Petronas sees more tough years with oil price at US$30

KUALA LUMPUR: Petroliam Nasional Bhd (Petronas) said crude prices could average US$$30 (RM131.89) a barrel this year and warned that the state oil company faces two to three tough years.

Just two months after the company was assuming an average price of US$48 a barrel, chief executive officer Wan Zulkiflee Wan Ariffin (pic) laid out the new “low-price” scenario for 2016.

Petronas remained committed to its multi-billion dollar projects as it sticked to its capital expenditure plan of as much as RM350bil over the next five years, he said on Monday.

The world is awash in oil as members of the Organisation of Petroleum Exporting Countries seek to increase market share by pressuring high-cost producers, rather than cutting output to support prices. The deepening slump is adding fresh pain for Petronas as it juggles investing in long-term projects for future growth and meeting dividend obligations to the government.

“It’s prudent for Petronas and other organisations to be planning for an extended period of low prices,” Wan Zulkiflee, 55, said in an hour-long interview on the 81st floor of the world’s tallest twin towers. “The longer we are in this difficult period, I think the steeper will be the recovery because people don’t invest.”

The drop in oil has in part led to international investors souring on Malaysia, with the ringgit slumping to a 17-year low in 2015. The net-oil exporting nation stands to lose RM300mil for every US$1 a barrel decline in crude, according to government estimates. Brent currently trades below US$32 a barrel.

While a weaker ringgit was traditionally a boon for the company as it sold its products internationally, the benefits were less this time around as Petronas imported machinery and other goods for its projects, the CEO said.

Moody Investors Service lowered its credit-rating outlook for Malaysia on Monday, citing an external environment that has crimped government revenue despite Prime Minister Datuk Seri Najib Tun Razak’s efforts to improve the country’s finances. Najib said last week he would amend the 2016 budget to take into account the lower price of oil after using the same price assumption that Petronas did.

“The reversal in the price will happen,” Wan Zulkiflee said. “It’s only whether it will happen in three years, five years or in seven years’ time.”

A forecast of about US$30 a barrel already takes into consideration the oil glut and the lifting of restrictions on Iran selling in the international market, said Wan Zulkiflee, a three-decade veteran at the company. Petronas, which halted imports of crude from Iran in 2012, would explore the possibility of buying from the Middle Eastern nation once again when sanctions were lifted, he said, declining to elaborate.

The slowing Chinese economy and its weakening yuan were having an impact on Petronas’ sales and operations in the North Asian nation, Wan Zulkiflee said.

In Canada, Petronas is still awaiting environmental approval from regulators to start construction on the Pacific NorthWest LNG project, which has faced resistance from groups including indigenous organisations. The C$36bil proposal was “shovel-ready” and only awaited the permit, Michael Culbert, chief executive officer of the venture, said in October.

The company would review its decision within this quarter on whether to proceed because the project “can’t be held in abeyance indefinitely,” said Wan Zulkiflee. “The window is closing fast.”

It was important for oil companies to continue investing even as low prices prevailed, the chemical engineer by training said, citing Petronas projects such as a US$27bil integrated refinery and petrochemical complex in Johor. The development known as Rapid was expected to come onstream in 2019 and would require about 3,000 employees, he said.

If investments were held back, “when demand picks up, the whole industry may not be ready to meet the demand,” he said.

Wan Zulkiflee said the company would continue to maintain its production levels as significant cuts would result in setbacks when there was a recovery. Petronas hadn’t gotten to the point where it needed to “right-size” permanent employees even as it reviewed the status of contract workers, he said. It was also lowering spending by improving on procurement processes and cutting costs on business travel that saved the company 24% in operating expenditure excluding salaries last year, Wan Zulkiflee said.

The oil company reported a loss of RM565mil in the third quarter compared with net income of RM12.4bil a year earlier because of impairments resulting from lower crude prices. It was still committed to paying the Government RM16bil in dividends this year, down from RM26bil in 2015, Wan Zulkiflee said.

Petronas raised US$5bil by selling dollar bonds and Islamic debt in March. While it had sufficient cash to go through the difficult period, Petronas also had “a lot of headroom” if it needed to tap the dollar market, Wan Zulkiflee said. The company had net cash of about RM88bil at the moment, he said. — Bloomberg