological advances to increase production efficiency, lower cost or improve recovery rates. Technological Advances that enable production in preViously inaccessible areas may drive growth by bringing new deposits into production. This drives growth of Supporting Product and Service Providers. PETRONAS Policy and Leadership PETRONAS has a policy of nurturing the development of local Oil and Gas Industry operators, including Local Supporting Product and Services Providers. In addition, PETRONAS encourages Malaysian operators to participate in the Oil and Gas Industry overseas. Qualified Malaysian Oil and Gas Industry operators, including Local Supporting Product and Services Providers, are encouraged to support PETRONAS’ foreign operations. As at 31 March 2006, PETRONAS had interests a total of 62 upstream (exploration and production) ventures in 23 overseas countries (Source: PETRONAS). Opening of Acreage for New Exploration The opening of new blocks of Malaysian territorial waters for exploration, development and production will create new demand for supporting products and services. Deleum Berhad 19 Industry Assessment 355 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions With a large proportion of shallow water (generally with depth of less than 200 metres) already allocated to PSC operators, the opening of new acreage is most likely to be for deep-water exploration, development and production. Between 1976, when the current PSC model was initiated, and October 1999, PETRONAS has signed a total of 70 Production Sharing Contracts with various Oil and Gas Industry operators. 9 new PSC were signed during the year ended 31 March 2006, and a historical high of 60 PSC were in operation in Malaysia (Source: PETRONAS). 1.17 AREAS OF GROWTH AND OPPORTUNITIES Overseas Operations • The Malaysian Oil and Gas Industry is large, and has been able to sustain the development of local operators. However to grow further it is important that these operators operate in other markets.
• It is also important to venture to new areas to survive beyond the depletion of Malaysia’s own hydrocarbon resources, although given the current size of reserves and production rate this is not likely to happen in the near or medium term.

Technological Advancement • The Oil and Gas Industry is driven by technology, and operators are generally willing to adopt new technologies. This is particularly true for advances that increase production efficiency, decrease cost of production, and/or enable production in previously inaccessible areas.
• Development of technological advance that fits one or more criteria is likely to create an opportunity for operators that are able to provide that technology.
• Examples of such technology developed in the past includes: Seismic survey utilising computer technology; Directional and multilateral drilling; Floating Production, Storage and Offloading vessels and Floating Storage and Offloading Vessels; Deep sea production platforms; De-waxing and other Production chemicals.

Sustained High Price of Hydrocarbons • The expectation that high market price for hydrocarbons can be sustained should encourage development of marginal fields. . Deleum Berhad 20 Industry Assessment 356 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • With the high market price for hydrocarbons, the expected value of the extractable hydrocarbons rises such that the expected return from production becomes economically viable.
• Development of marginal fields is likely to create an opportunity for operators that able to provide supporting products and services to enable production from these fields.
• High hydrocarbon prices could also revive some old wells that still contain some proportion of reserves to be commercially viable for extraction.
• PETRONAS reported that during the year ended 31 March 2006, operators intensified exploration, development and production activities to capitalise on the high oil price scenario (Source: PETRONAS).

1.18 THREATS AND RISK ANALYSIS Sustained Fall in the Market Price of Hydrocarbons • Hydrocarbons, including crude petroleum and natural gas, are internationally traded commodities whose price fluctuates with the constant interaction between supply and demand for hydrocarbons. Factors such as geopolitical factors and unforeseen supply disruptions may also influence the market price of hydrocarbons.
• Activity in the Oil and Gas Industry is, to some degree, affected by fluctuations
in the market price of hydrocarbons: ActiVity tends to increase during periods of sustained high hydrocarbon prices. This is due to elevated production activity, as well as increased activity to bring reserves into production, and to explore for new hydrocarbon reserves; Activity tends to decline during periods of sustained low hydrocarbon prices. This is due to lower production activity, as well as temporarily reducing or shutting down production from reserves that are no longer commercially viable. Exploration activity tends to continue, however.
• There is a risk that sustained lower price of hydrocarbons will negatively affect activity in the Oil and Gas Industry, leading to lower demand for Supporting Products and Services.

