THE local oil and gas (O&G) sector looks set to enter a period of consolidation after a slew of major contracts dished out over the past few years propelled stocks to record highs.
A warning by their biggest customer, Petroliam Nasional Bhd (Petronas), has served notice that bidding will be more competitive.
In March, the national oil company’s president and CEO, Tan Sri Shamsul Azhar Abbas, warned of falling charter rates.
He expressed caution on companies expanding their fleet of O&G assets such as offshore support vessels (OSV) and drilling rigs, stressing that charter rates were set to see a marked slowdown from their current levels.
Citing a recent tender exercise, Shamsul had said OSV charter rates were 15% below the-then market rate.
In Malaysia, O&G service providers essentially have only one major end customer – Petronas.
So what it says matters. A termination, cancellation or reduction in orders by Petronas could adversely affect OSV players, and indeed all others along the value chain.
A fund manager, who declines to be named, opines that Shamsul’s warning is perhaps directed to the operators of smaller vessels, who tend to be more “eager” in their bidding.
According to MIDF Research analyst Aaron Tan Wei Min, Shamsul could be referring to smaller tugboats that belong to private companies, rather than large fleet owners.
“For the oil and gas sector as a whole, there is no concern about rates dropping. The bulk of our Malaysian public-listed companies own vessels that are in the medium range,” he notes.
As a rough guide, OSVs in the 5,000 brake horsepower (bhp) to 8,000 bhp category are medium sized, while those above 10,000 bhps are considered large.
Presently, Perdana Petroleum has the largest vessel capacity of its peers at 9,600 bhp. Icon Offshore’s is the smallest at approximately 5,200 bhp, analysts say.
Bumi Armada Bhd’s vessels have a capacity of 5,100 bhp, but they are in high demand due to their heavier tonnage.
An O&G analyst says that for the medium and large vessels, daily charter rates are cheaper in Malaysia than overseas.
While the calculations are complex, a simple back of the envelope will indicate that charter rates in Malaysia are US$2 per bhp, compared with US$3 per bhp in North America, the Gulf of Mexico and Africa.
“This is because our waters are calmer. In the Gulf of Mexico, the water tends to be rougher and there are also hurricanes,” he adds.
Of more concern to Petronas, however, is the age of locally-flagged vessels. Generally, vessels above 15 years of age are no longer useful and need to be scrapped.
But Malaysian OSVs remain young relative to the region at an average age of 6.4 years versus the South-East Asia average of 11 years.
Petronas’ current policies favour local companies over foreigners and restrict the ability of suppliers operating in Malaysia by requiring, among others, foreign suppliers to use Malaysian content in their operations and to operate with a Malaysian partner.
A fundamental change in Petronas’ policies, like the relaxation or liberalisation of licensing requirements, or allowing entities abroad to operate in Malaysia without restrictions, will no doubt pose a threat to the local industry, although market observers don’t expect Malaysia to become an open market anytime soon.
For now, analysts say there is no cause for panic, as the contracts dished out to local listed companies are locked into multi-year charters.
“In the near term, jobs for most OSV operators are not up for renewal. The bulk of these contracts are fairly new, having been awarded in 2013. In fact, we have been seeing expired charter contracts being renewed and extended as well. They typically last three to four years, with options for extension,” says MIDF’s Tan.
Another analyst notes that since most of these jobs come from reputable oil companies like Petronas, Shell and Petrofac, the risk of a downtrend in rates or contracts being cancelled are low.
In fact, given the current pace of O&G exploration and production, Tan believes that demand for offshore services is expected to inch higher.
He explains that as Malaysia’s daily production rate has dropped below 600,000 barrels of oil equivalent (boe) per day since November 2012, Petronas will pour even more effort into bumping up its reserves.
“For the last five months, Malaysia has produced an average of 580,000 boe per day. I foresee that more activities will take place. Vessels will be needed, not just to transport workers and supplies, but also equipment such as drilling fluids and generators,” Tan says.
An example of an offshore vehicle that will continue to command premium rates are pipe-lay and derrick lay barges, used to lay pipes which are also expensive to construct.
In Malaysia, the three notable operators of this type of vessel include Global Offshore (M) Sdn Bhd, a subsidiary of Puncak Niaga, Barakah Offshore Petroleum Bhd and SapuraKencana Petroleum.