‘Local players still cautious about capital, operating spending’

KUALA LUMPUR: Local oil and gas (O&G) firms remain cautious about capital expenditure (capex) and operating expenditure despite global oil majors having raised theirs this year.

The industry is most likely to see increased capex for oil refining and gas processing, integrated companies and exploration and production.

Malaysia Petroleum Resources Corporation (MPRC) president and chief executive officer Datuk Shahrol Halmi said although the recovery in crude oil prices had led to some optimism in the upstream O&G sector, a higher oil price scenario (higher than US$70, or RM273, per barrel) might not be sustainable in the longer term.

“In this environment, upstream investments are gradually expected to recover but decisions will be based on a more moderate oil price of between US$50 and US$60 a barrel, and existing assets will continue to be operated at a lower cost to maintain margins.

“This situation is also likely to pave the way for more investments to be made into extracting value from the O&G value chain in areas such as petrochemicals (for oil) and power (for gas). “We also expect oil companies to increasingly explore opportunities in the renewable energy space as a result of these developments,” he told NST Business recently. Shahrol said the majority of Malaysian oilfields were in the matured stage (brownfields) while newer ones were located in deeper water, posing technically challenging requirements that drive up costs.

“It is critical that the cost per barrel for Malaysian fields remains competitive. This will increase the attractiveness of our oilfields amid intense competition for capital between lowercost oil producing nations.

“If our costs are high, investments from international oil companies will be reallocated to other areas that provide better returns and, hence, resulting in fewer projects in Malaysia.

“We encourage local players to respond to the challenges by increasing economies of scale, moving up the value chain, developing innovative technologies, expanding into international markets and diversifying into the downstream segment.”

MIDF Research O&G analyst Aaron Tan said increasing capex required cash and banks were still reluctant to lend to O&G service providers.

“While capex increase is a positive indicator for major oil companies, it is not a positive indicator for service providers. Increase in capex must tally with the new contracts that they are confident of getting. Most are extremely cautious and are looking at maintenance capex instead of capex for fresh expansion.

“The catalysts for service providers will be project, contract or activity visibility. Therefore, higher crude oil prices will cause oil majors to increase capex, which will result in them dishing out projects and increasing offshore works,” he said.