Challenges for Petronas

Petronas Dagangan chairman Datuk Wan Zulkiflee Wan Ariffin

IN Malaysia, at the centre of the oil price crash lies Petroliam Nasional Bhd (Petronas), whose fortunes are inextricably woven with that of our nation’s.

The question that everyone keeps asking is how badly will Petronas be affected and what would the impact of that be.

The simple answer is that in the short- to medium-term (and also depending on how prolonged the oil price decline will be) Petronas will be badly hit, like all other major oil companies.

But in comparison to international oil companies (IOCs), Petronas is buffered in the sense that it owns the oil and gas deposits in Malaysia.

Still, Petronas’ latest second quarter result displayed the extent to which it was being affected by the lower oil price – profits from its upstream business fell by 57% for the first six months of this year.

It is also slowing down its exploration work. By the end of the year, only 14 of its exploration rigs will be in operations, compared with 39 as at the end of last year.

Petronas’ increased production figure plus excellent oil refining margins have not been able to set off the impact of low crude oil prices.

Petronas also said that in this low oil price environment, its cash flow from operations is not expected to meet its capital expenditure (capex) and dividend commitments moving forward.

But this should not come as a surprise. Petronas’ officials have been warning of this for some time now.

IOCs are also being hit hard.

It has been reported that BP, Royal Dutch Shell, Chevron, Norway’s Statoil and Australia’s Woodside Petroleum have collectively shelved some US$200bil of their planned capex on projects due to the slumping oil prices. French giant Technip is expected to cut 20% of its 3,000-strong workforce in Malaysia this year, including locals and expatriates on contract and full-time basis

But what sets Petronas from the rest is this fact: it is in the midst of two massive projects that would require billions in investments - the RM60bil Refinery and Petrochemicals Integrated Development (Rapid) project in Pengerang, Johor and the US$36bil (RM137bil) Petronas-led Pacific NorthWest LNG project in Canada.

What complicates things is that both projects were first entered into just before the recent oil price crash.

So why is Petronas still pursuing these investments and are these going to be viable projects considering the oil price direction now?

Petronas has already revealed that they are renegotiating contracts on these projects, to reflect current rates which in turn have dipped in line with lower oil prices.

And this could be the silver lining: Petronas would be building up this capacity in a low cost environment and potentially reap the benefits if and when oil and gas prices rise back to the highs of yesteryears.

To be sure there are two assumptions here: one that Petronas is really able to keep its costs down on these projects (in other words, whether it is able to successfully renegoatite all earlier signed contracts for thsse projects) and secondly, that the price of oil does rise to previous highs at some point in the future.

Whatever the case, Petronas new CEO Datuk Wan Zulkiflee Wan Ariffin (pic) has certainly got his work cut out to see to the national oil company through these times of turbulence.