PETALING JAYA: Petroliam Nasional Bhd (Petronas) is looking to make cuts in its operating expenditure (opex) by between 25% and 30% to preserve its profitablity as crude oil prices continue to tumble.
Sources said that the national oil company was reviewing its spending and was in the process of identifying where cuts could be made. Projects it has committed to from last year and in its budget are likely to continue.
Oil company executives said word was starting to filter to them that cuts in opex would be made as the price of crude oil continues to fall. As the price of Brent crude oil was falling and at US$70 a barrel late November last year, Petronas said it would slash its capital expenditure (capex) up to 15% this year.
With the price of global crude oil now at around US$50 a barrel, more oil majors have announced cuts in not only capex but also their opex, which includes payroll.
One executive said the drop in crude oil prices had been worse than what many in the industry had imagined and that it would have a ripple effect throughout the entire supply chain.
“We are expecting operating and capital expenditure cuts by Petronas and are starting to make adjustments,” he said. The oil and gas industry had focused on production as prices remained high and often neglected the cost management side of the business.
That is changing and executives said the first effects from cuts were being seen in exploration and production (E&P) activity.
Moody’s Investors Service said in a report yesterday that the plunge in crude oil prices would reduce E&P activity and raised the risk for oilfield service (OFS) companies.
“Lower oil prices will directly reduce cashflow in 2015 for E&P companies, which will try to offset the shortfall by reducing their capital investments, reducing earnings for OFS companies as activity drops and E&P customers negotiate lower prices,” Moody’s said.
Oil majors around the world have started to slash their spending and jobs are already being lost as a result of plunging crude oil prices.
Giants such as BP will cut thousands of jobs at a cost of US$1bil and for the companies in Malaysia, the fear is that job cuts may be next.
The price of West Texas Intermediate (WTI) crude oil was at around US$48 a barrel at press time yesterday. The price of Brent was slightly higher at around US$51 a barrel.
Industry officials fear Petronas will flex its muscle to ensure cuts are carried out should it deem necessary.
The officials said clauses in contracts with Petronas tended to give the national oil firm leeway to make changes in the terms of service with the private companies it dealt with.
“Development projects that Petronas has committed to are expected to continue but there will be changes in how they consume services. And there will not be many companies that are going to challenge Petronas even as it makes changes to the services it uses,” said one oil company executive.
But some feel that risk may not materialise.
An oil and gas analyst said that when Petronas gave out contracts, there were clauses which stated that Petronas could scale back what had been given out depending on certain conditions.
“So yes, the service providers are at the mercy of the vendor. Petronas has never exercised that clause before,” said the analyst.
An industry player is hopeful Petronas would not revisit the terms and conditions of existing contracts because there would be legal implications, as contractors also beared certain risks such as foreign exchange and other operating risks at the time of agreement.
On top of that, it would be time and resource consuming for Petronas to change the terms.
“Many oil and gas contracts won were through bidding. In the process, Petronas will shortlist contractors with the technical knowhow and then they will choose the contractor who offered the lowest price,” he explained.
He opined that Petronas might be more conservative in its capex compared with opex when it came to cost-cutting measures.
“Although it had indicated that it would cut capex by around 15% in the event oil prices stayed too low, the national oil company can choose not to spend the capex it initially anticipated,” he added.
He also noted that it was a challenging period for services providers and they too would have to adapt to the new structure and find innovative ways to keep their prices low.
That said, the industry player was hopeful that things would improve in the second quarter because shale production in the United States would no longer be commercially viable if the price of crude oil stayed at this level for too long or falls further. For industry players to remain competitive, they will have to diversify their clientele base.
“Players will also have to look for alternative income revenues to replenish their order-books.”