Industry Overview

Frost & Sullivan (M) Sdn. 8hd. ,,,,,”,WI  Frost & Sullivan (M) Sdn. 8hd. ,,,,,”,WI  FRO S  T  &  SULLIVAN  Suite E-08-15, Block E, Plaza Mont’ Klara 2, Jalan Kiara, Mont’ Klara,  50480 Kuala Lumpur  Tel: 603 6204 5800 Fax: 603 62017402  10 JUN 2004  To:
The Board of Directors Perisai Petroleum Teknologi Bhd Lot No.9, Jalan PIlS Kawasan Perindustrian MIEL Fasa 4, Seksyen 10 Bandar Baru Bangi 43680 Selangor Re: Independent Market Consultant Report on the Malaysia Atmospheric Corrosion Control Market This market research report is prepared for inclusion In the prospectus of Perisai Petroleum Teknologi Bhd to be dated 16th June, 2004 in relation to its listing on the Mesdaq Markel in Bursa Malaysia. This research is undertaken with the purpose of providing an analysis of the market position of Perisai Petroleum Teknologi Bhd within the petroleum industry in Malaysia. The report prOVIdes a special focus on the particular segment of the industry that Perisai Petroleum Teknologi Bhd is operating in, The market research report was undertaken through both primary and secondary sources. Interviews were conducted with Pelronas, the national oil company, to ascertain the Vendor Development Program (VDP) status ofPerisai Petroleum Teknologi Bhd. Secondary research includes a review of the in-house database of Frost and Sullivan, the Eighth Malaysia Plan 2001-2005, the Third Outline Perspective Plan 2001-2010, the Malaysia International Trade and Industry Report 2002, Bank Negara Malaysia Annual Report 2003 and others. The research was completed in January 2004, with some updates done in April 2004. Findings in this study may be used in the listing prospectus with consent from Frost and Sullivan. Yours faithfully For and behalf of F’~~(M) SooBhd SANJAY SINGH DIRECTOR INDUSTRIAL TECHNOLOGIES, ASIA PACTFTC New York Sflicon Valley Toronto San Anronio London Frankfurt Paris Oxford Tokyo Mumbai Chennaf Singapore Kuala Lumpur Beijing Shanghai Sydney
Strategic Insight of the Malaysia Atmospheric Corrosion Control Market
April 2004
© 2004 Frost & Sullivan The market research process for this srudy has been undertaken through detailed primary research which involves discussing the status of the industry with leading industry participants and industry experts, The methodology used is the Expert Opinion Consensus Methodology. Quantitative market information is based primarily on such interviews and therefore could be subject to fluctuation. The market research was completed in January 2004, with some updates done in April 2004. Frost & Sullivan reports are for our customersl internal use and not for general publication or disclosure to third parties. No part of this report may be given, lent, resold, OT disclosed to non-customers without wriLLen permission. Furthermore, no part may be reproduced. stored in a retrieval system, or transmitted in any form or by an)’ means, e[ectronic. mechanical, photocopying, recording, or otherwise, without the perntissioLl of the publisher. for information regarding permission, write:

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CHAPTER 1 EXECUTIVE SUMMARY Global Economy 1-1 Malaysian Economy 1-2 Dependence on Other Industries 1-3 Overview of lhe Petroleum Industry in Malaysia 1-3 Market Dynamics 1-4 Relevant Laws and RegulatioJls 1-4 Overview of the Petroleum Industry in Brunei 1-5 Overview of the Petroleum Industry in Indonesia 1-5 Substitute Products 1-6 Industry Reliance and VullU!rability to Imports 1-6 Industry Outlook 1-7 CHAPTER 2 STRATEGIC ANALYSIS OF THE MALAYSIA ATMOSPHERIC CORROSION CONTROL MARKET Market Overview 2-1 Product Deftnition 2-3 Market Engineering Measurement Analysis 2-5 Identification a/Challenges Facing thl! Malaysian Atmospheric Corrosion Control Market 2-5
Market Drivers 2-7 Market Restraints 2-10
Revenue Forecasts 2-11 Competitive Structure 2-15 © 2004 Frost & Sullivan Confidential to Pcrisai Petroleum Teknologi Bhd
Pricing Trends Market Trends

Substitute Products Technology Trends
Dist,ibution Channels Ease ofEntory and Exit Capital Intensity Environmental Issues Trade Restrictions, Political and Economic Factors SWOT Analysis Diversification into New Products Overview of the Petroleum Industry in Brunei Overview of tile Petroleum Industry in Indonesia CHAPTER 3 Research Methodology Ovemiew Strafeg;c Significance of the IvIarket Engineering Forecast Judging Credibility and Accuracy ofMarket Engineering Forecasts 2-16 2-17 2-18 2-20 2-20 2-21 2-21 2-21 2-21 2-22 2-23 2-24 2-26 3-1 3-3 3-4
iO 2004 Frost & Sullivan Confidential to Perisai Petroleum Tcknologi Bhd 1