De/eum Berhad 2/ Industry Assessment 357 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions Mitigating Factor • OPEC, a grouping that includes many of the world’s largest petroleum producing nations, has some influence on the price of hydrocarbons through their control of a sizable proportion of the world’s production capacity and reserves. Although the influence of OPEC over the market price of hydrocarbons is not absolute, OPEC has a vested interest in ensuring that hydrocarbon prices do not collapse, and as such are likely to actively attempt to sustain hydrocarbon prices at an ‘acceptable’ level. Downturn in Local and Global Economies • Any prolonged and/or widespread downturn in the global economy is likely to negatively affect the global demand for, and production of, hydrocarbons. This, in turn, is likely to negatively affect demand for Supporting Products and Services in Malaysia, as Oil and Gas Industry activity in Malaysia slows down.
Mitigating Factors
• A global economic slowdown may not automatically lead to a sustained fall in the market price for hydrocarbons, as the demand for hydrocarbons for power generation and transport tends to be relatively inelastic.
• The Malaysian Government has shown to have taken pro-active policies in mitigating negative impacts of global economic downturn through stimulus packages to boost domestic spending and demand in countering a slowdown in the local economy.

Dependency on Strategic Partners • Suppliers of Supporting Products and Services to the Oil and Gas Industry are dependent on their strategic partners to the extent that they rely on these partners for critical systems, components, services, or technology in the provision of Supporting Products and Services. Any disruption or break in the relationship with their strategic partners has a negative impact on their ability to supply Supporting Products and Services to their clients.
• Strategic partners may supply the following services, systems, equipment,
and raw materials: Gas turbine power generating packages; Support for gas turbine technical services; Offshore production platforms; Offshore drilling rigs; Seismic survey services; Oilfield and other chemicals, and related services.
• As the number of suitable strategic partners for the supply of most critical services, systems, equipment and raw materials is likely to be small, it may be difficult to source these items from an alternative source should a disruption occur.

Deleum Berhad 22 Industry Assessment 358 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions Mitigating Factors • The stability and robustness of strategic partnerships can be enhanced through equity participation through joint ventures.
• In addition, there should generally be a lower probability of disruption affecting long-standing strategic relationships.

Depletion of Hydrocarbon Resources • All hydrocarbon deposits are non-renewable, in that it is not possible to regenerate these hydrocarbons within a reasonable timeframe once they have been extracted. As such, Hydrocarbon resources in all Hydrocarbon producing regions, including Malaysia, will eventually be depleted.
• It is likely that demand for Supporting Products and Services in Malaysia will end soon after Oil and Gas Industry Exploration and Production activities ceases in Malaysia.

Mitigating Factors • The relatively long period of time before current reserves Crude Oil (including Condensates) in Malaysia are expected to be completely depleted enables Oil and Gas Industry operators, including fabricators of offshore platforms and skidded systems, to diversify into other industries and/or venture into overseas markets.
• The National Depletion Policy introduced in 1980 to safeguard the exploitation of the natural oil reserves by postponing development and control the production of major oil fields (with reserves of 400 million barrels or more) will also ensure that extraction is carefUlly managed and sustainable over the long term.
• Current reserve estimates tend to be conservative and may underestimate the actual amount of hydrocarbons that is Ultimately extracted, as they do not take into account the following:
the existence of currently undiscovered hydrocarbon reserves; technological advances that increases the amount of hydrocarbons that may be commercially extracted from existing reserves; technological advances that enable production from previously inaccessible regions.
• As such, activity in the Oil and Gas Industry in Malaysia may very well continue beyond the currently estimated date of complete Hydrocarbon Reserve depletion.

