Despite slow global demand and softening oil prices, the next wave of Petronas’ big contracts is expected to continue.
THE value creation and multiplier effect of Petroliam Nasional Bhd’s (Petronas) capital expenditure (capex) for the Malaysian oil and gas (O&G) industry is staggering.
There are close to 4,000 Malaysian O&G-related companies, and most of them are feeding off the huge capex being rolled out by Petronas over the last two decades.
From the peddling of nuts, bolts and grease to the higher-end services such as fabrication, chartering and engineering, immense wealth has been created.
Just some eight years ago in 2008, there were 15 listed O&G service support companies. Today, this has doubled to 30. The original 15 have seen their market capitalisation increase by 500% to 1,500% over this period.
Combined with the additional 13 new listed companies, a whopping value creation of almost RM130bil has been created over this six-year period.
This isn’t surprising, considering Petronas has invested some RM297bil for exploration and production (E&P) and related services between 2008 and 2013.
Consistently, nearly every quarter, a steady array of new contracts are being dished out to service players. Coming in to 2015, the pace of contract awards continues unabated. Surely, this means the party isn’t ending any time soon. The next wave of big contracts is expected to continue, with big money going into enhanced oil recovery (EOR) projects on the upstream, and Petronas’ Refinery and Petrochemical Integrated Development (Rapid) project in Pengerang, Johor, on the downstream.
On Wednesday, Petronas announced that it plans to ramp up production in its Gumusut-Kakap field, with sources saying that it could reach 80,000 to 90,000 barrels per day (bpd) by next year, from its current 20,000 to 30,000 bpd.
“Now, that is a huge ramp-up and will definitely require a lot more services. I would describe the sector as robust and exciting over the next five years,” said MIDF analyst Aaron Tan.
Given the need for more operating expenditure, service support companies continue to bank and harp on Petronas dishing out more work, apart from its five-year RM300bil capex plan up to 2015.
After all, investments will be needed for the replacement of ageing infrastructure like pipelines.
But will the exuberance continue?
Despite the exuberance, some cracks are showing.
Petronas itself has stated that the current decline in crude oil prices will dampen earnings in the second half of the year, even as its net income in the second quarter ended June 30, 2014 surged 46.58% to RM18.33bil from RM12.51bil a year ago.
The International Energy Agency (IEA) on Thursday said demand for oil worldwide is falling fast, as growth in Europe and China slows.
Reuters reported that for the whole of 2014, the IEA has cut its oil demand growth projection by 65,000 bpd to 900,000 bpd, while for 2015, it has cut its estimate by 100,000 bpd to 1.2 million bpd.
Petronas chief executive Tan Sri Shamsul Azhar Abbas recently warned that costs were on the rise, as E&P efforts grew more complex.
In a recent tender exercise, Shamsul said rates for offshore supply vessels (OSVs) had tumbled 30%, which he said was a “good thing”, as the market for offshore services had been overheating for “far too long”.
“Everybody has to accept this fact. Production sharing contractors are also looking for clarity (in terms of costs) and this could affect FIDs (final investment decisions).”
SapuraKencana Petroleum Bhd non-executive vice-chairman and part-owner Tan Sri Mokhzani Mahathir believes the sector will still be robust despite there being less consumption by the United States.
“The price of oil may not go crazy high ever again, but there are too many countries whose budgets depend on US$100 oil, so they will ensure it stays around that price. This will mean service contractors will still have a good order book. The field is getting competitive, but clients are still looking for the experienced contractor, strong enough to bear financial risk along with the promise of rewards,” says Mokhzani.
He says the trend is slowly moving towards alliance contracts, where it is very open book. Rates will come down and this will favour the established players, who have been in the industry and market for a longer period of time and know how to operate lean and mean.
“Many Malaysian companies have blossomed in the last six years, meaning they have not really experienced a downturn. The Malaysian giants of today like SapuraKencana, Dialog Group Bhd
and BUMI ARMADA BHD are products of the early 2000s and were ripe to take advantage of the booming oil business of the mid-2000s and withstand the dip in 2008. Those who came in after 2008 still have to learn how to operate on a low-cost basis,” he says.
Who would do well?