Executive Summary Global Economy Macroeconomic stimuli, inventory dynamics and a stronger turnaround in the high technology markets are expected to set the stage for a wider recovery through the traditional channels of international transmission. With global trade steadily increasing, and interest rates at historically low levels, the global economy is poised for a gradual recovery. Lower interest rates helped keep the consumers’ demand for durable products strong. Together with fiscal easing, that demand should provide support for an economic rebound in the US, and to a lesser extent in some Asian and European countries. The recovery in the global markets is shaped primarily by the developments in the industrial countries. Corporate spending on IT investments in the US, Euro Area and Japan picked up towards the end of 2003, putting on the momentum for further global recovery in 2004. Therefore, both the world economy and global trade are anticipated to improve, moving forward into 2005. Uncertainties, especially geopolitical ones, are keeping investors cautious, throughout most parts of the world. In the developing countries, investment behavior has become a key clement of the outlook. They are especially vulnerable to jitters in the financial markets. Sudden reversals in capital flows can dampen investments sharply and weaken the growth momentum. Hence, countries with strong policies in place are more likely to avoid or smoothly absorb external financial shocks. The downside risks to the forecasts include the emergence of other flash points in the Middle East, terrorist reprisals, the US economy slows down markedly, the US dollar declines too sharply and the further weakening of the Japanese economy. A weakened US dollar would translate into slower demand for imported goods into the US, with repercussions for the Asian export-oriented economics. Japan remains an important trading partner and a source of capital for many of the neighboring Asian countries, not withstanding its prolonged economic weakness. Hence, its economic performance has a direct effect on its neighbors. lO 2004 Frost & Sullivan Confidential to Perisai Petroleum Tcknologi Bhd 1-1 Malaysian Economy Malaysia’s economy expanded at 5,2 percent in 2003, with fiscal stimulus and low interest rates generating multiplier effects in the real economy. Increased intra-trade activities between China and Malaysia might also provide a relief from the weak market in the United States. As the rate of capacity utilization increases in the manufacturing sector and the inventory levels decreased, more manufacturing activities are expected, including increasing employment as well as both better conSumer sentiments and business confidence. This would all translate into a more vigorous economy. Since the Asian financial crisis, the government has been relying on a fiscal pump-priming policy to boost domestic demand, aimed at preventing recession and keeping unemployment down, in the wake of both volatility and uncertainty in the global economy. Assuming that the global economic recovery takes place gradually, fiscal pump-priming is projected to remain a tool in the hands of the government to boost consumption demand, and to a lesser extent, both physical investment and construction activities in 2004. As an indication of the continuation of this trend, another fiscal stimulus amounting to RM7.3 billion was announced in 2003, to counter the negative effects of both the Second Persian Gulf War and the Severe Acute Respiratory Syndrome (SARS). Hence, the government has been faced with a fiscal deficit anuually as it tries to pump in more money into the economy with fisca1 stimulus packages. Fiscal expansion has further led to increased fiscal deficit and debt accumulation. The fiscal deficit, expressed as a percentage of the GDP, was recorded at 1.8 percent in 1998 and 3.2 percent in 1999, and subsequently, increased significantly to 5,8 percent in 2000, 5.5 percent in 2001, 5.6 percent in 2002 and 5.3 percent in 2003. These figures are much higher than the situation prevailing in the other economies in the region affected by the crisis. with the exception of the Philippines. The government plans to balance the budget by 2005 through a combination of containing growth in operating expenditures and scaling back non-core development projects. The central bank is likely to continue its accommodative monetary policy to support consumer spending over the next 2 years. The economy. which has been dependent on domestic demand over the last several years, is likely to see external demand playing an increasing important role in 2004 and 2005, since the industrial countries’ economies are likely to expand further than in 2003. Therefore, the Malaysia’s economic growth in 2004 and 2005 should be more balanced with significant shares coming from consumption. investment and exports. Private consumption should also be boosted by rising disposal incomes, continued accommodative monetary and fiscal policies, and improving consumer confidence. Cl2004 Frost & Sullivan Confidential to Perisai Petroleum Tcknologi Bhd Several downside risks are present that may adversely impact the economy and undermine the above projections. They include further delays in the recovery of both the US and Japanese economies. delayed corporate spending and the consequent demand for electronics products. Dependence on Other Industries The market for atmospheric corrosion control products is dependent on both the upstream sector (offshore platforms) and downstream sector (onshore pipelines. refinery installations and petrochemical complexes). Due to the increasing competition from China in the non­resource based manufacturing industries, the government is keen to promote the development of the resource-based industries like petroleum. The move into deep water exploration and production activities is expected to boost the petroleum industry. Due to the maturing of existing petroleum fields, deep water exploration is viewed as the final frontier of the petroleum industry. Together with technological advances in seismic-imaging techniques and more powerful computers, the petroleum industry is expected to be the main source of power for an increasingLy energy-deficient world over the next few decades. To ensure more value added economic activities are being churned out in the economy. the petroleum industry in Malaysia has ventured downstream into refining and the manufacturing of petrochemicals. Today, there are around 5 refineries and 25 petrochemical plants in the country. They are also a potential market for atmospheric corrosion control products, as they are located near to the coastal areas. Due to both costs and structural strengths. metallic structures are widely used in the petroleum industry. Being mostly carbon steel, they are particularly susceptible to corrosion. Hence, the necessity for the installation of atmospheric corrosion control products, which in return would lead to less downtime and more safety at the production sites. Merchant marine ships are another group of end-users. Increasing trading activities due to the globalization process is projected to spur the globaL merchant marine fleets. Obviously. any buildings or structures with exposed carbon steel that are located in the maritime or coastal areas are subjected to the natural atmospheric corrosion processes. Overview of the Petroleum Industry in Malaysia The word “petroleum” comprises both crude oil and natural gas. As at January 2003. Malaysia has about 3.2 billion barrels of crude oil reserves and approximately 2.5 trillion cubic meters of gas reserves. In terms of positioning. Malaysia has the 27th largest crude oil ~ 2004 Frost &. Sullivan Confidential to Perisai Petroleum TeknoLogi Bhd reserves and 12th largest natural gas reserves in the world. In 2002, daily production of crude oil and natural gas amounted to 698,000 barrels and 131.7 million cubic meters, respectively. At the current pace of production, the reserves of crude oil and natural gas are expected to last for around 13 years and 54 years, respectively. The importance of the petroleum industry can be seen from the fact it contributes mOre than 9 percentage points to the country’s GOP. Ongoing and future production projects in the upstream sector in Malaysia are expected to amount to RMll.2 billion through 2005. In South-East Asia, ongoing and future pipeline projects are projected at approximately RM18.6 billion through 2009. Market Dynamics The market size for atmospheric corrosion control products was estimated at approximately RM120 million in Malaysia in 2002. It is projected to expand to about RM201.2 million in 2008, yielding a compounded annual growth rate (CAGR) of 8.9 percent during the forecast period. The figure includes the instanation or service component of conlracts, in addition to the hardware. TypicaUy, the installation or service component accounts for around 40 percent of the contract, as they require specialized skills and technical expertise that the petroleum companies are not able to provide in the first place. Corro-Shield (M) Sdn Bhd (“Corro-Shield”) is the only supplier of atmospheric corrosion control products to the petroleum industry in Malaysia, being appointed as a vendor under Petronas’ Vendor Development program. The nearest product alternative to Corro-Shield’s range of atmospheric corrosion control products are paints and coatings. In this context, Corro-Shield registered a market share of about 9 percent in the atmospheric corrosion control market in 2002. The remaining 91 percent was accounted by the various paints and
coatings companies. Relevant Laws and Regulations Petronas was incorporated in 1974 as the country’s national petroleum company to develop the nation’s petroleum resources, the ownership of which has been vested in the company by the Petroleum Development Act 1974, and to participate in the refining, manufacturing and marketing of petroleum products as provided under the same Act. The monopolistic status in the upstream operation, based on the same Act, is expected to remain in the foreseeable future. As the sole shareholder, the government controls the approval of all corporate matters under the Malaysian Companies Act, including the approval of dividends and the appointment of directors. Also, the same Act stipulates that the company is subject to the (l 2004 Frost &: Sullivan Confidential to PeTisai Petroleum Tcknologi Bhd control and direction of the Prime Minister, making the company’s management potentially affected by government policies. However, the government has provided the company with adequate latitude to manage itself based on commercial principles and will likely be the same for the foreseeable future. Both the operators and contractors, as well as their subcontractors, are subject to the Occupational Safety and Health Act, 1984. This Act is enforced by the Department of Occupational Safety and Health (DaSH), a department under the Ministry of Human Resources. Under this Act, employers have the duty to ensure, as far as practicable, the safety, health and welfare at work of all his employees. This includes the provision of plant and systems of work that are, 50 far as is practicable, safe and without risks to health. Both safety and absence of risks to health in connection with the use or operation, handling, storage and transport of plant and substances must be present. The employers must also ensure the provision of such information, training and supervision as is necessary to ensure, as far as is practicable, the safety and health at work of his employees. Overview of the Petroleum Industry in Brunei The economy of Brunei is heavily dependent on the petroleum industry. It generates between 75 percent and 90 percent of the government’s revenues and accounts for slightly more than 50 percent of the GDP. Reserves of crude oil and natural gas were estimated to be around 1.35 billion barrels and 391 billion cubic meters, respectively in 2002. In the same year, daily output amounted to 197,300 barrels of crude oil and condensates, and 30 million cubic meters of natural gas. The petroleum industry in Brunei is also venturing into deep water exploration activities, due to the maturing of existing fields. In an effort to create more value added products, the Brunei government is also encouraging the development of large­scale petrochemical projects, to take advantage of the huge natural gas reserves in the country. Overview of the Petroleum Industry in Indonesia In 2002, Indonesia has crude oil reserves and natural gas reserves of around 5 billion barrels and 2.6 trillion cubic meters, respectively. Daily production amounted to about 1.25 million barrels of crude oil and 86.1 million cubic meters of natural gas in 2002. Inspite of its huge petroleum reserves due to its geological factor endowments, Indonesia is viewed as being beleaguered by issues of regulatory enforcement, taxation, labor disputes, political stability, native land claims and forced socio-economic contributions outside the regular taxes. In Q 2004 Frost & Sullivan Confidential to Perisai Petroleum Teknologi Bhd addition, Indonesian waters suffer the dubious reputation of being subject to the highest number of piracy incidents, as reported by the International Maritime Bureau. This affects the passage of merchant ships through Indonesian waters, and ultimately, docking at Indonesian ports that have the potential to generate the demand for atmospheric corrosion control products, Utrough maintenance and repair. Substitute Products There are many atmospheric corrosion control methods available and they include protective coatings, corrosion-resistant metals and alloys, corrosion inhibitors, polymers and anodic and cathodic protection. Protective coatings comprise galvanizing and metallizing. Stainless steel, nickel-based alloys and titanium alloys are also used for corrosion control purposes. Paints and coatings are the most common form of corrosion control substitute. However, they are more suitable for short-term remedial purposes, due to the hostile marine or near-marine environment, with saltwater being the main corrosive agent. Some substitutes require the suspension or shutting down of production during the remedial or repair phase. This translates into expensive downtime, as the petroleum operators are obliged to produce a certain quantity of petroleum per day. The selection of a particular technique of corrosion control is a function of a number of factors, like the intended service, application, planned service life and cost. Industry Reliance and Vulnerability to Imports Most of the global suppliers of atmospheric corrosion protection products are either European or American companies. However. Corro-Shield, being a Bumiputera company, is given priority in the petroleum industry by Petronas in its Vendor Development Program, as part of the government’s efforts to build and develop a strong indigenous business community. In this context, the company is working closely with Petronas Research and Scientific Services to jointly develop and patent several products globally, in the field of atmospheric corrosion control. Imports or foreign sources of atmospheric corrosion control products from the United States and Europe are much more expensive. Hence, Corro-Shield has a strong position in the atmospheric corrosion control market in Malaysia. <02004 Frost & Sullivan Confidential to Perisai Peaoleum Teknotogi Bhd Industry Outlook Both economic development and industrialization in Asia will fuel the need for morc cnergy over the few decades. Globally, the demand for crude oil is expected to increase by abou t 60 percent over the next 25 years, with Asia leading the way. By 2020, Asia is projected to be the largest net importer of oil, with the demand for gas exceeding the demand for crude oil as well. With increasing iTading iTansactions as globalization takes hold, there is also a need for more shipping activities. This presents opportunities for the supporting and ancillary industries, including atmospheric corrosion control products. Although controlling atmospheric corrosion requires significant expenditures, the payoff includes increased public safety, reliable performance, maximized asset life, environmental protection and more cost-effective operations in the long run. Corro-Shield has a monopolistic advantage in the petroleum industry in Malaysia by virtue of its appointment as a supplier under the Petronas’ Vendor Development Program. Being the only company in Malaysia ablc to proVide a wide range of atmospheric corrosion control products, it faces virtually nil competition, except from the paints and coating companies, which are not direct competitors in the strictest sense of the word. It has the technical expertise, product quality, pricing, turnaround time and support facilities to meet the requirements of the petroleum industry in Malaysia. Also, by using Corro-Shield’s range or products, a petroleum operator does not need to face production downtime. Hence, Corro-Shield is able to meet the challenge of having to deal with the high bargaining power of petroleum multinationals like Petronas. As Corro-Shield’s products are concerned with atmospheric corrosion control, they do not involve much chemicals, if at all, in their formulation. Therefore, its range of products is not subjected to stringent environmental regulations. Over the long term, the strategies for Corro-Shield’s expansion is to come up with more innovative products that can compete in the market based on both price and quality, as well as turnaround time. With the VDP program implemented by Petronas, Corro-Shield is expected to maintain, or even increase its market share in Malaysia. If Corro­Shield is able to meet the technical requirements of the upstream sector, then it is able to leverage its strength to venture into the still untested market of the downstream sector of the petroleum industry. ~ 2004 Frost & Sullivan Confidential to Perisai Petroleum Tcknologi Bhd 2
Strategic Analysis of the Malaysia Atmospheric Corrosion Control Market Market Overview The global petroleum industry contains some of the world’s largest companies and influences many of the world’s significant geopolitical developments. The word Upetroleum” refers to both crude oil and natural gas. The International Energy Agency (lEA) forecasts that global production of crude oil must rise from the present level of less than 80 million barrels a day to around 115 million barrels a day by 2020 if expected demand is to be met, representing a compounded average annual growth (CAGR) rate of 2.2 percent. This requires an investment of around RM3.8 trillion (in today’s money) upstream over the next decade. much of it on technology. The desire for atmospheric corrosion control (external corrosion), particularly in industrial applications, is well known and the global market for corrosion preventive products is estimated at around R1vf76 billion. l\1etatlic structures are widely used in the petroleum industry. These metals, particularly carbon steel, will corrode in the absence of a coating. resulting in a reduction of the service life of the steel component part. Corrosion is a naturally occurring phenomenonr defined as the deterioration of a substance, usually metal, or its properties, due to the reaction with the environment. Coastal or marine areas are particularly susceptible to corrosion, due to the saltwater environment. In the global petroleum offshore platform market alone. the demand is projected conservatively at RM5.9 billion, based on the estimated 5,848 platforms in the world. In Malaysi8r the market for atmospheric corrosion control products was estimated at around RM120 million (US$31.6 million) in 2002. This represented about 0.02 percent of the nominal GOP of l\.1aLaysia in the same year. 1n Brunei and lndonesla, the Inarket is estimated at around US$10 million (R!