PETRONAS stays optimistic amidst falling oil prices-
The Malaysian oil and gas industry is facing one of its toughest periods in recent history. Disturbed by a prolonged drop in oil prices, the industry now needs to shape and execute a decisive and potentially transformative response to the global energy environment. The Oil and Gas Year Malaysia 2015 Investors Index reflects that the country’s oil and gas market has been hit hard by the global fall in oil prices, but has managed to retain its appeal for investors. Southeast Asia Infrastructure explores the potential, challenges and the way forward…
Lower oil prices have had a strong impact on Malaysia’s oil and gas industry. As a key oil and liquefied natural gas (LNG) exporter, the country has been one of the hardest hit by the slump in crude prices. In February 2015, the national oil company PETRONAS posted its first-ever quarterly loss followed by the announcement of a cut in its investment plans by as much as $8 billion. Despite this, the confidence in Malaysia’s hydrocarbon industry remains fairly strong, although not as much as was the case in 2015.
In response to the aforementioned events, the government has tightened its belt and aims to turn Malaysia into a regional hub for oil storage and trading, and oilfield services and equipment. This, of course, hinges crucially on a correction in crude prices.
Key statistics
Volatile oil prices, coupled with oversupply and lagging demand growth, continue to affect the country’s performance. This is evident from the statistics of its national oil company. The PETRONAS Group’s revenue for the second quarter of 2016 decreased by 21 per cent as compared to the same period in 2015 mainly due to lower average realised prices across all products following the downward trend in key benchmark prices (Dated Brent and Japan Customs Cleared Crude [JCC]). This was further affected by the lower sales volume of crude oil and condensate, processed gas and petroleum products. The decline, however, was partially offset by the effect of a favourable US dollar exchange rate against the Malaysian ringgit.
High aspirations
Even after Malaysia’s recent ratification for entry into the Trans-Pacific Partnership Agreement, it is envisaged that PETRONAS will largely retain its regulatory and licensing role as set out in the country’s Petroleum Development Act, 1974. This augurs well for the country as it balances the need to promote liberalisation while maintaining its ability to develop its local industry. To that end, it is worth noting that PETRONAS’s growth and stature by and large has been matched by a maturing local industry – with over 4,000 oil and gas businesses including international oil companies, independent companies, service providers and equipment manufacturers operating locally. Malaysia has positioned itself strongly to support the needs of the oil and gas value chain domestically and regionally. This is largely in line with the country’s aspirations to become a regional oil and gas hub.
Another important cornerstone in placing the country as a petro hub in the region is the establishment of the Malaysia Petroleum Resources Corporation (MPRC) with a mandate of coming up with innovative policy designs to promote, catalyse and transform the oil and gas services sector, and to strengthen the industry by 2017.
Uphill upstream
In the context of its domestic upstream activities, which includes 101 production sharing contracts and six risk sharing contracts, Malaysia requires a three-pronged approach to unlock its potential.
First, it needs to monetise its marginal fields. Malaysia has almost 0.6 billion boe spread across 100 marginal fields that could be exploited. However, this approach could face challenges because of a high breakeven cost. Second, Malaysia needs to tap its underexplored the deep-water potential. Only 50 per cent of deep-water potential has been discovered; there are about 7 billion boe of undiscovered resources. However, the pressure to reduce costs in the current environment may see the fruition of this strategy being delayed. Third, the country needs to intensify its enhanced oil recovery programme in 14 identified oilfields. This has the potential of unlocking approximately 1 billion boe.
The low crude price environment has also marred investments in innovation that were planned at PETRONAS. After its successful pioneering efforts to develop PFLNG1, the first floating LNG facility in the world, it had planned a second floating facility. However, given dropping oil prices and the declining demand for petroleum products, it has indicated that the second phase of the project would be deferred.
Downstream
Being strategically located along one of the world’s busiest shipping lanes and within close proximity to an international trading hub, Malaysia’s Pengerang Integrated Petroleum Complex in southern Johor is positioned to rival Singapore’s capabilities in the downstream sector.
Driving this effort are two catalytic developments which deserve specific mention, namely the Dialog Group’s Pengerang Independent Deepwater Petroleum Terminal (PIDPT) and PETRONAS’s Pengerang Integrated Complex. These projects, which are part of Malaysia’s Economic Transformation Programme, are part of a new integrated complex that seeks to eventually position Malaysia as a major regional petrochemicals player. The Dialog Group remains on track to build phase two of the PIDPT, capitalising on PETRONAS’s refinery and petrochemical integrated development (RAPID) project. It has now commenced engineering, procurement and construction works on the RM 6.3 billion Phase II, which is a dedicated industrial tank terminal, catering to the RAPID complex with progressive completion between 2018 and 2019.
PETRONAS’s RAPID project has also been bearing the brunt of the current low price environment. The project, consisting of a 300,000 barrels per day (bpd) refinery and petrochemical complex with a combined chemical output capacity of 7.7 million metric tonnes per year of various products, was envisaged to produce differentiated and specialty chemicals. In mid-2015 it was announced that PETRONAS would conduct rebidding to secure better prices, while depressed oil prices also prompted rephasing of some of its petrochemical projects involving phenolic chains. In spite of these challenges, PETRONAS and its listed subsidiary PETRONAS Chemicals Group appear to remain committed to delivering on the promise of a gradual shift to producing specialty chemicals, which would present opportunities for partnerships in higher value-added chemicals ventures in the future.
Conclusion
Globally, the hydrocarbon industry is going through a tough time, amidst low crude prices. While it has been a boon for the net importers, global net exporters, such as Malaysia, are taking a huge hit with regard to earnings. The respite, though, is that the phenomenon is global, and not specific to this Southeast Asian nation. The time is ripe for the Malaysian government to look outside for opportunities to retain the export markets, as the prices will eventually recover, if not sooner. Together with a well-established industry ecosystem characterised by strong support from its auxiliary industry, expectation with regard to realising the untapped potential is rational.
