Pumping the Petrol

The last two months must have been like a non stop hurricane and cyclone back-to-back one after another for the oil and gas sector, having too many variables and vitality.





Let’s start with the global crude oil price.

Brent crude price for 52weeks

The global Brent crude oil price shed almost 75% within a year. A steep bearish curve the last quarter.

It’s a combined and compounding effect of over production by Russia and Saudi Arabia and the global Covid-19 pandemic, which saw the drastic drop in consumer demand for petrol.

The national oil corporation, Petronas, is not spared.

Petronas recently issued fresh mid-to-long term bonds into the global equity market. It is quite easy to speculate for this draw down of RM26b instruments.

The previous administration of Seventh Prime Minister Dr Mahathir Mohamad, it was said within two years Petronas paid the Federal Government to the sum of RM106b in royalty, dividend, special dividends and prepayments. The poor fiscal management within the two years of Pakatan Harapan compounded by bad policies, decision making and execution.

Upon winning XIV GE and taking over the Federal Government, Prime Minister Dr Mahathir’s administration cancelled the consumer tax or GST, which left the Federal Government revenue impaired by RM46b.

Hence, the Federal Government broke the Petronas ‘piggy Bank’ for any deficit of public spending.

The global demand has dropped from 95mil barrels per day to 20mil barrels per day. Now that the bearish global demand for oil mismatched the production, Petronas plans to reduce their own capacity.

New Straits Times story:

Petronas shuts down 14 projects until oil price recovers

April 24, 2020 @ 10:07am

KUALA LUMPUR: Petroliam Nasional Bhd (Petronas) is said to have reduced the number of its fully active rigs from 18 to four since oil price began dropping late last year.

The national oil company had shut down or warm-stacked 14 projects until oil price recovers to break even levels, an industry publication reported, quoting sources.

Warm-stacking involves temporarily shutting down operations but maintaining minimal activity as a cost-saving measure.

“Petronas is unable to maintain its operation at the current price because its rigs are mainly in deepwater, which are more expensive to run,” the report said, putting the break even level at around US$70 a barrel.

Petronas did not respond to the New Straits Times’ queries at press time.

Petronas’ purported cost-cutting measure reflects the sentiments of the global oil and gas industry.

In the past few months, oil prices had plummeted from nearly US$100 a barrel to under US$20 a barrel now.

Consequently, oil majors have made substantial budget cuts on the back of the Covid-19 pandemic and the Saudi-Russia price war that has sent the oil prices, particularly the US’ crude West Texas Intermediate (WTI), down to historic lows.

Norwegian energy intelligence company Rystad Energy recently said new deepwater projects currently under evaluation by operators in Southeast Asia were likely to face delays.

Rystad said the Limbayong project in Malaysia, Abadi in Indonesia, Shew Yee Htun in block A6 in Myanmar and the Kelidang Cluster in Brunei, were all considered to be at risk in the current oil price environment.

Petronas previously stated that it would strive to maintain its domestic capital expenditure (capex) programme of RM26 billion-RM28 billion this year, while cutting the overseas capex.

***********

Petronas is likely to lose RM31b from the sharp decline of global crude oil price.

FMT story:

Analyst sees RM31 billion lost this year from dip in crude oil prices

Robin Augustin – April 22, 2020 10:00 AM

PETALING JAYA: An analyst in the oil and gas sector warns that Malaysia may lose some RM31 billion in revenue this year due to the low price of crude oil, which continues to be buffeted by the Covid-19 pandemic.

Renato Lima de Olivera, an assistant professor at the Asia School of Business, said the complicating factor for Malaysia is its mature basin and higher production costs compared with producers in the Middle East.

“While most Organisation of Petroleum Exporting Countries (Opec) can still profitably extract oil at US$20 per barrel, many other countries will see their exploration activity come to a halt,” he told FMT.

He was commenting on US oil prices which rebounded above zero yesterday, a day after West Texas Intermediate futures closed at -US$37.63.

Olivera attributed the low oil prices to the drop in demand for the commodity in the transport sector due to Covid-19 travel restrictions.

“About 60% of global oil consumption is in the transportation sector but now, mobility has been restricted as countries adopt lockdown measures.”

And because production has continued at a time when there is little demand, Olivera said the cost of storing oil had increased.

“To clear storage space, prices went negative. Even with Opec members agreeing to cut production by 10 million barrels per day, which is a 10% reduction from the 100 million barrels consumed globally per day, there is still an excess of oil produced as demand has dropped by almost 30%.”

The oil is stored in tankers which are now reaching full capacity. Olivera said even if demand recovers, prices will remain depressed due to the excess oil in storage.

He said this would have a “sizeable impact” on Malaysia as a net oil exporter which benefits from high oil prices.