\.138 million) each, in the same year. These atmospheric corrosion control products assist in the life cycle cost of a system. Otherwise, normal corrosion processes may cause premature failure of a piece of the equipment, leading to expensive downtime. Malaysia has around 500,000 square kilometers of acreage available for petroleum exploration, of which 205,500 (41.1 percent) are currently covered under the terms of the production sharing contracts (PSC). Supported by the monopolistic and privileged status in the upstream sector, Petronas entered into the PSCs under advantageous terms and conditions for the company. The PSCs are normally undertaken with a number of petroleum nluJtinationals and each contract obligates the contractor to provide all the financing and bear all the risks of exploration, development and production activities, in exchange for a share of the total production. Out of the 123 oil fields discovered, there are 47 producing oil fields currently. The production of crude oil and condensates increased by 4.9 percent to an average of around 698,000 barrels per day in 2002. Out of the 218 gas fields discovered. the 14 producing gas fields were producing approximately 131.7 million cubic meters per day in 2002. Several more gas fields are under development. ln 2002, the country exported 16.2 million tons of crude oil, an increase of 7.4 percent over the previous year. In the case of liquefied natural gas, exports decreased slightly by 2.7 percent to reach 15 million tons in 2002. The natural gas production from the gas fields offshore Terengganu is delivered to the gas processing plants in Kerteh. Subsequently, the processed natural gas is then delivered by pipeline as fuel to the end-users, which include households, manufacturers and power companies, as well as feedstock to petrochemical, anlrnonia and urea plants in the peninsula. Meanwhile, the natural gas production from the offshore gas fields in Sabah is transported to the processing plant on Labuan island, and subsequently to the methanol plant as feedstock and the direct reduced iron (DRI) plant as fuel. Lastly, natural gas production from the gas fields offshore Sarawak is channeled to the 3 liquefied natural gas plants as well as the ammonia and urea plants in Bintu)u, Sarawak. As at January 2003, Malaysia has about 3.2 billion barrels of crude oil reserves and about 2.5 triHion cubic meters of gas reserves. Under the current pace of development and production rate, the crude oil and natural gas are expected to last for approximately 13 years and 54 years, respectively. Of course, with more successful efforts in exploration activities, the reserves might rise in the future. Of the natural gas reserves, about 50 percent was located offshore Sarawak, 41 percent offshore east coast peninsula 1vlalaysia and the remaining 9 percent offshore Sabah. In July 2002, Murphy Oil Corporation, an independent contractor working for Petronas struck crude oil in 1,340 meters of water 150 kilometers in the Baram Delta off the coast of Sabah. The field has an estimated recoverable reserve of up to 700 million barrels, or nearly 21 percent of the country’s current crude oil reserves. The country has the 12th largest gas reserves and 27th largest crude oit reserves in the world. The importance of the petroleum industry is illustrated by the fact that although it contributes about 9.4 percent to the country’s GOP, the value added is six times as large as that of the electronics industry. Every additional RMS billion in investment in the petroleum industry can potentially add 100 basis points to the GOP growth. In addition, higher crude oil prices should provide more leeway to the government when it is adopting expansionary fiscal stimulus to strengthen the economic recovery. The petroleum. industry generates around Rrv115.4 billion in revenues to the government, in the form of taxes and dividends. Product Definition Corro-Shield is involved in the manufacturing, marketing and installation of atmospheric corrosion control products to the petroleum industry. Its range of products are as follows: » Nuts and bolts protection: Nuts and bolts are prone to corrosion due to the crevices in between. In addition, they are also subjected to both galvanic and stress cracking. The CorroCaps .re from silicon, which is a synthetic rubber. They are made with a unique one-way valve system, which essentially insulates the exposed products from the harmful effects of the corrosive environment by enclosing it within a near-vacuum environment. y Flange protection: Many crevices and annular spaces exist in the body of the flange and at the sealing faces. They suffer from mechanical damage during assembly, besides being difficult to coat. The FlangeShield system employs a non-toxic and a non-flammable rust-converting compound, which is injected to temporarily fill in the void spaces. The material is heated so as to lower its viscosity, allowing it to penetrate all crevices. There are no volatile organic compounds (Vae) present in the system. ~ Pipe support systems: Corrosion at the crevices is common at pipe supports, leading to external failures and prem.ture paint failure on piping systems. The fibaroll is now employed to prOVide protection in these areas, by helping to eliminate the crevices and keep off the water. » Pipe protection .nd leak containment systems: Fibaroll is a unique form of fibre-reinforced plastic (FRP) and it provides a seamless solution for pipe protection. It can be applied to any surface. On steel piping, it is resistant to abrasion, high temperatures and corrosion. It also allows easy visual and non-destructive testing (KDT) of the condition of the pipe. It has also been tested and is proven to provide leak containment and to strengthen the pipes. > Riser clamp protection: Besides using both ConoCaps and FlangeSmeld systems. the surrounding areas are protected by application with Corro-Cill;n. It is a specially blended formulation of waxes containing organic corrosion inhibitors and agents for long-term cavity protection. No heating or disposal is needed as the product dries to an almost transparent film. ~ Protective insulation system: Completely non-flanunable, perlite insulations arc widely used as insulation materials for heated equipment, vessels and piping. They have a high ratio of sodium silicate to chloride ratio. As sodium silicate is a corrosion-inhibitor, it limits the corrosive effects of soluble chlorides, and the entry of soluble chloride into the system. Thus, it assist to avoid unnecessary shutdowns and loss of production hours at refineries, petrochemical plants and power plants caused by the corrosion of pipingJ fittings and vessels. Perlite insula.tions come in the form of pipe covers and boards and they consist of expanded perlite powder bound together by a.n inorganic binder and reinforcing fibre. )-Permanent sleeve repair This consists of one, or several mating sleeve sections, which are welded or bolted together around the corroded or damaged pipe area. The sleeve is fabricated to allow an annulus between the original pipe and the sleeve. After preparation of the existing pipe, welding or bolting the sleeve section into position, and pressure testing; a specially formulated epoxy resin is injected into the annulus. By completely integrating the sleeve and the existing pipe, the epoxy prOVides an additional structural reinforcement. To arrest specific external corrosion, a range of epoxy fornlulas and annular space combinations can be used. Subsequently when cured, the external steel sleeve, epoxy and riser pipe act as a composite section. The sleeve isolates the riser, thus preventing further external corrosion. ) Marine growth removal and prevention: Powered solely by natural ocean forces and their own buoyancy, the impactors and protectors assist to maintain the surface free of marine growth and colonisation. Organisms like anemones, hydroids and sponges are denied an environment of nutrients in which to breed and develop, resulting in a zero-growth surface finish. This is particularly critical in the splash zone areas as cathodic protection systems are ineffective. The impactors are deployed temporarily to remove the marine growth and the protectors are subsequently installed to prevent the formation of microbial slime, which is the food source for marine organisms, by the continuous rubbing action on the pile. if) 2004 Prost & Sulliviln Confidential to Peris<‘Ii Petroleum T~knologi I3hd Market Engineering Measurement Analysis Chart 2.1 Atmospheric Corrosion Control Products: Market Engineering Measurements (Malaysia), 2002
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Identification of Challenges Facing the Malaysian Atmospheric Corrosive Control Market The first phase of the Market Engineering system is to identify the key challenges facing the industry. These challenges have an impact and are integrated into every phase of the Market Engineering system. An industry challenge is any issue that can affect the development of the market or the competitors in the marketplace. Challenges include customer issues, regulatory programs, economic trends, market measurement trends, competitive strategies. new technologies, sales and marketing strategies, new market opportunities and market threats. [n the analysis of the challenges to the industry. the lime frame is important. Each challenge varies depending on the time frame tha t is likely to see the highest impact on the market. This time frame analysis dlrectly affects the market forecasts and the development of market strategies and investment timing by industry participants. Figure 2-1 presents the challenges ranked in order of impact for the Malaysian Atmospheric Corrosion Control market between 2002 and 2008. Figure 2-1 Atmospheric Corrosion Control Market: Market Challenges Ranked in Order of Impact (Malaysia). 2002-2008 Rank Challenge 2003-2005 21JO(;.200s ffigh Bargaining Power of Buyers High High Increasingly SlIingent Environmental Regulations Medium High Source: Frost 8: Sullivan High Bargaining Power of Buyers In tandem with the widespread mergers and acquisitions taking place in the world, many petroleum companies are also merging so as to achieve economies of scale. FOT example. both Exxon and Mobil merged to become ExxonMobii in 1998. The net effect is that there are fewer petroleum companies in the scene, which lead to a higher bargai.ning power on their part. This factor applies particularly when the purchases are conducted in large volumes and the supporting and ancillary companies are single customer-oriented. In general, the less product differentiation there is, the more bargaining power the buyers possess. This is due to the fact that only price differentiation exists among the products in the market, which can be obtained off-the-shelve like a commodity. The impact of this factor is anticipated to remain high during the forecast period. Increasingly Stringent Environmental Regulations In Line with increasing environmental awareness in the industrialized countries. and cou pled with the fact that most of the foreign petroleum multinationals originated from these countries, there is the trend towards more environmental awareness among the petroleum companies in Malaysia. In general, these petroleum companies want to be seen as responsible corporate citizens. Both reasonable precautions and care are taken to mitigate the adverse impacts their business operations may have on the environnlent. Environmentally-friend’y products are used which are in accordance with the approprlate industry standards and best practices, so as to conserve and preserve the environment. The ripple effects of these environmental regulations are also transmitted to the supporting and ancillary companies in the supply chain. with some effects felt in the production costs. The impact of this factor is projected to increase in the future, in consonant with rising environmental awareness. Market Drivers Market drivers are factors that are stimulating growth in the market, and which increase sales and revenues for atmospheric corrosion control products. Figure 2-2 presents the market drivers ranked in order of impact for the Malaysian ahnospheric corrosion control market. Figure 2-2 Atmospheric Corrosion Control Market: Market Drivers Ranked in Order of Impact (Malaysia). 2003-2008 Rank Driver 200:>-2005 200&-2008 1  Technological Auvances Stimulate Exploration and Production  Medium  High  Activities  2  Expansion of Downstream Gas Activities Spur Demand  Medium  High  3  Development uf Petrochemical Industry Stimulates Demand  Medium  Medium  4  Promotion of Shipbuilding Industry Encourages Demand  Medium  Medium
Source: Frost & Sullivan Technological Advances Stimuiate Exploration and Production Activities The hydrocarbon potential of the Baram Delta has long been seen a promising. but the cost of deep-water prospecting repelled most potential investors. The recent discovery could bring about more deep water exploration and production activities in both Malaysia and Asia as a whole. Deep water exploration is the final frontier of the petroleum industry, with the maturing of existing perroleum fields. Over the past few years, there have been dramatic changes in technology that greatly reduces the cost of accessing a molecule of petroleum. Both ultra-deep platforms and next generation seismic-imaging tedmiques allow reservoirs to be visualized on a screen in minutes rather than the months it would have taken a few years ago. The arrival of three dimension seismic imaging in the late eighties and nineties helped transformed the petroleum industry. By assisting to make sense of what is going on inside the rocks underground, this has made the process of finding petroleum much less of a hit-and­miss affair. However, there is still room for further improvement. Another potential technological advance lies in the development of smarter drill bits that encase sensors capable of measuring conditions in the surrounding rocks. They act as the eyes and ears for the driller, by looking far ahead of the drill bit and communicating to the operator in real time. Thanks largely to technological advances, the average finding and development cost of crude oil has fallen to a third of the RM76 a barrel it was 2 decades ago. Meanwhile. the average extraction cost has fallen by half, to less than RM15 a barrel, © 2004 Frost & Sullivan Confidential to Perisai Petroleum Teknologi Bhd 185 The average recovery rate for an oil field remains at between 30 percent and 35 percent. In other words, of all the crude oil proven to exist in a given reservoir, petroleum companies typically get only about a third to the market. The key is not simply to coax more crude oil from the oil-bearing rocks of a reservo1r, but also to tap smaller fields nearby that were previously uneconomic, by using tools such as multi-directional wells. As a harbinger of things to come, the use of chemicals pumped down the wells under high pressure could enhance the fracturing of low permeability rocks and thereby increasing the production, In addition. installing compressors at the bottom of the wells could help to stave off the decline in reservoir pressure over a period of time, and so boost petroleum recovery. Hence, the arrival of sequential technological advances in three broad areas should collectively add up to im.proved recovery rates and lower extraction costs. This includes better visualization of reservoirs, better placement and drilling and bettcr management once the wells are in production. Needless to say, the longer the reservoirs arc producing petroleum, the longer are the platforms and associated facilities are needed, and the more corrosion control measures are needed. The impact of this factor is projected to increase during the forecast period. Expansion of Downstream Gas Activities Spur Demand Currently, Malaysia is the third largest exporter of liquefied natural gas (LNG), after Indonesia and Algeria. There are three LNG plants in operation in Bintulu, Sarawak. The first LNG plant came on-stream in 1983. the second one in 1996 and the third one in 2003. The natural gas comes from the offshore fields in Sarawak. Collectively, the 3 plants make the Bintulu LNC complex the world’s largest LNC production center with a combined capacity of 23 million metric tons per annum. Besides the LNG plants, other gas projects include the Peninsula Gas Utilisation (PGU) project in west Malaysia, gas supply to the western coast of Sabah and the Trans-Thailand-Malaysia Cas Pipeline System. Under the Trans-Thailand-Malaysia Gas Pipeline System, gas will be transported from the Malaysia-Thai loint Development Area (JDA) to the Peninsula Gas Utilisation pipeline at Changlun, Kedah. This linkage is expected to make a mark a major step towards realizing the trans-ASEAN Gas Grid project. Petronas also owns and operates two of the five refineries in Malaysia, producing about a quarter million barrels per day. Due to constant exposure to the weathering agents, these gas facilities also need corrosion control products and the impact of this factor is projected to increase towards the end of the forecast period. Development of Petrochemical Industry Stimulates Demand To date, integrated petrochemical complexes have been established in Cebeng (Pahang), Kerteh (Terengganu) and Tanjung Langsat (Johore) in the country. Collectively, there are 25 petrochemical projects located in the three petrochemical complexes. To achieve self­© 2004 Frost« Sullivan Confidential to Pcrisai Petroleum Tekn{}logi Bhd 186 sufficiency in selected petrochemical products, Petronas is planning to invest around RM6.9 billion during the period between 2001 and 2005, with both local and foreign partners, on the petrochemical industry. The feedstock to these petrochemical plants comes from the gas depOSits extracted by 66 petroleum platforms lying offshore in Terengganu. Being located near to the coastal areas, these petrochemical plants are subjected to constant corrosion, and hence, need corrosion control products_ The impact of this factor is anticipated to remain constant throughout the forecast period. Promotion ofShipbuilding Industry Encourages Demand The government plans to gradually establish a shipbuilding and repair infrastructure, as the country is a major trading nation. The industry has developed naturally on the basis of national requirements and the need for transportation of goods along the coastline. Opportunities are present in the building of ships and boats such as small tankers. cargo vessels, ferries, tugboats and trawlers, the repairing of ships and boats and the fabrication of smaller craft like leisure yachts, pleasure boats and sailboats. At present, only a handful of ship yards have the capability and capacity to build and repair ocean-going ships, generally in the range of not more than 5,000 dead weight tons (DWT). Repairs on a few foreign ships have been undertaken on a jobbing basis. All these activities require substantial amount of corrosion control products in the refurbishing and repairing phases. However, the development of the shjpping industry is forecasted to be slow and relatively constant during the duration of the forecast period. Hence, the impact of this factor is expected to be moderate during the duration of the forecast period. © 2004 Frost & Sullivan Confidential to Perisai Petroleum T(“lmologi Bhd Market Restraints Market restraints are factors that affect the growth of the industry, and ultimately, sales and revenues for atmospheric corrosion control products. Figure 2-3 presents the market restraints ranked in order of impact for the Malaysian atmospheric corrosion control market. Figure 2-3 Atmospheric Corrosion Control Market: Market Restraints Ranked in Order of Impaci (Malaysia),2003-2008 Rank Restraint 200:;’200S 2006-200B Regional Excess Capacity in R~fine.ry Facilities Constrains  High  Medium  Growth  2  Sweet Crude Reduces Demand  Medium  Medium  3  Industrial OveIcapacity in Petrochemicals Confines Demand  Medium  Medium
Source: Frost &: Sullivan Regional Excess Capacity in Refinery Facilities Constrains Growth Allhough Petronas’ refinery facilities maintain an operation rale of more than 90 percent, which is considerable higher than that in neighboring countries, there is still regional excess capacity. Hence, this leads to lower profitability and capital expenditure. Unlike the upstream sector where it enjoys a monopoly, Petronas’ downstream activities face competition from both Shell and ExxonMobiI. The impact of this factor is projected to decrease over the forecast period as the regional excess capacity situation diminishes gradually. Sweel Crude Red uces Demand The crude oil produced in Malaysia tends 10 be of the sweel variety (containing less sulphur which is a corrosive agent), and hence, the refineries are not subjected to intense corrosion when using the feedstock. Reflecting this, major new investments in the domestic downstream sector, including atmospheric corrosion control, are not scheduled in the near future. The impact of this factor is projected to remain constant during the forecast period. “2004 Fro~t & Sullivan Confide-ntial to Pcrisaj Petroleum Teknologi Bhd 188 Industrial Overcapacity in Petrochemicals Confines Demand Prices of petrochemicals, also known as polymers, are under pressure from increasing competition and industrial overcapacity, especially from the neighboring manufacturers based in Singapore and Thailand. The import duty on polymers is scheduled to be reduced to 5 percent from 15 percent previously under the terms of AFTA (ASEAN Free Trade Area) coming into play in 2003. Polymer facilities being built today, are significantly larger than they were in the last decade. The average size of a world-scale plant ranges between 250,000 tons to 450,000 tons a year. New advances in both operating and catalyst technology will allow existing and new facilities to be even more productive and efficient in the years to l:ome. “\lith narrowing margins as polymers become increasingly commoditized in the market, this leads to less capital expenditure ultimately on the part of the polymer manufacturers. The impact of this factor is projected to remain constant over the forecast period. Revenue Forecasts Both figures 2-4 and 2-5 refer to the costs of on-going and future production projects in Malaysia and the rest of South-East Asia. They exclude the exploration projects, which do not need much atmospheric corrosion control products. Fi gure 2-4 Costs of Ongoing and Future Production Projects in Malaysia Projects  Location  Type  Start  Status  Operator  RM Million  F6 gas field  Offshore Sarawak  Cas field development  1987  Ongoing  Shell  319  Angsi  Offshore  Satellite oil  2000  Ongoing  Carigali  6,460  Terengganu  field  Larut  development  2000  Ongoing  ExxonMobil  Bintang  Offshore Terengganu  Gas field development  2002  Ongoing  ExxonMobil  38  Joint  Offshore  Pipeline  2004  Finalising  Petroleum  2,147  Development  Thai- Authority of  Authority – Malaysia  Thailand –
Q 2004-Prost & Sullivan Confid~ntial to P~risai Pctr<:alcum Tcknologi Bhd Songkhla  border  Petronas  Cakerwala  Offshore Thai-Malaysia border  Gas field development  2005  Planning  Carigali Triton  – 2,280  Total  11,244
Source: The Edge, 14 July 2003 Figu re 2-5 Costs of Ongoing and Future Pipeline PrOjects in South East Asia Projects  Location  Distance (km.)  Start  Status  Operator  RM Million  16 offshore projects  Offshore Sarawak  72  2002  In progress  Talisman  152  Helang-Jintan  Offshore  420  2002  In  Nippon  n. a.  pipeline  Sarawak  progress  Oil / Shell  Duri-Ma lacca  lndonesia to Malaysia  200  2002  In progress  Petronas -Pertamina  429  Natuna-Kcrtch  Indonesia to Malaysia  280  2003  Confirmed  Petronas -Pertamina  2,291  Arun-Pauh  Indonesia to Malaysia  365  2005  Planning  Petronas -Pertamina  1,577  Natuna-Sabah-LuzonJPalawa n  Indonesia -Malaysia -Philippines  1,540  2008  Planning  – 11,537  Joint  Offshore  140  2009  Planning  – 376  Development  Thai- Authority – Malaysia  Block B  border
C 2004 lirost & Sullivan Confidential to Perisai Petroleum Teknologi Bhd Gas Malaysia  West  200  2004  Planning  Gas  49  distribution  Malaysia  Malaysia  lines  Joint  Offshore  255  2004  FinaHsing  Petroleum  2,147  Development  Thai- Authority  Authority – Malaysia  of  Songkhla  border  Thailand – Petronas  Tolal  .. 18,558
Source: The Edge, 24 July 2003 1I.1arine ships are another end-user of atmospheric corrosion control products. With over 1.100 ships, the nlerchant marine fleet in Malaysia consists of oil tankers, liquefied natural gas carriers, general cargo ships, passenger ships, container ships. vehicle carriers and others. The main shipping company is Malaysia International Shipping Corporation Berhad (MISC). Being a subsidiary of Pelronas, MISC operates a fleel of 127 vessels. The company is a specialist in the carriage of liquefied natural gas, besides being involved in the shipping of crude oil, petroleum products tankers and bulk commodities. The other main shipping companies in MaJaysia are Halim Mazmin Berhad, Nepline Berhad, Global Carriers, PDZ Holdings Berhad, Malaysian Merchant Marine Berhad and Wawasan Shipping Sdn Bhd. Figure 2-6 present the revenue forecasts for the Malaysian atmospheric corrosion control market from 2000 to 2008. Figure 2-6 Atmospheric Corrosion Control Market: Revenue Forecasts (Malaysia), 2000-2008 Revenue Revenues Growth Rate Year (RM Million) (%) :~~OD .li:J~)~~11;~j!:!::ii!~:;>;:~’ 2001 111.1 7.5 2002 120.0 8.0 2003 130,8 9.0 ~.Q~tlli£2ili~i{
2007 183.9

