Difficult oil or new efficient energy pursuit poser


PETROLIAM Nasional Bhd (Petronas), which recorded a weaker financial performance in its second quarter for the financial year 2012, is aiming to substantially beef up its capital expenditure (capex) moving forward.

Its CEO Tan Sri Shamsul Azhar Abbas and executive vice-president of finance Datuk George Ratilal had repeatedly highlighted in Friday's press conference that this will be the immediate focus for Petronas at least in the coming five years.

Shamsul who appeared sombre in the press conference said Petronas' capex requirements were projected to cost it RM32bil over the next five years. These would be spent on renewing its assets to cope in the new era of “difficult oil” exploration for oil and gas companies (O&G), he said.

“The era of easy oil is over. We are moving into an era of “difficult oil”. To develop and produce these difficult oil involves new equipments which are costly. Entitlement in terms of production of (O&G) is going to get less and less. This will have a significant impact on Petronas' profitability,” Shamsul said

“Old facilities have got to be replaced these are basically critical types of facilities and equipments. It will grow (lengthen) the life of these facilities but not bring in any profits at all. That's what it is. Towards the end of this year and the next, a lot of our upstream facilities' maintenance schedule have been deferred. This is because we are facing pressure to produce gas, so we have no choice but to defer some of these maintenance work because we were forced to produce gas for the country's requirements,” he said.

He notes that due to this, Petronas will need to embark on “maintenance and shutdown programmes” for its asset facilities.

This sentiment is also shared by George who had articulated that Petronas will need to see substantial capex spending moving forward.

“Very soon you will see Petronas hitting the half a trillion ringgit mark in total assets. But the larger the base, the higher risk there is, especially when profits are down,” he added.

“We have embarked on some major capex programmes the pipeline of renewals will have an impact and they are not going to bring any additional profit. This is cost, but we need this, otherwise we will not have any revenue in future,” he said.

Petronas may need to rethink whether it is economically feasible to continue on the arduous task of exploring difficult oil or whether it should plough a portion of its resources into research and development and to eventually become a producer of new and more efficient energy sources instead.

This is more so as the national oil company is reliant on the fluctuations of oil prices and other factors such as currency movements which are out of its control.

As Shamsul aptly says in his presentation that should oil prices go below US$80 per barrel “it may be difficult for Petronas to continue growing, funding our capex plans and giving the government dividends.”

As the national oil company moves into an era of difficult oil, industry trends of late indicate that traditional O&G giants are slowly evolving to become more comprehensive energy companies instead. This is apparent in commercial oil giants such as Shell, ExxonMobil and BP which have over time developed their alternative energy company entities.

On the backdrop of the evolving energy landscape, ExxonMobil had noted in its corporate profile that energy supplies can change dramatically over time considering that 100 years ago, most of the world's energy came from wood and coal.

“Over the next 30 years, advances in technology will continue to remake the world's energy landscape. Fuels will continue to grow less carbon-intensive and more diverse,” ExxonMobil says.

Moving forward, it is forthcoming not only for commercially driven O&G entities to be in the learning curve of alternative energy production but also for state-owned giants such as Petronas to eventually step into this elaborate learning curve as well, however steep it may be.

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