National OGSE industry blueprint — A decade-long revival to O&G industry

The oil and gas (O&G) industry is yet to fully recover from the great oil bust of 2014 when the Covid-19 pandemic slowly crept in late 2019.

A full-blown pandemic began to disrupt the global economy in early 2020 with the imposition of lockdowns worldwide, adding further volatility to the industry as well as the aviation industry with no cross border travel allowed for a major part of last year.

Narrowed down to the oil and gas, services and equipment (OGSE) sector, it has not been spared from the pressure of a low oil price environment that has persisted since 2014 with shareholder value already reversed approximately 60 per cent by end-2019.

Apart from the pandemic, value creation was further depressed with the emergence of two other major events last year namely OPEC+ disagreement on supply cuts and the storage shocks that quickly followed amid an oversupply in the oil market.

In addition to these market forces, O&G operators had also reduced their capital expenditure amid the environment and further erased 50 per cent of the market capitalisation of OGSE firms since early 2020.

Malaysian OGSE players

Against a backdrop of a weaker oil and gas environment, the government has launched the National OGSE Industry Blueprint 2021-2030 to revive the industry’s ailing ecosystem with emphasis on diversification, upskill and consolidation among its key goals.

Despite substantial growth of the OGSE industry in Malaysia in the past, the industry faced constraints in achieving further value creation, having already endured a reversal in value following the 20142016 oil price crash, which has led to a persistently low oil environment.

International oil benchmark Brent crude averaged at US$41.96 per barrel in 2020 compared to an average price of US$64.30 per barrel the previous year.

Malaysia has a total of 1,563 active OGSE companies as of November 2020 that has contributed RM65.1 billion in revenue in 2019. Exports made up 32 per cent of total revenue that year. Asia School of Business assistant professor of business and society, Dr Renato Lima de Oliveira said Malaysia has been historically able to develop a strong supply base for the O&G industry, with growing inroads into international markets, particularly in comparison to countries like Indonesia, Thailand or Vietnam.

“Malaysia’s OGSE is an important segment and I am glad to see the attention received with this initiative and the efforts led by Malaysia Petroleum Resources Corp (MPRC) with the recently launched blueprint,” he told Bernama.

Among the long-term goals set in the industry, the blueprint includes the need to have the OGSE sector contribute RM40 billion to RM50 billion in annual gross domestic product (GDP) from RM20 billion to RM40 billion currently.

The blueprint

Maybe it is safe to assume that Covid-19 is a turning point for the government to revive and strengthen the oil and gas industry, which has long been one of the key contributors to the economy.

The OGSE industry contributed 5.0 per cent to 8.0 per cent to the country’s GDP directly servicing the domestic O&G industry that made up 14.5 per cent of GDP and 13.8 per cent of the government’s revenue in 2018. However, the industry has long been weighed down by structural issues, such as financing gaps, high dependency on Petroliam Nasional Bhd (Petronas) contracts as well as an oversaturated industry that warrants industry consolidation.

“Some of the challenges were similar to 2014, as the fragmentation of the supply chain and low margins of operation; but others are new, such as the speed in which the energy transition is taking place,” said de Oliveira.

Looking at the sector today, he added that it was critical to prepare players to seize opportunities beyond oil and gas transferring their capabilities and skills to new sectors, such as renewables, the most dynamic energy segment nowadays.

“Ideally, the initiatives set up by the blueprint would help Malaysian companies to gain market share in international operations, enter into more value-added, research and development-intense segments, and transition to beyond oil and gas,” noted De Oliveira.

The blueprint also aims to see 25 per cent of total revenue derived outside of the O&G sector – such as renewables and other power sectors – by 2030, as well as to triple OGSE patents from just 36 patents filed over the last five years. It also aims to churn out 60,000 skilled and semi-skilled talents by 2030 and two per cent of the OGSE companies to be listed on Malaysia’s stock exchange in the period.

The blueprint also allows the OGSE industry to adapt and to be a part of the renewable energy sector in light of the growing environmental, social and corporate governance concerns and also helping the players to secure their social licence to operate.

Devil is in the Detail

All eyes cast on the details on upcoming measures such as customised incentives for consolidation as well as export grants and incentives.

Also launched recently was an RM25 million OGSE Development Grant, which is targeted to accelerate innovation in hightechnology and environmentally sustainable solutions.

De Oliveira said the blueprint identifies good flagship initiatives, but the most challenging part of an industrial policy was always the implementation and monitoring of results over time.

“It is a good start but there will be lots of work ahead,” he added, while also highlighting three key challenges of the future of the O&G industry in Malaysia.

The primary challenge was the domestic volume of production has peaked since 2008 and may decline fast after 2025 unless significant new discoveries are found, he pointed out.