···::~;i~~1~~~ihHB¥fiili_ill::; ‘i~~:_~i;
Compound Annual Growth Rate (2002-2008): 8,9
Note: All figures are rounded,’ the b<15e year is 2002. Source: Frost & Sullivan The revenue forecasts above include the installation or service component of the contracts. In general, the servicing or service component comprises around 40 percent of the bidding, with the remaining 60 percent accounted by the price of the hardware. This is due to the fact that the installation of the hardware requires specialized skills and teclmical expertise that the petroleum c01upanies are not able to provide in the first place. Obviously, the perceived degree of difficulty of installing the corrosion protection products and the environment (friendly or harsh) has an impact on the service component cost. Hence, the prices quoted by a company are very project-specific and is intangible. The market for atmospheric corrosion control products was estimated at around RM120 million in 2002. Over the forecast period, the market is anticipated to increase dramatically, to reach RM201.2 million in 2008, ylclding a CAGR of 8,9 percent. There is a trend towards applying corrosion control products when the plant and equipment is first commissioned, instead of applying remedial actions \vhen nOTmal corrosion takes place. ro 2004 Frost & SuIlivan Ccmfic\ential to PerisaiPetroleumTelmologiBhd
Competitive Structure Figure 2-7 presents the competitive structure of the atmospheric corrosion control market in Malaysia for tne year 2002. Figure 2-7 Atmospheric Corrosion Control Market: Competitive Structure (Malaysia), 2002 ::;)::i;!:;i~N~::~i~~~i:~~mpetitci~~”()~~, ~~~~7.~~. due to Corra­.’ ‘Shield’s appointment . “”.;c,. plier.’·· -‘ionas’YehdOr Development pro,g~:;:e ., Distributton Structure: Oirect to the end-user Through sales office or agents Upstream petroleum sediib:
Downstream petroleu;¢;~’~~~&6~ Shipping

