LNG's adverse impact on Petronas and Malaysia

PETALING JAYA: The earnings of state-owned Petroliam Nasional Bhd (Petronas) and the country’s current account are expected to come under pressure in the next few months due to the steep drop in the average price of spot liquefied natural gas (LNG).

LNG prices track crude oil prices and have more than halved, with the average spot price down as of April to US$7.60 mmbtu (million British thermal units)since oil prices started their downward descent last July.

LNG makes up two-thirds of Petronas’ total oil and gas production, and with contract agreements up for renewal, analysts pointed out that earnings would be hit.

The average price of spot-LNG in July 2014 was US$13.8MMbtu, and prices rose slightly to US$15.1mmbtu as of Dec 2014. It started adjusting early this year, and as of April, it stands at US$7.9mmbtu.

Economists believed that the country would face a current account (CA) deficit in the second quarter if countracts negotiated were not favourable.

Citigroup Inc economist Kit Wei Zheng warned that headwinds from lower oil prices, which have not been as severe based on first-quarter gross domestic product (GDP) data, could increase going forward.

“The impact of weaker LNG prices on the CA should be maximum in the second quarter, and the CA surplus should recover in the second-half for leading to a full year surplus of 3.2% of GDP,” he said in a report following the release of Bank Negara’s first-quarter GDP data last Friday.

In 2014, Petronas produced a total of 1,358 kboe (kilo barrel of oils equivalent) of gas out of a total of 2,226 kboe of oil and gas. Gas made up 61% of Petronas’ total oil and gas production that year.

The LNG sales volume that year increased 4% to 30.12 million tonnes from 28.85 tonnes in 2013, driven by higher trading volume and higher sales from the Petronas LNG complex in Bintulu, Sarawak.

Not only would that have implications on Petronas earnings, but Petronas’ contributions to government revenue could be impacted. Petronas contribution had dropped to about 22%, from 30%.

In 2012 and 2013, when the going was still good and Brent crude stood above US$100 per barrel, Petronas had contributed RM80bil and RM73.4bil respectively to the Government.

For 2014, that contribution has been estimated to drop to around RM68bil with Brent averaging US$99 a barrel. The contribution for 2015 would decrease further with Brent oil now hovering at the US$60 level.

Petronas had earlier estimated that Brent crude would be about US$55 per barrel for 2015. Brent crude has now recovered slightly to the US$66 level.

Besides the implications to Petronas earnings and the Government’s revenue, economists have pointed out that the drop in LNG prices could potentially impact Malaysia’s CA surplus.

However, a Petronas official said recently that the national oil company has a long-term approach to the LNG business, with supply security part of contract negotiations, which could be signed for up to 20 years in some cases.

This official said that negotiators should not view LNG contracts as any other trading or marketing deals, and depend solely on the vagaries of price fluctuations.

Therefore, the official pointed out that contracts were not locked in based on market prices. In Petronas’ case, the price offered to customers differs based on its multiple sources of gas supply and proximity to the customers’ markets.

With differing degrees of project maturity in its portfolio, Petronas can offer differentiated terms and varying degrees of tenure to the contracts.

Petronas has continued to boost gas resources in Malaysia, growing it to more than 100 trillion cubic feet last year.

“This ensures that we deliver 25.7 million tonnes per annum of LNG from our complex in Bintulu. The additional gas resources discovered to date will ensure that we can continuously sustain this level of production for years to come,” said the official.

In Petronas’ Canadian operations, the potential recoverable resource exceeds 60 trillion cubic feet.

Oil & Gas , Economy , Corporate News , Gas , Petronas , LNG