PETROLIAM Nasional Bhd’s (Petronas) announcement of its third-quarter results comes at a delicate time, considering that it is being watched by all and sundry.
Amidst a scenario of a free-fall of oil prices and the politically-charged Umno General Assembly, it comes as no surprise that Tan Sri Shamsul Azhar Abbas (pic), the oil major’s president and chief executive, says he has to be “politically correct” in delivering his key message.
At a press conference yesterday, Shamsul also explained that Petronas had waited for the all-important Organisation of the Petroleum Exporting Countries (Opec) meeting to conclude before addressing the media in Kuala Lumpur.
And rightly so
The 12-member Opec decided on Thursday not to lower its output target, leading to oil prices plunging by a further 8% on Friday, cumulating in an almost 40% dip since mid-June.
The Brent crude oil price is now at US$72.84 per barrel and some forecasters are predicting that oil prices could hit US$60 per barrel.
Petronas itself is now predicting that oil prices could settle at US$70-US$75 next year.
This is a far cry from the US$108 per barrel that Petronas had averaged last year and the US$106 per barrel, which is the average price of the Brent crude for the first nine months of this year.
Shamsul lays out the bare truth on what the falling oil prices would mean for Petronas, the oil and gas (O&G) services industry and the federal government’s coffers:
> Capital expenditure (capex) on the O&G industry will be cut by between 15% and 20%;
> Petronas’ contribution to Government coffers in the form of dividends, taxes and oil royalty for next year will dive by 37% to RM43bil, assuming the Brent crude settles at US$75 per barrel;
> Petronas will not proceed with contracts to award new marginal oil fields unless oil settles at levels above US$80 per barrel;
> Projects in Pengerang that have yet to receive the final investment decision (FID) will be affected by the cut-backs. Projects worth US$27bil that have received FID will not be affected, but Petronas does not have 100% equity in all the projects approved.
The capex crunch is expected to send chills down the spine of the already fragile O&G sector, with the stock prices of listed players already haemorrhaging in light of the free-fall of oil prices.
Apart from the 40-odd listed O&G companies, there are close to 4,000 other smaller companies that depend on Petronas for O&G service jobs.
“Nearly all depend on Petronas for jobs,” says an official in the O&G industry.
The capex cut by the national oil company is likely to have a negative impact on these companies and runs contrary to what research houses have been projecting.
Several research houses have been stating that the Malaysian O&G industry is sheltered from the global slide in crude because Petronas will keep up with its spending of about RM60bil per year.
Taking a jibe at the forecasters, Shamsul says he has been warning of a shake-up in the industry in all his quarterly briefings.
“But nobody wants to listen to me. The worst part is, some of them have been listening to these so-called desk-top analysts who say this cannot happen because Petronas is always there to help them out … dream on.”
Shamsul says it is also reviewing the feasibility of some of its projects and could shelve projects that are no longer viable and for which Petronas has yet to make its FID.
“For the last nine months, we have been telling you guys about the likelihood that oil prices will drop. So the declining oil price is no surprise to us,” says Shamsul.
“But like every international oil company (IOC) out there, declining oil prices will impact us, and as such, we have to review our capex plans for next year onwards, which is also what the IOCs are doing. We have to assess the feasibility of projects,” Shamsul says.
He adds that at current oil price levels, marginal oil fields are no longer feasible for Petronas to get involved in, and warns that companies seeking to get involved in this business are “dreaming”.
When asked what was his message to the service providers seeking to do more work for Petronas, Shamsul said: “I’ve been singing this song for the last nine months, to watch out because things are not going to be that rosy.
“But not many seem to want to listen to me. So, I’ve stopped singing that song. But when they (service providers) get hurt, they will know,” he said.
Clearly, Shamsul is referring to how the sluggish oil price will force it to become more cost-effective in its projects, cancelling some, shelving others and negotiating down the terms of others.
Impact to federal government coffers
Meanwhile, Shamsul also explains that based on the assumption that oil prices average US$75 per barrel for 2015, the state oil firm would be paying the Government about RM43bil in dividends, royalty and taxes.
This would be 37% less than the RM68bil it plans to pay the Government this year.
“The lower dividend and other payout contributions is to ensure Petronas has enough money to replenish the reserves. If we are to maintain the payouts, it will have a significant impact on our growth plans,” says Shamsul.
As such, he says the Government should relook and rebalance its budget planning to adjust to the new level of oil prices.
He also reiterates that Petronas still needs to keep investing in new technology, in overseas projects and increasing its oil reserves in order to maintain its growth, considering that current production levels decline by some 10% every year, naturally.
At present, Petronas produces some two million barrels of oil equivalent per day.
“In five years, if we don’t replenish our production, our production will be down to half of what we have today,” he asserts.