Competitive Factors: Technical Expertise Appointed vendor under the Vendor Development Program Product Quality Pricing
Turnaround Time Support Facilities
Source: Frost & Sullivan In a capital-intensive industry like petroleum, the service companies must have both the technical expertise and product quality. The turnaround time and support facilities are also critical as production downtime translates into a hit on the bottom line. The prices are negotiated with the client prior to the contract being awarded. Lastly, in order to encourage the development of Bumiputera entrepreneurs, Petronas has establisned the Vendor Development Program (VDP). The major conditions for a company to be appointed as a vendor under the VDP are as follows: ~ At least 70 percent of the company’s equity is to be held by Bumiputeras )-The management must be of Bumiputera majority ~ The owner and operator must hold 51 percent of the company’. equity };> Registered as a private limited company under the Companies Act, 1965 (> 2004 Prost & Sullivan Confidential to Perisai Petmleum Teknologi Rhd » Must have a minimum paid-up capital of RMI00, 000 In this context, Corro-Shield is the only Malaysian (and Bumiputera) company that has been awarded to supply and install atmospheric corrosion control products under the Vendor Development Program by Petronas. The vendor status is also extended to the other PSC contractors of Petronas like Shell and ExxonMobH. Hence, Corro-Shield has a monopoly in the installation of atmospheric corrosion products in the petroleum industry in Malaysia. Pricing Trends Price in Relation to Raw Material Cost Many of the raw materials used in the manufacturing of atmospheric corrosion control products utilize plastics and synthetic rubber, with the precursor raw material being mostly petroleum. Even the corrosion control compounds are made from a blend of petroleum waxes, oils and inhibitors. As synthetic rubber is not produced in Malaysia, it has to be imported. Hence, the price of corrosion protective products is inherently linked to the global movement in the price of petroleum. Price in Relation to Technical Support As the cost of skilled labor is·ri.sing in Malaysia, that has an ilnpact on the cost of installation and after sales service. Skilled labor refers to both engineers and technicians. The acquisitions of contracts to supply corrosion control products come with a commitment to provide a relatively high level of technical support to the client. This is exacerbated by the stringent safety requirements imposed by the petroleum companies. However, companies based in Malaysia have an advantage as they do not have to supply expatriate engineers, which are normally needed by the foreign-based companies. © 2004 frost & Sullivan Confidential to IJerisai Petroleum Teknologi Bhd Market Trends Figure 2-8 presents the market share for atmospheric corrosion control suppliers in 2002. Figure 2-8 Corrosion Protective Market: Company Market Share by Revenues (Malaysia), 2002 Company 2002 (“!o) 91.0