Deleum Berhad 23 Industry Assessment 359 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions Change in PETRONAS Policy • A fundamental change in PETRONAS policy with regards to regulating the Oil
and Gas Industry in Malaysia can take either one of two forms: Liberalisation of the Oil and Gas Industry; Nationalisation of the Oil and Gas Industry.
• PETRONAS may liberalise the Oil and Gas Industry by: Removing licensing requirements for the provision of all supporting products and services; Loosening licensing requirements such that it becomes easier to obtain a license; Allowing foreign suppliers to operate in Malaysia without restrictions and the need to operate with a local partner.
• Liberalising the Oil and Gas Industry in this manner will negatively impact incumbent operators by increasing competition in the industry.
• Nationalisation of the Oil and Gas Industry will prevent all private companies from operating in the Oil and Gas Industry in Malaysia.

Mitigating Factors • Malaysia as an open market and dependent on foreign investments would not likely nationalise any industry for fear of frightening off foreign investments.
• Currently, despite the restriction of licensing and registration, competition is intense. In the event of any liberalisation, existing operators would not be any worst off as they have been operating in a very competitive environment already.
• On the contrary, the liberalisation of the Oil and Gas Industry may provide benefits to existing operators as they may be able to enter new areas that leverage from their existing strengths and customer base.

1.19 THREAT OF SUBSTITUTES • There are limited practical substitutes for most of the Exploration and Production technologies, products and services. As such, Deleum Group faces limited threat of substitutes.
• One potential exception is in the use of Reciprocating Engines in place of Gas turbines for power generation on offshore production platforms.

Deleum Berhad 24 Industry Assessment 360 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions Reciprocating Engines • A Reciprocating Engine, also known as a piston engine, is a type of internal combustion engine that utilises one or more pistons to convert pressure into a rotating motion. A range of fuels can be used in Reciprocating engines, including gasoline, diesel fuel, oil or natural gas.
• A wide range of Reciprocating engines are currently in use, generating power in a wide range of applications. The more familiar reciprocating engine types include:
Petrol engines in passenger cars and motorcycles; Diesel engines in commercial vehicles, locomotives and ships; Diesel engines for electric power generation.

• Reciprocating engines are a potential substitute to gas turbine engines in power generating applications on offshore platforms in the Oil and Gas Industry. The advantages of Reciprocating engines over gas turbines generally include lower capital cost per unit of power output. Diesel engines may be cheaper to operate, due to their inherent fuel efficiency.

Mitigating Factors • The advantages of Gas turbine engines over Reciprocating engines include
the following: Gas turbines typically have a higher power to weight ratio compared to Reciprocating engines; The availability of Gas turbines is generally higher compared to Reciprocating engines. Lost production due to Reciprocating engine unavailability is a critical economic factor; The reliability of Gas turbines is generally higher compared to Reciprocating engines. Gas turbines operate with only the rotor rotating in a balanced mode. Reciprocating engines have many moving parts, which may cause vibration and metal fatigue due to the reciprocating motion of the pistons; Reciprocating engines generally produce more vibration than gas turbine engines of comparable power output due to the reciprocating motion of their pistons.
• An Offshore production platforms that houses a Reciprocating engines generally has to be more robust compared to one that houses a Gas turbine of comparable power to accommodate the greater weight, volume and vibration of a Reciprocating engine. As a result, any potential capital saving from purchasing a Reciprocating engine may be offset by the increased cost of fabricating the structure.

Deleum Berhad 25 Industry Assessment 361 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions 1.20 RELIANCE ON AND VULNERABILITY TO IMPORTS • The Supporting Products and Services for the Oil and Gas Industry in Malaysia is generally dependent on imported raw materials, systems and services,
• Raw materials, systems and services are imported for the following reasons: Certain items are not readily available from local sources. For example, Gas turbine packages, subsea production system and wellhead products, and drag reducing agent are not commonly manufactured in Malaysia. The manufacture of items such as these are highly specialised, and in some instances controlled by patents and other intellectual property rights. As a result, they are not commonly manufactured in Malaysia, Some of the items are specified by the customer, and as a result their source is predetermined.
• Local operators can mitigate their vulnerability to a disruption in imports by forming joint ventures, or by entering into exclusive distribution agreements with international suppliers, as these international suppliers will then have an interest in supporting their local partners.
• In addition, local operators who have long business relationships with international suppliers also mitigate against their vulnerability to a disruption in imports.

