Subdued but improving oil and gas industry in 2016

Oil consensus: Petronas has voiced its commitment to adjust crude oil production in line with the Opec and non-Opec agreement to reduce global supply.

KUALA LUMPUR: The oil and gas industry endured another challenging year in 2016 as the global supply glut continued to haunt the market, pushing global crude oil prices to their lows.

In fact, benchmark Brent dived to as low as US$27.88 per barrel in January from a high of US$114.81 recorded in June 2014.

Save for the intervention by the Organisation of the Petroleum Exporting Countries (Opec) in December, which injected some positive vibes to prices, the industry was mostly quiet with little news making the headlines throughout the year.

The decline in oil prices has also forced the government to recalibrate the 2016 budget in January as the initial budget tabled in parliament in October 2016 forecast oil price to average US$48 per barrel this year.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid described the sector this year as weak in various fronts.

“For one, we have seen the sharp fall in Petronas’ capital expenditure which was down 28%, year-to-date, for the nine-month 2016 period to RM35.9bil from RM49.7bil in the corresponding period last year.

“In that sense, we can expect companies along the value chain, especially those involved in the upstream activities, to be the immediate casualties,” he told Bernama.

Afzanizam said assets under-utilisation became common with significant impact to the cashflow and profitability among players.

“In a nutshell, players are scaling back their investments in view of oil price uncertainties,” he said.

Hibiscus Petroleum Bhd managing director Kenneth Pereira said it took Opec and non-Opec producers to collectively intervene to really make a difference and stabilise oil prices, the main driver of financial performance for industry participants.

For our small company, we could only hope that the main players would act logically and rationally for a collective good. After two years of pain and uncertainty, it seems we are getting there, he said.

Among the positive stories of the industry during the year was the success of special purpose acquisition company (SPAC) Reach Energy Bhd to obtain approval from shareholders for its qualifying asset (QA) of the onshore oil and gas field called Emir-Oil LLP in Kazakhstan, for US$154.89mil (RM640.54mil).

This made Reach Energy the second SPAC, after Hibiscus Petroleum Bhd, to become a full-fledged oil and gas firm.

However, it was not the same story for two other SPACs, Sona Petroleum Bhd and CLIQ Energy Bhd, which had to be liquidated after failing to obtain the QAs before their deadlines set under the SPAC guideline by the Securities Commission.

Sona Petroleum, in a filing with Bursa Malaysia in July, announced that the company would appoint a liquidator for winding up purposes after failing to acquire QA before July 31 while earlier in April, CLIQ Energy made the same announcement after failing to obtain the QA before April 9.

Overseas, the consortium, led by Petronas, received the nod from the Canadian government to build a US$27bil liquefied natural gas plant on Canada’s Pacific Coast after more than three years of regulatory review.

The approval, however, came with more than 190 conditions and Petronas said it would review the conditions attached before deciding whether to move forward with the project.

Domestically, Petronas’ Refinery and Petrochemical Integrated Development (Rapid) project site in Pengerang continued to make steady progress and is on track to be completed by early 2019.

Petronas has also voiced its commitment to adjust crude oil production in line with the Opec and non-Opec agreement to reduce global supply.

The voluntary adjustment is expected to be implemented beginning January 2017, taking into account prevailing market conditions and prospects, it said in an email reply to a foreign media.

Meanwhile, a deepwater field operated by Royal Dutch Shell, Malikai, off the east coast of Sabah is scheduled to start oil production soon and at its peak can produce 60,000 bpd oil.

Going forward, Opec’s decision on Dec 1 at the cartel meeting in Vienna to cut oil production by 1.2 million barrels per day (bpd) starting from January next year, gave some boost to the oil price with Brent jumping almost 10% after the announcement.

In line with the decision to boost oil prices, Russia also announced its commitment to reduce output by 300,000 bpd, with several other non-Opec countries following suit.

That commitment by non-Opec countries is estimated to cut a total 600,000 bpd from the supply line.

The combined 1.8 million bpd potential output cut from Opec and non-Opec is said to represent 2% of global oil production.

As of Dec 16, Brent was trading around US$54 per barrel and has been trading above US$50 per barrel since the announcement.

According to an analyst, the global oil market is currently oversupplied by 700,000 bpd while demand is expected to increase by 1.2 million bpd next year.

The cut in production will definite give a positive momentum to oil price going forward, he maintained.

This is considering that US shale production, a major contributor to the oversupply situation, has also declined to 8.6 million bpd currently from its peak of 9.6 million bpd in June 2015.

Pereira said the increase in oil price to above US$60 per barrel would bring the US shale industry into play in a big way.

Prices above US$60 per barrel will also cause shale opportunities to open up in other countries.

“So my feeling is that unless there is a spike in global energy demand or a political or military intervention in a geography that is impactful to the supply side of the equation, oil prices of US$54-US$60 per barrel is the range we have to work with at the current time,” he said.

Furthermore, newly-elected US President Donald Trump’s plan to revitalise the shale industry can again hamper the oil and gas sector, putting more uncertainties to the movement of oil prices next year.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said there were still a lot of uncertainties with regard to the prospect of crude oil prices in the medium to long-term. – Bernama

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