:’i:i!llmb:o .,:~:c,i;t;~~lijl~Ud\i~~’lj:’,.
Nate: A/I ngures are rounded; the base year is 2002. Source: Frost & Sullivan Chart 2.2 Atmospheric Cormsion Control Mar1<el: Mar1<el Share by Revenues, 2002 / Corro-Shield (M) Sdn Bhd 9%

Paints and 1/coatings i companies 91%
Source; Fmst & SutliVall The market size for atmospheric corrosion products was mainly computed based on the nUlnber of oil and gas platforms and. onshore installations. Of the total market size of around 02004 & Sullivan Confidential to Perisai PeLroleum TeknoJo~i Bhd 195 RM120 million for corrosion control products in 2002, Corro-Shield had a market share of approximately 9 percent. The rest of the market is accounted by the various paints and coatings companies. which are not direct competitors to CorTO-Shield’s range of products. This is due to the fact that paints and coatings are normally used when there is a budget constraint on the part of the clients. They are basically available off-the-shelves and are viewed as commodities in the market. Some of the more prominent companies supplying paints and coatings to the petroleum industry include: • jotun (M) Sdn Bhd
• Nippon Paint (M) Sdn Bhd
• Sime Leigh Sdn Bhd

International Coatings Sdn Bhd • Corrocoat Corrosion Services Sdn Bhd • Chugoku Paints (M) Sdn Bhd
• Dimet (M) Sdn Bhd

Hempel (M) Sdn Bhd • DNT (M) Sdn 8M Substitute Products There are many corrosion control methods available and they include protective coatings, corrosion-resistant metals and alloys, corrosion inhibitors, polymers and anodic and cathodic protection. Protective coatings comprise galvanizing and metallizing. Stainless steel, nickel· based alloys and titanium alloys are also used fOT corrosion control purposes. In general, paints and coatings are the nearest substitute or alternative for corrosion control purposes. The selection of a particular technique of corrosion control is dependent on a number of factors, like the intended service, application, planned service life and cost. » Nuts and bolts protection: Alternative products include painting, fluorocarbon coatings and plastic caps. Given the sharp edges and poor accessibility of a nuts and bolts system, it is extremely difficult to get a unifoTm thickness of paint. Subsequently, this aspect resulted in pinholes. Fluorocarbon coatings refer to the usage of many layers of protective fluorocarbon polymer films. However, 02004 Frost & Sullivan Confidential to Peri.~al Petroleum Teknologi t3hd they are susceptible to either mechanical damage or rough handling. which are impossible to avoid in the marine and plant environment. The threads are also vulnerable, as the nuts have to be put back after the coating is in place. Plastic caps have limited advantages as they required minimum exposed stud lengths and are also easily removed by high pressure water jetling. » Flange protection: Alternative products are caulking, tapes and flooding. The usage of tapes does not prevent galvanic corrosion from taking place. In addition, the tapes have a limited life span and hence, require routine maintenance. Lastly, the system of flooding the flange voids with waxes or inhibitors is aesthetically unpleasant. » Pipe support systems: Neoprene pads are commonly used. However, this results in a tight crevice being formed. Subsequently, through capillary action, the crevice attracts and retains llloisture. It is exacerbated by the fact that the original coating specifications are not intended to perform in a submerged environment, resulting in premature coating failure and aggravated corrosion. The same situation applies to the standard pipe rack supports as they are difficult to access and experience similar defects. >-Pipe protection and leak containment systems: Current repair methods include the usage of damps for localized repairs and specialized connectors with sleeves for extensive repairs, It is also possible to encircle the defective area with close fit metallic sleeves, which are welded together. As it has to be seal welded, it could cause weld-induced damage or material property changes on the pipe to be repaired. In underwater conditions, this may require specialist habitats to carry out hyperbaric welding. However, this is costly and may pose additional dangers associated with welding on live pipelines and is currently not practiced by the major petroleum operators in the region. Another method is to cut and replace the particular section of the pipe. Nevertheless, such connectors are expensive and take substantial man-hours to design, manufacture and assemble the required section. » Riser clamp protection: Similarly, neoprene pads are used. As they are placed between the clamps.. moisture is trapped in the process. This forces the coatings, which were designed for splash zone conditions.. to work in submerged conditions.. resulting in premature coating failure. The progressive failure of coating can compromise the structural integrity of dsecs. 02004 Frost & Sullivan Confidcntial to Pcrisai Pctroleum Tl.’knologi Bhd ~ Protective insulation system Alternative products are calcium silicate, rock wool and glass wool. However, these products suffer from very high water absorption rates resulting in a loss of their insulation properties. )00. Permanent sleeve repair An alternative is to cut and replace, which is not cost-effective because of production of downtime. The client has an obligation to produce certain quantities of petroleum per day and downtime is not a favorable option. );;> Marine growth removal and prevention The alternative is to conduct blasting, on an annual basis, so as to remove the marine growth. The blasting is normally carried out by divers and involves the deployment of both diving vessels and compression chambers. As it is weather-dependent, it is both risky and is extremely expensive. Technology Trends As with any industrial product, technologies are constantly evolving, due to better results obtained in basic research, applied research and technology development. This also extends into the atmospheric corrosion control products. Improvements in the understanding and knowledge of both materials science and metallurgy over a period of time would aJso lead to the discovery and development of corrosion control products. Companies involved in this field are constantly striving to come up with better products. Distribution Channels Corro-Shield participates in the petroleum industry in both Malaysia and Indonesia by dealing directly with the national petroleum companies, that is, Petronas and Petromina, respectively. In other words, it is involved in a direct marketing channel. [n Brunei, Corro­Shield is represented by an agent. It is a one-level intermediary channel. The agent, through its contacts, experience. knowledge, specialization and scale of operation. offers the company more than it can usually achieve on its own. Ease of Entry and Exit There is a high barrier to entry, principally in terms of proprietary product technology. The design characteristics are kept proprietary through patents that typically last around 15 years in Malaysia. Also, a company must be appointed by Petronas under the Vendor Development Progranl in order to venture into the petroleum industry. [n addition, the corrosion protective market is unique in the sense that there is a very high ratio of fixed costs to variable costs. Fixed cosis include warehousing facilities, rentals, research and development costs, salaries and plant and machinery. On the other hand, the variable costs include offshore allowances, cost of material inpu ts and transportation charges for product installation. The sunk costs may be unrecoverable if a market participant decides to leave the market. There is no main exit barrier in the corrosion protective industry. Capital Intensity Effective August 1995, the Malaysian government has defined a capital-intensive industry by using a benchmark of RM55, 000. This is computed based on the capital investment por employee ratio. Using this definition, Corro-Shield’s manufacturing operation in Malaysia is considered a capital-intensive industry, as it exceeds this figure. Environmental Issues In environmental issues, both the Environmental Quality Act, 1974 and the Exclusive Economic Zone Act, 1984 apply to the offshore petroleum industry. The Department of Environment (DOE) comes into play if the petroleum activities are within the territorial waters of Malaysia. If activities take place beyond the territorial waters, that is, the economic exclusive zone (EEZ), then both Petronas and the Ministry of Domestic Trade and Consumer affairs have regulatory control over the environmental aspects of offshore operations. The territorial waters are defined as situated within 12 nautical miles form the coast. The maritime zone adjacent to the territorial water may not extend beyond 2.00 nautical miles from the baselines from which the breadth of the territorial waters is measured, under the framework of the United Nations Convention on the Law of the Sea, which entered into force in 1994. Besides these national environmental regulations, international agreements do apply, as well as voluntary measures in the form of codes of practice. Trade Restrictions, Political and Economic Factors Both Malaysia and Brunei had been enjoying political stability over the past few decades. However, since the Asian financial crisis struck in mid-1997, Indonesia has been beset by a et> 2004 Frost &: Sullivan Confidentia.l to Peri!’iai Petroleum Tcknologi Ehd 199 host of political and economic difficulties. Given ASEAN’s proposal for a Trans-ASEAN Gas Pipeline through 2010, there are no major setbacks for Corro-Shield foreseen during the forecast period, in terms of the regional market potential. The 4,200-kilometer pipeline is projected to cost around RM26.6 billion with seven systems connecting the gas fields of Vietnam, the Philippines, Sumatra, Kalimantan, Malaysia and Thailand. The development of a regional gas transmission backbone is expected to encourage the development of stranded, uneconomic gas fields whose small size do not currently justify the production and utilization of natural gas by the end-users. SWOT Analysis Strengths: • VDP status.
• A range of atmospheric corrosion control products to suit a variety of end~user needs.
• Patented products.