1.21 SUSTAINABILITY • The sustainability of the overall Oil and Gas Industry, particularly in the Exploration and Production sectors, is dependent on a large degree to the availability of Hydrocarbon Reserves in Malaysian territory. The sustainability of Local Supporting and Service Providers, particularly those that support the Exploration and Production sectors, is similarly dependent on a large degree to the availability of Hydrocarbon Reserves in Malaysian territory
• Over time, Hydrocarbon Reserves are depleted as hydrocarbons are extracted from hydrocarbon reserves. Hydrocarbon Reserves may increase with the discovery of commercially viable hydrocarbon reserves that were previously unknown.
• As at 1 January 2006, Malaysia’s Reserves of Crude Oil (Including Condensates) totalled 5.25 billion BOE. If these reserves were extracted at a constant rate equal to the Crude Oil (Including Condensate) production rate recorded in 2006, production is projected to continue for 20 years.
• As at 1 January 2006, Malaysia’s Reserves of Natural Gas totalled 14,66 billion BOE. At the current daily rate of Natural Gas production, production in Malaysia is projected to continue for 34 years.

Deleum Berhad 26 Industry Assessment 362 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • During the year ended 31 March 2006, a total of 645.3 million BOE of Crude Oil (Including Condensates) and Natural Gas were discovered in Malaysia. Deepwater discoveries accounted for nearly 60% of these discoveries (Source’ PETRONAS). 1.22 CRITICAL SUCCESS FACTORS • The critical success factors for manufactures in the Oil and Gas Industry, including among Supporting Product and Service Providers are as follows: PETRONAS Licensing and Registration: Companies wishing to participate in the Oil and Gas Industry in Malaysia are required to obtain PETRONAS licenses, or to be successfully registered with PETRONAS, as providers of specified products and services. The possession of these licenses or registrations is a fundamental requirement for direct entry and participation. Track Record: The possession of an established track record is a key advantage when submitting tenders or proposals for contracts. This is particularly true for Supporting Product and Service Providers. Quality of Product and Services: Operators who are able to offer proof of quality through formal quality accreditation are able to offer comfort to their clients. Financial Stability: Supporting Product and Service Providers who are in a healthy financial position are more likely to retain and attract new customers. Potential customers would emphasise financial stability as a key criterion in the evaluation of a prospective operators as they would not want any disruption in the supply of products and services, particularly in a long-term contract. A financially strong provider would be in a better position to upgrade its product and service range, if necessary, to keep abreast with technology, or to meet future demand for increased supply of products and services. Operators without sufficient cash flow or reserves would run into possible supply problems. Access to Technology: In instances where operators do not develop their own technology, they may have to rely of partners or third parties for access to technology. Having an established network with major Oil and Gas Industry operators both locally and internationally who are able to provide this is one of the success factors. Strategic Partnerships: The ability to develop and sustain strategic partnerships is a critical success factor for operators who do not possess the internal resources necessary for the provision of a particular supporting service or product. Deleum Berhad 27 Industry Assessment 363 11. EXECUTIVE SUMMARY OF THE INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cant’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions 1.23 MARKET SIZE OF DOMESTIC DEMAND FOR GAS TURBINES • Malaysia does not manufacture Gas Turbine. Malaysia relies exclusively on imports for its Gas Turbines. Thus, apparent consumption is used as a proxy for the local market size for Gas Turbines of all sizes.
• In 2006, the market size for Gas Turbines of all sizes based on apparent consumption was estimated at RM250 million (Source: Department of Statistics).

Vital Factor Consulting Sdn Bhd has prepared this report in an independent and objective manner and has taken all reasonable consideration and care to ensure the accuracy and completeness of the report. It is our opinion that the report represents a true and fair assessment of the industry within the limitations of, among others, secondary statistics and information, and primary market research. Our assessment is for the overall industry and may not necessarily reflect the individual performance of any company. We do not take any responsibilities for the decisions or actions of readers of this document. This report should not be taken as a recommendation to buy or not to buy the shares of any company. Yours sincerely
Managing Director Vital Factor Consulting Sdn Bhd Deleum Berhad 28 Industry Assessment 364

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