The type of players who would do well over the next five years will be extremely different from those who had done well in the past.
Tan says that not all O&G players are over-reliant on Petronas.
“If we were to track the contracts that have been dished out to our local listed players, value-wise, some 70% are from international oil majors,” says Tan.
Sources say that within the industry, two big trends stand out.
“Firstly, due to Petronas’ increasing commitments of selling gas to its international clients, there may come a time where every oil producer who drills for oil will be made to produce gas as well,” says an observer.
“Petronas has long-term commitments to sell gas. There could be certain targets worked out for providers who produce oil with Petronas. Therefore, moving forward, oil producers will have to think of a clever technology to produce gas cheaply,” says the observer.
Secondly, there are currently almost no decomissioning contracts in the market, but this is set to increase.
“There are big plans here. Moving forward, contracts handed out may include a budget for the decommissioning and deconstruction of a rig. This could be a very lucrative business for players who can do decomissioning,” says the observer.
Thirdly, there are EOR projects in the pipeline involving central-processing platforms such as those for the Kasawari, Sepat and Guntong fields that are up for grabs.
“While packages for the Rapid project in Pengerang, Johor, have been recently awarded to multiple foreign contractors, there is still a likelihood that some of the smaller jobs may be awarded to the local yards,” says AmResearch O&G analyst Alex Goh.
Mokhzani says that the O&G industry is all about managing life cycles of the reservoir.
“With more emphasis on environmental issues, production-sharing contract (PSC) holders can no longer not plan and be held liable for decommissioning. It’s happening now as more PSCs are coming to the end of their life cycle and fields are relinquished,” he says.
Mokhzani adds that the decommissioning business is a great way for smaller, newer companies to venture into the O&G space, as it’s still a sizeable contract, has little risk and does not need heavy assets to do the job.
“In risk service contracts (RSC), the emphasis is on the ‘R’, which precludes many small players who cannot take advantage of the contracts that the RSC gives out because they have no services to provide,” he notes.
Meanwhile, Mokhzani opines that EOR is also a big boys’ game because it is very technology-intensive.
“In Rapid, the cream of the contracts are in the engineering and procurement segment. The rest is really civil works and manpower supply,” he says.
Malaysian Oil and Gas Services Council president and SapuraKencana executive director Ramlan Malek says those that do well will be those involved in drilling, engineering and fabrication for heavier structures. “My feel is that it is still a very robust environment out there with healthy growth for the next five years,” says Ramlan.
Barakah Offshore Petroleum Bhd founder Nik Hamdan Daud says that now is the time to learn the E&P business and establish local strengths. “Over the next 10 years, we will see many local E&P players.”
He adds that the EOR is a big programme which will require a 20-year design life. It will enhance existing facilities, and hence, lengthen the lifespan of the reservoir. More maintenance will be required.
Tan adds that Petronas has not mentioned anything about reducing its operating expenditure, which is good.
“In fact, now that the production in the Gumusut-Kakap field is set to be increased (to 80,000 to 90,000 bpd), the increase in production will definitely require more services, from human resources to OSV,” he says.
Overcapacity?
Undeniably, some of the sectors, such as the chartering of certain vessels, are overheating. Too many players have entered the field and margins are already on their way down.
Secondly, the fabrication of lower tonnage vessels also seem to be declining, as there are too many of these vessels floating about in the market, and without work.
“There are admittedly many service support vessels in the market. With an environment of softening prices, and a more crowded playing field, there will be less work out there,” says Ramlan.
As for the fabricators, Mokhzani says that it is the backbone of the industry.
“What the larger fabricators are trying to do is form a smart partnership with clients to standardise designs of platforms, jackets and vessels, among others.
“This will enable a costing down programme and saves money for the contractor and client. Some clients and fabricators are preparing for the next downturn cycle. Perhaps 2018? This is because big assets take two years to build.
“In the last five years, there have been huge numbers of new assets like rigs and drill ships coming into the market.”
Tan is positive on the OSV segment for this very reason. A higher number of rigs coming onstream means more OSV being needed. Those affected will be players who own lower-end vessels.
Nik Hamdan adds that what is lacking in the industry is manpower capabilities.