• Management staff with experience in the petroleum industry. • Ability to provide timely services due to its presence in the region, as opposed to other companies based in Europe and the United States. ” Corroborative work with Petronas Research and Scientific Services Sdn Bhd. Weaknesses: • A relativeI}’ small capital base.
• Need to tie-up with foreign partners or appoint agents to venture into other regions.
• The enormous petroleum industry, which provides huge opportunities fOT the

Opportunities company’s range of products. • The petroleum industry in Malaysia is poised for further expansion as the goverrunent recognizes it as another engine of growth to replace the sluggish manufacturing sector. © 2004 Prost & Sullivan Confidential to Perisai Petroleum Tcknologi Bhd Threats: • Should Corro-Shield venture into the other neighboring countries, it faces strong competition from more established companies who are based there. Some of the more prominent companies for sleeve repairs in these countries include PH International, Mexssub International, Hydratight Sweeney Limited and Oil States Hydrotech. In the field of caps, they are Radolid and Sapsea!. • Petroleum is a commodity, and hence subjected to wide fluctuations in prices. A sharp drop ill the price of petroleum would cause the petroleum nlultinationals to curtain their capital expenditure. Diversification into New Products As part of its diversification process, the group of companies under Perisai Petroleum Teknologi Berhad is moving into the distribution of new products used in the petroleum industry. BioSolve A sister company of Cocco-Shield, Whizz Water Sdn Bhd, is venturing into the distribution of BioSolve. As a water-based biD-remediation surfactant, it is non-hazardous, non-flammable and biodegradable and is specially engineered as a clean-up and mitigating agent on hydrocarbon and hydrocarbon-based prod ucts. Jt solubilizes, emulsifies and separates the hydrocarbons into small micro-emulsions, ultimately, changing them into a water-based solution. These actions render the volatile hydrocarbons into non-flammable substances and at the same time, stimulate the bio-remediation of the hydrocarbons by increasing the end­chain reaction created by the micro-emulsions. Subsequently, the broken-down hydrocarbons become an easily assimilated food source for bacteria. Hence, BioSoIve is a unique, versatile and environmentally-friendly product utilized in fuel and oil spill clean-up and remediation, fire fighting, vapor suppression and general cleaning and degreasing applications. As a patented product. BioSolve is also approved by the Department of Environment, Malaysia. Heat Exchanger Another sister company of Corro-Shield, Romilly (M) Sdn Bhd is a specialist cOl\tractor for inspection and maintenance of heat exchangers and is the only company in Malaysia prOViding both inspection and maintenance under one roof. It’s existing principal activities are maintenance, cleaning, repairs and inspection of plant process facilities such as heat exchangers, boilers, process vessels, storage tanks and condensers for oil & gas al\d petro­chemical industries It also restores, repairs and carries out retubing of boilers, heat exchangers and condensers and mechanical repairs. fabrication and installation works for piping, structures and lifting equipment and offers chemical cleaning and associated services. Romilly (M) Sdn Bhd has recently been given an agency by CTl lndustries Inc.• a US based company, which developed a revolutionary way of restoring the tubes of damaged heat exchangers and condensers. The restoration and repair of heat exchanger and condenser tubes involves thin-walled expandable metallic sleeves. This technology is proven to be technically accepted and cost-effective with the potential cost savings as high as 70 percent. compared to re-tubing. H has been used extensively in the petrochemical, power, marine and petroleunl industries across more than 30 countries. This tube restoration technology essentially comprises the insertion of thin-walled and galvanically-compatible metallic sleeve onto corroded, leaked or weakened portion of the tube, which normally occurs at a distance of between 150 mm. and 300 mm. from the inlet end of the tube sheet. The inserted sleeve will then be expanded hydraulically or mechanically using specially designed tools to achieve intimate metal to metal contact between the sleeve and tube material. If it is used to internally-line the entire length of the tube, the method of sleeve expansion wHl be hydraulic only. The presence of the expanded sleeve saves the tube from being permanently plugged or decommissioned. besides restoring the affected tube to its original strength. The main advantage of a fulllengih tube lining is that the tube material can be upgraded to a better material and there is no requirement for an entire tube replacement. It is also technically superior as compared to other sleeving methods using non-expandable materials such as plastics or ceramic ferrules. Overview of the Petroleum Industry in Brunei The first offshore discovery in Brunei was made in 1963, although onshore production started in 1929. The petroleum industry plays a major role in Brunei’s economy. The industry generated between 75 percent and 90 percent of the government’s revenues. There are seven offshore fields and two onshore fields. In 2002, hydrocarbon output accounted for slightly more than 50 percent of the GDP and close to 90 percent of the export revenues. The country’s proven reserves of crude oil and natural gas were estimated to be around 1.35 billion barrels and 391 billion cubic meters, respectively in 2002. [n the same year, the output of crude oil and condensate averaged about 197,300 barrels per day, while natural gas output averaged 30 million cubic meters per day. About 90 percent of the crude oil production and almost all the naturaJ gas output, in the form of liquefied natural gas, were exported. The remaining 10 percent was delivered to domestic power plants for electricity generation. Brunei is South East Asia’s fourth largest crude oil producer, after Tndonesia, Vietnam and Malaysia. At the teJ 2004 Prost &-Sullivan Confidential to Perisai Petroleurn Tel<nologi ahd current fate of extraction. the crude oil and gas reserves are expected to last about 15 years and 30 years, respectively. Brunei Shell Petroleum Company is the major producer, pumping petroleum from 8 offshore fields and 2 onshore fields. This comprises 200 structures and 4 production complexes. The Brunei government and Royal Dutch Shell are equal shareholders in Brunei Shell Petroleum Company. Natural gas is also produced by EPA, a subsidiary of TOTAL Fina Elf S. A. (formerly known as Elf Aquitaine) and Shell New Zealand (formedy known as Fletcher Challenge Energy of New Zealand).
With declining reservesl Brunei made legal claims to its Economic Exclusive Zone. tn this context, the activities would take in ultra-deep waters, some 1.5 to 2.5 kilometers deep. The deepwater acreage was opened in 2002. The move into deep sea activities presents both risks and opportunities. It also comes with a huge cost, in the order of between $3 billion and 54 billion to develop a commercial discovery. However, the acreage is viewed as the best piece of deep water in South East Asia. Recognizing the declining petroleum reserves, during the past three years, Brunei Shell Petroleum Company have began investing in two major projects to maintain prod uction levels and to extend production for another 30 years to 40 years, partly through enhanced oil Tecovery (EOC). A decision was made on the development of the new Egret Field in 2001, which has a projected cost of $79 million. Phase 1 of the gas development project involves project management, engineering, procurement and fabrication. It covers the construction of a new drilling platform, a 25-kilometer long pipeline, and modification to the existing complex facilities. The second phase of the offshore Ampa-Fairley Rationalization Project was also launched in the same year. It costs $347 million and is expected to rejuvenate the Western Field infrastructure. This covers a new onshore compression plant (OCP), offshore modifications and the laying of offshore pipelines. The Brunei Petrochemical Industry Master Plan was completed in 2001 and it identified a number of potential of areas for development over the next few decades. The Brunei government had sought expressions of interests for large-scale petrochemical projects, from both foreign and local companies in 2002. 1n this context, it had also set aside two sites for the use of such downstream industries and planned to bring the proposed facilities on-stream by 2007. Foreign investors would be allowed to own 100 percent equity interest in these projects, and mostly likely be granted pioneer status for a five-year period, for investing between $278,600 and $1.4 million; and an eight-year tax relief for investing more than $1.4 million. The proposed site is the 1,000 square kilometer Pulau Muara Besar which is located just across the Muara deepwaler port. It is to be used for the development of integrated petrochemical projects. However, in the interim period, the 230-hectare Sungai Liang site is available, complete with existing gas pipelines to the nearby Lumut LNG plant, as well as the onshore gas processing plant. This is the sole LNG plant in Brunei and it prod uced around 9.2 billion cubic meters of LNG in 2002. ~ 2004. Frost &: Sullivan Confidential to Pensaj Petroleum T~knologi Dhd 2-2.5 203 To tender for work with the Brunei Shell Petroleum Company, a vendor could either register itself with the company, or appointing a local agent or partner who is already registered with the company in the first place. Brunei Shell Petroleum Company encourages the development of technological capabilities of the indigenous Bruneian companies by encouraging joint ventures with foreign companies. There are tw”o main categories for business developments and they are as follows: “) 100 percent Bumiputera -work is only open to contractors and companies which are 100 percent owned by indigenous Bruneians. ,.. open to all -work is open to all companies for registration. However, if there are sufficient Bruneian companies registered in the specific category of work. then international companies may not be registered. A new development in the country’s petroleum industry in 2002 was the implementation of the production sharing contract (PSC) as a new model of agreement for the exploration and production of petroleum. This replaced the old concession modeL Brunei’s Oil and Gas Authority (BOGA), the state’s regulatory body was dissolved when a new national petroleum company was established in 2002, also known as Brunei National Petroleum Company or PetroleumBRUNEI. A subsidiary of Brunei Shell Petroleum Company is the Brunei Shell Tanker Sdn Bhd. Owning seven tankers, the company is involved with !:he shipping of liquefied natural gas to major markets overseas. This presents another market for atmospheric corrosion control products. Brunei Shell Petroleum Company spends an average of $10 million on atmospheric corrosion control per annum. Approximatel)’ 50 percent of the costs are channeled into offshore structures, while the remaining into onshore installations. However, the figure spent on atmospheriC corrosion control products varies from year to year as it is very project specific and is also a function of the urgency of the remedial actions needed. Brunei Shell Petroleum Company awarded a $700,000 contract to Corro-Shield, through its local agent, Joffren Omar, to carry out corrosion control prevention and maintenance (34 metres below water), which does not involves the suspension of production. This was implemented in 2003. Overview of the Petroleum Industry in Indonesia Indonesia had crude oil and natural gas reserves of approximately 5 billion barrels and 2.6 trillion cubic meters, respectively, in 2002. The country’s crude oil, natural gas liquid and condensate production experienced a fourth consecutive year of decline in 2002, to an average of around 1.25 million barrels per da),. This was attributed mainly to ageing fields. Exports of crude oil also declined in tandem. which was recorded at 271.8 million barrels in 2002, due to both lower output and higher domestic demand. Natural gas production was recorded at 86.1 e 2004 Frost & Sullivan Confidential to Perisai Petroleum Tck.nologi Bhd million cubic meters per day in 2002. Indonesia was the biggest exporter of liquefied natural gas in the world in 2002, exporting up to 26.2 million tons. Foreign companies participate in the petroleum industry through the production sharing contract (PSe) model. This system only applies for a green field area, where exploration has never been carried out. In addition to this model, Indonesia also has a variety of other contractual agreements that are designed for areas that have previously been explored or been worked, like the technical assistance contract (lAC), enhanced oil recovery (EOR) and joint operating agreements (JOA) The state gas corporation -PT Perusahaan Cas Negara (PGN) is responsible for a series of gas pipeline projects. It plans to install in phases, an integrated gas transmission pipeline network, also known as the integrated transmission system to link the main gas fields in South Sumatra, Natuna and offshore East Java. Upon completion of the system, Indonesia is expected to have 3,800 kilometers of pipelines linking Batam, Central Sumatra, South Sumatra and Java. While the national petroleum company, Pertamina, produces some crude oil (2.5 percent of the national total output), the vast majority are produced by the foreign multinational corporations under the PSC model. The government sets the tendering guidelines and also makes the final decision on large purchases of most equipment and services. In this context, all purchases by ei.ther Pertamina or the foreign MNCs must be firstly made through a local limited liability company, except for materials or equipment that are demonstrated 10 be available more cheaply overseas or are not available locally, They are usually procured by a tendering process. The capacity utilization of the 9 retineries (eight plants are state-run) stood at 94 percent, out of the installed capacity of over 1.06 million barrels per day in 2002. The largest share of natural gas production is processed into liquefied natural gas and liquefied petroleum gas, followed by its generation for electricity production and conversion into polymers by the petrochemical plants. There are 13 liquefied petroleum gas and 2 liquefied natural gas plants in the downstream sector, besides 3 petrochemical plants. lnspite of its huge petroleum reserves due to its geological factor endowments, the global petroleum industry views tndonesia as being beset by almost insurmountable problems. They include i.ssues of regulatory enforcement, interpretation, administration and duplication; taxation; labor regulation; political stability; native land claims; and forced socio-economic contributions outside the regular taxes. Indonesia is the largest archipelago in the world, consisting of more than 17,000 islands. The country’s sea area is 7.9 million square kilometers, including the exclusive economic zone, or about 4 ti.mes its land area, Hence, Indonesia is heavily dependent on maritime transport for both international and domestic trade. Pertamina also has its own shipping subsidiary, @ 2004 host & Sullivan Confidential to Perisai Petroleum Teknologi Bhd consisting of 31 ships to carry petroleum products. However, Jndonesian waters suffer the dubious reputation of being unsafe, in light of the highest number of piracy incidents reported by the International Maritime Bureau. Hence. it aHects the passage of vessels through Indonesian waters, and ultimately, docking at lndonesian ports that have the potential to generate the demand for corrosion control products, through maintenance and repair_ [t is estimated that Indonesia’s petroleum industry spends around $10 million per annum on atmospheric corrosion control. It is also subjected to budget constraints and is a function of the urgency of the remedial actions needed on the part of the petroleum corporations. Corro­Shield markets its products directly to the end-users in the Indonesian market. C 2004 Frost & Sullivan Confidential to Pcrisai Petroleum Teknologi Bhd 3


