Petronas gains from higher oil prices

But national oil company determined to continue with cost-cutting measures

COST-CUTTING measures have helped lift Petroliam Nasional Bhd (Petronas) to sail through the storm from the heavy beating it has taken from the plunge in the price of crude oil since September 2014.

Although the price of oil is at about half of what it was three years ago at US$100 a barrel, Petronas has managed to steer its business in the right direction to cope with today’s volatile oil market.

At the first-half results briefing on Petronas, president and chief executive officer Datuk Wan Zulkiflee Wan Ariffin, who is in his final year of a three-year contract, looks determined to continue with cost-cutting measures and is not about to take an optimistic viewpoint, stating that the low oil price environment is to continue.

“Despite higher oil prices compared to a year ago and overall stronger financial and operational performance, the industry remains volatile, and we are tempering our optimism,” he says.

“The price of oil today, at around US$50 per barrel, is the level we must take as the norm,” he says, adding that the oil price is expected to be at US$49 per barrel at the end of the year and next year.

As crude oil prices rebound from an atrocious level following the crash in the commodity, Petronas managed to steer its performance in an upward trajectory for its second quarter ended June 30.

The national oil company posted more than a four-fold jump in profit after tax to RM7bil from RM1.7bil a year ago. Revenue for the quarter rose 10% to RM51.6bil from RM46.9bil previously.

For the first-half of 2017, the group’s revenue surged 15.4% to RM108.1bil from RM93.7bil previously. Its net profit for the period soared 160% to RM17.3bil from RM6.4bil in the same period last year.

While the higher price of crude oil helped greatly, the cost-cutting measures and efficiency drive also lifted profit.

“While the price of oil was a significant factor, I also view this as the tangible results of Petronas’ transformation measures taken in response to the industry downturn,” Wan Zulkiflee says.

Petronas’ cost-cutting measures have led to about RM7bil in cumulative cash improvements since 2015 from revenue generation, cost reduction, tax optimisation and working capital.

Wan Zulkiflee is quick to point out that there were several “hard decisions” that the national oil company had to make “in sustaining the organisation’s future business interest”.

The major one was to call off its proposed US$29bil liquefied natural gas (LNG) export terminal project in western Canada due to soft prices.

The decision, Wan Zulkiflee says, has a total impact of RM1.5bil after tax, including about RM700mil impairment charges, while the rest is termination costs for TransCanada for the construction of a pipeline.

Petronas also sold two major blocks in Vietnam following the expiry of the contract, which marked the end of its 26 years of upstream operation in that country.

The firm is also winding down its presence in Cameroon as part of its portfolio review.

“I view them as short-term pain for long-term gains; something we will continue to do,” Wan Zulkiflee says, adding that the divestment will allow the oil major to pool its resources on better projects.

The key areas Petronas is looking at is continuing with its investment in the downstream sector, as well as making the Americas as its key geographical focus.

Although the LNG terminal project in Canada is off the table, Petronas’ Canadian dream has yet to come to an end.

Wan Zulkiflee says Petronas is now looking at other methods to monetise its gas assets in Canada, which has 22.3 trillion cu m of proven resources.

“We will be in Canada for the long term. North America has a big market for gas.

“Now, we are looking at our options and finalising our strategy on how to monetise our gas assets in Canada,” he says.

‘Future-proofing’ through downstream

Wan Zulkiflee points out that Petronas has been “upstream biased” in the past years, and that will change with the completion of its mammoth US$27bil Refinery and Petrochemical Integrated Development (Rapid) project.

“Contribution from the downstream sector will be bigger than what it was 10 years ago,” he says.

The Rapid project, located at Pengerang in Johor, is expected to begin operations in 2019. Rapid will contain a 300,000-barrelper-day oil refinery and a petrochemical complex that will be able to produce 7.7 million tonnes a year.

“We are future-proofing the company. The decision to go further into downstream will strengthen our portfolio, and it is a decision that is also being undertaken by our competitors,” Wan Zulkiflee says.

According to him, Rapid will be the key for a bigger contribution in the downstream segment aside from expanding its lubricant and petrochemical businesses in Malaysia, Vietnam and India.

As at June 30, Petronas had spent RM21.3bil in capex, of which 59% was for the Rapid project. Only 20% of its first-half capex was used for exploration and development projects.

Too many service providers

While the call for consolidation among the oil and gas (O&G) service providers has been made countless times by Petronas since 2014, Wan Zulkiflee reckons it will continue to take a long path.

He says consolidation is neces- sary, especially with the need to build resilient companies that are able to withstand the cycles in the O&G industry.

He explains that there are eight fabrication yards in Malaysia, and that Petronas’ requirement for the next few years will not be able to fill up the available capacity.

“But it’s not only the fabricators. We just have too many service providers in the industry,” he says.

To further push for consolidation among the players, Wan Zulkiflee says Petronas has started to be transparent about its plans over the next two to three years on the type of capacities it needs.

“This will be made available to companies that are registered with Petronas so that they will have the data on our plans in terms of projects for the next three years,” he says.

There are about 3,700 O&G companies that are registered with Petronas. Norway, which has similar-sized O&G deposits as Malaysia, has just around 700 players in this sector.

“Also, we really are pushing for consolidation. This will also be input for companies and part of their consolidation plans so that they will have a feel for the market over the next few years,” Wan Zulkiflee says.

“I think it will benefit all parties involved, not only Petronas and production sharing contracts, but also the O&G service industry,” he adds.