‘Oil price unlikely to remain high’
Wan Zulkiflee: Market well-supplied despite attacks on Saudi facility
THE drone attacks on major oil installations in Saudi Arabia early this week caused panic in the global oil markets. But the price surge that followed didn’t last long.
Petroliam Nasional Bhd’s (Petronas) president and group CEO Tan Sri Wan Zulkiflee Wan Ariffin explains that oil prices are unlikely to enjoy any prolonged surge because the market is “well-supplied”.
This is despite the fact that Saudi Arabia produces about 10% of the world’s oil supplies and that the recent incident is said to be the single worst sudden disruption for oil markets in history.
On Sunday, there was a drone attack on one of Saudi Arabia’s most important oil facilities which removed almost 5% of the world’s daily supply of crude oil.
The situation also created an assumption that oil prices would remain high, much of the benefit of Petronas.
“I don’t think there will be prolonged elevated prices. Like what we have seen this week, the price had settled down to US$64 per barrel, after Brent crude oil spiked to US$70 a few days before,”
“It is a short-term disruption. The focus is what would happen next after the drone attacks,” he tells reporters after Petronas’ first half 2019 results briefing in Kuala Lumpur yesterday.
Nonetheless, Wan Zulkiflee points out that the demand for oil, which impacts oil prices, is constantly being watched by Petronas.
In particular, he refers to possible oil demand disruptions as a result of the trade war between the United States and China.
He points out that the International Energy Agency (IEA) has lowered its growth forecast for oil demand for 2019 to 1.1 million barrels a day from 1.5 million a day previously.
“That is a 33% reduction in nine months,” he says, adding that Brent crude oil prices could be averaging at mid-us$50 per barrel next year.
Notably, IEA has also reduced its forecast for oil demand in 2020 to 1.3 million barrels a day.
In terms of supply, the agency expected that supplies from outside Opec would rise by 2.3 million barrels a day in 2020 from 1.9 million barrels a day this year.
Energy research firm Rystad Energy says US oil production is on track to spike to a record 13.4 million barrels per day by the end of 2019, which is more than double what it produced in 2012 and almost two million barrels more than a year ago.
The United States imports about 630,000 barrels of Saudi oil a day, down about half from 2017.
Petronas capex at Rm50bil
While the oil and gas (O&G) industry remains challenging due to declining demand and lower crude oil price expectations, activities in the local upstream sector are more vibrant than last year.
Wan Zulkiflee says the national oil company remains committed with its Rm50bil capital expenditure this year, despite a slow start in the first half of the year.
For the first half of the year, Petronas deployed about Rm15.7bil of its capital expenditure to the upstream activities.
It is targeting to deploy close to Rm35bil in the second half of the year.
Wan Zulkiflee points out that typically for first half of the year, capex deployment is usually slower and will pick up in the second half.
About half of the total capex allocation at Rm25bil has been earmarked for local oil and gas activities, which should boost activity in the sector.
“O&G activities in Malaysia is picking up with about 28 rigs in production in comparison to last year’s 18 rigs,” Wan Zulkiflee says.
“We expect activities would remain around this level for this year,” he adds.
For some context, Petronas had some 39 rigs in operation in 2014, and this reduced dramatically to 14 in 2015, in line with the depressed market.
In an interview with Starbizweek last month, Wan Zulkiflee had reiterated that Petronas would like to have consistent annual capex of Rm50bil regardless of the market condition.
“I don’t believe in big swings in capex spending even in difficult times. This is because our projects have a long gestation period.
“We need to take a view of oil prices in the next three to five years, when the project is completed,” Wan Zulkiflee explained.
Based on Petronas’ activity outlook for 2019, a low case scenario will still see 16 jack-up rigs (JURS) deployed for this year, in comparison with an average of nine to 10 JURS in Malaysian waters as at October 2018.
Going by its latest results, Petronas has readily available cash of Rm169.98bil against total debt of around Rm77.3bil at June 31.
Despite the lower average oil price at US$66 per barrel this year compared to US$70 last year, Petronas posted a 9% increase in profit after tax to Rm28.9bil for the first half ended June 30, from Rm26.65bil a year ago.
It attributed the increase in its bottom line to higher sales of crude oil and liquefied natural gas (LNG) and a weak ringgit against the US dollar.
In terms of revenue, it rose by 3% Rm121.12bil in the same period from Rm117.16bil a year ago.
Stellar performance
Earnings before interest, tax, depreciation and amortisation rose by 5% to Rm54.70bil from Rm52.20bil, in line with the higher profit before tax.
“Petronas continued to deliver a healthy financial performance for the first half of 2019 despite persistent challenging market conditions,” Wan Zulkiflee points out.
For the second quarter ended June 30, Petronas’s profit after tax increased by almost 8% to Rm14.69bil from Rm13.62bil a year ago.
However, revenue marginally declined to Rm59.12bil from Rm59.24bil, due to lower average realised prices for petroleum products and LNG. This was partially offset by higher sales volume for crude oil and LNG, coupled with the effect of the weakening ringgit against the US dollar.
Aside from renewable energy, Wan Zulkiflee says Petronas is also expanding its core business including smaller-scale LNG solutions such as bunkering and virtual pipeline systems via isotank.
In terms of dividend, which is a hot topic, he says Petronas is expected pay lower dividend to the government next year.
Notably, for this year, Petronas will be paying a total of Rm54bil to the government consisting a special dividend of Rm30bil and the normal dividend of Rm24bil.
The special dividend is for the government to settle the outstanding tax refunds.