Research Methodology Frost & Sullivan has refined its research methodology over many years of experience, having researched a wide diversity of markets in many different life cycles -from embryonic to mature. Frost & Sullivan’s reference publication, Industrial Market Engineering (Publication 5168-80), explains the research methodology in great depth. Frost & Sullivan’s Market Engineering system: • Focuses on challenges, problems, and needs of industry participants
• [s based on primary market research. not secondary or previously published

research • Is based on detailed, comprehensive “bottom-up” data collection techniques • Is based on measurements Market Engineering Forecasting Methodology Overview One of the most common questions Frost & Sullivan receives from its clients is. “What is your forecasting methodology and how can I assess its level of credibility and accuracy?” This section on Frost & Sullivan’s proprietary Market Engineering forecasting-methodology has been added to answer this question. ~ 2004 Frost & Sullivan COTlfidential to Perisai Petroleum Teknologi Bhd 3-1 This methodology integrates several forecasting techniques with the Market Engineering measurement-based system. It relies on the expertise of the analyst team in integrating the critical market elements investigated during the research phase of the project. These elements include: • Expert-opinion forecasting methodology
• Delphi forecasting methodology
• Integration of market drivers and restraints
• Integration with the market cltaHenges
• Integration of the Market Engineering measurement trends
• Integration of econometric variables
• Integration of customer demographics

The Market Engineering forecasting methodology is a seven-step system that maximizes the credibility and accuracy of the forecasts. The steps in this process arc discussed in the follOWing: Market Engineering Research Process Completed The Market Engineering research process provides the naVigational measurements of
current market position and trends, which become the basis of the forecast. Measurements and Challenges Analyzed over Time Measurements and chaHenges are analyzed over time to provide more insight into their potential impact on market size and development. Identification of Market Drivers and Restraints At this stage, the analyst specifies the faclors that will drive the market forward in terms of revenues and determines the elements that will inhibit growth. © 2004 Frost & Sullivan Confidential to Perisai Petroleum Teknologi Bhd Expert-Opinion Intcgration with Analyst Team The interview process includcs a variety of industry experts: competitors and key customers. These expert opinions on the direction of the market arc integrated with the data and analysis already created. Forecasts Calculated At this stage, analysts collect all the market data needed to create the initial forecast scenarios. Each scenario is tested to determine the most probable outcome for the market size. For example, the forecasts are matched to the leading economic indicators and drivers for each specific industry. Delphi Technique Integration When Needed If data and forecast scenarios conflict, it becomes necessary to again discuss the market forecasts with the industry experts interviewed in the research process. Quality Control Within Research Department Once the forecasts are intcgrated into the market section, they are checked by other team members in the industry research group (IRG) and the research director. The forecasts are also checked for mathematical accuracy and internal consistency by the Final Review Preparation Department and the Editing Department. Strategic Significance of the Market Engineering Forecast The Market Engineering forecast can have a significant impact on the business in several areas. Therefore, it should be integrated into business planning, strategy development, and decision-rnaking. C> 2004 Frost &. Sullivan Confidential to Perisai Petroleum Teknologi Bhd Judging Credibility and Accuracy of Market Engineering Forecasts Frost &: Sullivan forecasts integrate the key elements that typically have an impact on market growth and size. No one can consistently make accurate forecasts, but market research has a proven track record in making accurate projections of market trends and growth rates. The key test of credibility is whether the analyst team integrated all the critical elements of the market into the forecast. If all the elements that create a credible forecast are included in the analysis, then the forecast has strong credibility. The accuracy of a forecast to within a 10 percent range over a three-year period is not vitally important. What is important is that the overall trend be forecast correctly, because the overall trend drives the appropriate strategy and subsequent decisions. The Market Engineering forecasting methodology has consistently proved to be an accurate and reliable forecasting tool, particularly for high technology and industrial markets. All the currencies reported are in the US dollar. For the Malaysian market, the currencies specified are in Ringgit Malaysia (RM). Over the past 40 years, Frost &: Sullivan has had an impressive track record in forecasting emerging markets, new technologies, and shifts in existing markets. Unexpected events have always significantly changed the marketplace, but these do not occur often, and they typically merely delay the development of the market rather than destroy it. Frost &: Sullivan always advise clients that its forecasts should not be the exclusive basis for decision making at their companies. It should be one more source of input and a support tool for their work in investigating the market and creating a winning strategy. In the final analysis, decision-making is based on the general trend of the forecast. not its absolute accuracy. It is important to accurately determine the range of the forecast, because that will have the greatest impact on the investment or strategy decision. Typically the decisions revolve around questions such as: • Should the company enter the market?
• Should the company increase or decrease its investment?
• Should the company improve its performance in the market?


l§ 2004 Frost & Sullivan Conlidential to Perisai Petroleum Teknologi Bhd These decisions do not require accuracy within a few percentage points. They require accuracy in the determination of the general trend category. All business decisions carry some risk. Market Engineering increases the probability that the decisions will be correct, but it does not eliminate all risks. ~ 2004 Frost & Sullivan Confidential to Pcrisai Petroleum Tcknologi Bhd 3·5 211


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