“This is going to be a huge problem. The training of engineers is expensive. However, without enough jobs, we cannot train more engineers. Furthermore, as these engineers have skills which not many people have, they become very expensive as a result,” says Nik Hamdan.
More players to go upstream
Certainly, Petronas’ capex over the decade has resulted not only in enriching the companies, but also in creating global companies, namely, SapuraKencana, SCOMI GROUP BHD and Uzma Group Bhd. What do they all have in common? Well, they all have moved further upstream.
Petronas’ push has resulted in nearly every O&G company today owning some sort of an asset, whether a floating production, storage and offloading vessel, a floating storage and offloading vessel, a mobile offshore production unit, or an offshore vessel.
“There is still plenty of room for our Malaysian O&G companies, especially in the area of E&P. We will also see more local companies getting involved in RSC. This is superb for the development of our players,” says Nik Hamdan.
REACH ENERGY BHD executive director Datuk Mazlin Junid says with Malaysian companies going further upstream, they are now able to step in and fill up the vacuum left by the foreign upstream players.
He cites the example of SapuraKencana buying over the O&G assets of Newfield Exploration last year for US$898mil.
Mazlin says that as more players go upstream, more assets come to Malaysia, and this is already evident.
“Nowadays, you see local companies owning more sophisticated assets. You also notice that more and more discoveries are happening offshore,” he says.
Mazlin adds that as asset ownership is localised, prices will come down.
“Exploration and asset ownership have now been brought down to the local level, and because of this, we have become more competitive,” he says.
Notably, the interest in E&P has increased significantly and this is largely fuelled by Petronas’ successful oilfinds in Sabah and Sarawak over the last 10 years.
Earlier this month, SapuraKencana discovered gas at Bakong-1, the fifth and final well in its 2014 drilling campaign within the SK408 PSC area offshore Sarawak.
The newest discovery is the biggest in terms of gross gas column. It brings the total gas discovered to more than three trillion standard cu ft of gas in-place.
“There would be growth in the upstream. Petronas and its PSC partners are still very successful in exploration, as seen from the numerous O&G discoveries. So moving forward, we can continue to expect more development projects to be implemented,” says Ramlan.
Competitive players
Ramlan says that Petronas has been very supportive of the development of local players, even to the extent of supporting them overseas.
He adds too that the market should not over-generalise that Malaysian companies are expensive, as many Malaysian companies are competitive.
“At the end of the day, Petronas wants cost-effective services, so local companies will have to be more competitive,” he says.
He points out that some foreign companies may be able to offer better rates, as they get the support from their own governments. For instance, some of them get a tax exemption and certain other incentives, so this enables them to lower their cost. The examples are in manufacturing and fabrication,” says Ramlan.
As an example, Nik Hamdan adds that the cost of jobs in Malaysia is higher than in Indonesia because of higher requirements.
“For the same job and the same scope, it is higher here because of our requirements. For instance, in terms of safety, inventory or experience, Petronas has a higher criteria,” he says.
Nik Hamdan says credit has to be given to Petronas, as the push for deepwater has resulted in new technologies for deepwater exploration.
“This new technology has resulted in cost savings. Our companies have become more schedule-driven and safety-driven. We see quite a lot of innovations,where companies have now become more efficient,” he says.
He adds that Petronas does not want to see bumiputra agents stay just as agents. Petronas wants to see the sharing of contracts and the establishment of manpower capabilities.
Under Petronas too, the selection of bidder licences has now become stricter. There are now minimum technical requirements.
“Service providers who win jobs with Petronas really do have the capabilities to execute them,” says Tan.
Mazlin says Petronas’ push has resulted in Malaysian O&G service support companies becoming more competitive and producing world-class companies.
Petronas supports those that have stood out on their own merit.
“A lot of these companies now bid for more jobs in other parts of the world. They are now able to compete on a global platform,” he concludes.
The 2nd Malaysia Oil & Gas Services Exhibition and Conference (MOGSEC 2014), which is jointly organised by the Malaysian Oil & Gas Services Council (MOGSC), will be held at the Kuala Lumpur Convention Centre from Sept 23 to 25. The exhibition will showcase about 500 member service companies and is expected to attract about 10,000 industry visitors.
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