He noted previous estimates by the finance ministry that a US$1 drop in oil prices would cost the country RM300 million in revenue.

“Petronas, as a 100%-owned national oil company with sizeable international presence, is hurt by low oil prices. With less revenue, it becomes more challenging to make the same amount of capital expenditures and pay dividends to the government.”

Naturally, he said, the oil and gas supply chain would also be affected, which could see job losses and a reduction in economic activity created by capital investments.

He said his analysis showed that if prices remained under US$30 per barrel, fiscal revenue from oil and gas could drop by US$7.1 billion (RM31.2 billion).

On how long these low prices would last, Olivera said in the short term it would depend on the lifting of travel restrictions implemented by countries around the world due to Covid-19.

“The faster the economy returns to normal with people travelling, the better for the oil industry.

“In the medium to long term, the price of oil will be pressured by the energy transition and the efforts by Opec countries to regain the market share lost to unconventional oil producers.”

He said Putrajaya might need to consider the possibility that low prices would be the “new normal” and step up efforts to diversify revenue sources and invest in innovations to reduce domestic production costs.

Universiti Tun Abdul Razak economist Barjoyai Bardai said the price of oil would likely only recover above the US$50 mark next year.

Like Olivera, he expects companies linked to the industry to see high rates of unemployment.

Even after the movement control order is lifted, Barjoyai said the consumption of petrol would probably not increase by a drastic amount as people would still be subject to social distancing rules, and would reduce the need for non-essential travel.

“Putrajaya will need to reinvent the economy, shifting from traditional revenue sources and ditching old spending habits.

“The country cannot go back to the way it used to be. The world will have changed after Covid-19, and we must be ready for that world,” he said.

*********

Despite all that, Federal Government is expected to milk Petronas further as the RM20b in cash has to be raised to fund the Economic Stimulus Package announced by Prime Minister Muhyiddin exactly four weeks ago.

Bloomberg story:

Petronas mulls bigger dividend to fund stimulus package

Bloomberg – April 24, 2020 11:04 AM

KUALA LUMPUR: State oil company Petronas is considering raising this year’s dividend to help the government fund its nearly US$60 billion stimulus package, according to people familiar with the matter.

Petronas, or Petroliam Nasional Bhd, could increase the payout by as much as RM10 billion (US$2.3 billion), said one of the people, who asked not to be named as the information is private. The company had earlier announced that it would pay RM24 billion in dividend this year.

A higher payout would help Prime Minister Muhyiddin Yassin fund the government’s RM260 billion stimulus package, which is aimed at shoring up an economy that’s struggling with the impact of the pandemic and a crash in oil prices.

Even with the stimulus, the central bank expects gross domestic product to shrink as much as 2% or grow up to 0.5% this year

Deliberations on the dividend increase are still ongoing, the people said. Any additional dividends, which is subject to approval of the board, will need to take into account factors including funding requirements for operations and ability to service debts and other obligations, a representative for Petronas said in an emailed response to Bloomberg News.

Petronas was asked to pay RM54 billion of dividend last year, including a RM30 billion one-time special payment, as the government struggled to narrow the budget deficit after revising its consumer tax policy.

The payout increase this year would come after the company sold US$6 billion of bonds this month, the biggest offering by a company in Asia in 2020.

Fitch Ratings revised its outlook of Petronas to negative, from stable, while affirming its A- rating on April 14. The state oil firm had cash holdings of RM123 billion against total debt of around RM55 billion at end-2019, and the government is expected to support the company in maintaining a healthy credit profile due to its importance to state revenue, Fitch said in the report.

**********

So many is very concerned with Petronas. This include former Prime Minister Dr Mahathir’s Political Secretary Matthias Chang.

It is interesting to note since changing of the guards on 29 February 2020, there is no movement of key and strategic personalities in the National oil corporation.

This include one of the Directors, who is believed to be a closet political blogger and Facebook account operator, notorious for his vile and venomous attacks against dissenters.

It is time for Prime Minister Muhyiddin to ‘plug the leak’, from the nation’s most treasured well.

Petronas has to have a comprehensive restructuring. A new business model and structure has to be introduced.

The assets and borrowings have to be restructured. Everything has to be rationalised and the operations and projects have to reflect and be planned based on the rationalisation program.

It includes getting new people in, especially to fit the short and long term agenda of the nation, and the ‘new normal’.

The transparency in stories like this ‘shutdown of projects’ is necessary. The market needs to understand the recovery of the investment in the over RM100b project at the South East tip of Johor, RAPID.

The massive investment by Petronas, co-owned by Saudi Aramco is designed to produce 300,000 bpd.

The market is already edgy with so many uncertainties.

Published in: on April 25, 2020 at 17:08  Leave a Comment  

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