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Industry players must emulate Petronas


In the environment of low oil prices, Petronas also underwent a restructuring. It created a new business division called Project Delivery and Technology, which was responsible for projects, and research and technical solutions for the upstream and downstream units. The company also slashed a lot of duplication and simplified processes, freeing up employees to focus efforts on generating more value and improving productivity.

In the environment of low oil prices, Petronas also underwent a restructuring. It created a new business division called Project Delivery and Technology, which was responsible for projects, and research and technical solutions for the upstream and downstream units. The company also slashed a lot of duplication and simplified processes, freeing up employees to focus efforts on generating more value and improving productivity.

The surge in the price of crude oil in the 2000s was the catalyst that led to the Goldilocks period that transformed the local oil and gas (O&G) services and equipment (OGSE) players.

According to the International Energy Agency, investments in the upstream O&G industry between 2000 and 2014 saw a five-fold increase, growing from US$160bil in 2000 to US$780bil in 2014 when crude oil prices peaked above US$100 a barrel.

The spike in the price of crude oil was driven by rapid growth in China and developing countries during the 2000s that saw production of crude oil struggle to keep up with demand.

High crude oil prices meant that once uneconomical deposits of unconventional oil were profitable to produce, and that sparked the exploration and development of shale oil between 2010 and 2014. That extra source of crude O&G, which tipped the scales of supply ahead of demand, led to a price meltdown in the global crude oil market in mid-September 2014.

What emerged from then was a collapse in the price of crude oil, which nobody thought was possible. From the lofty price of above US$100 a barrel, the price of crude oil plunged below US$40 a barrel, creating turmoil in the O&G industry around the world, and subsequently, huge cuts in upstream investments by the oil majors.

Petroliam Nasional Bhd (Petronas) was not spared. It has reduced both capital expenditure (capex), investment in new projects and operating expenditure by close to RM50bil since 2015.

Petronas also undertook a series of sequential steps to weather the immediate impact of the declining price, which focused on cutting costs, improving cash generation and ensuring successful delivery of key growth projects. Named Project Cactus for the plant’s resilient nature, pragmatic cuts allowed Petronas to save RM7bil, on top of the capex cuts it had made.

In the environment of low oil prices, Petronas also underwent a restructuring. It created a new business division called Project Delivery and Technology, which was responsible for projects, and research and technical solutions for the upstream and downstream units. The company also slashed a lot of duplication and simplified processes, freeing up employees to focus efforts on generating more value and improving productivity.

The national oil company also took bold steps to embark on industry-wide initiatives known as Coral 2.0, or the cost reduction alliance 2.0 programme.

The aim was to sustain the long-term competitiveness of Malaysia’s upstream sector through close collaboration between Petronas and its partners, including the petroleum arrangement contractors (PACs) and OGSEs, and drive a cost-conscious mindset across its businesses. Coral 2.0 is a five-year programme from 2015 until 2019 and is an extension of Coral 1.0, which was implemented from 1994 to 2005.

Its efforts are now bearing fruit. The cost-cutting measures have helped Petronas weather the price storm that has sent the industry reeling over the past three years.

There were 11 initiatives highlighted under Coral 2.0, and some included technology replication, low-cost drilling, late field optimisation and integrated logistics control.

The collaborative efforts between Petronas, the PACs and service providers to cut cost have created about RM5bil in additional cash savings since 2015 that was eked out via revenue generation, cost reduction, tax optimisation and working capital.

The slump in crude oil prices in 2014 also prompted international oil majors and service providers to undertake measures to cut costs.

In the ensuing years of its cost-saving programmes, the question of what is the next step for the local O&G industry has become pertinent in the industry.

Some argue that it would take some time for the industry to transform itself in an environment of low oil prices.

But the trend is slowly changing and moving towards alliance contracts and consolidation that would see players learn how to operate by being lean and efficient.

To further push for consolidation among the players, Petronas has started to be transparent with the industry players about its plans over the next two to three years on the type of capacities it needs.

There are about 4,000 O&G companies that are registered with Petronas. Norway, which has similar-sized O&G deposits as Malaysia, has just around 700 players in this sector.

 

Low oil price to stay

ALTHOUGH the price of crude oil has rebounded from its atrocious levels following the crash in 2014, the growth of the upstream segment, which involves activities in exploration and drilling, is expected to remain challenging with the supply glut expected to continue.

That impact of the low oil price environment on the diverse and competitive OGSE sector in Malaysia can be telling.

“It is, thus, critical to have any approach to reforming the industry not be a ‘one-size fits all’ model, but rather one with a clear appreciation of the distinctions among individual segments,” BCG Kuala Lumpur Partner and managing director Rick Ramli says.

As with any rejig in an industry, there will be winners and losers and it will take time for the adjustment process to work.

“It is important to stay the course even if in the short term, we hear more from those negatively impacted by the reform measures than from those positively impacted. In the end, we will have a much stronger, competitive and vibrant OGSE industry. It will take many parties to work together to truly transform the OGSE sector,” he says.

“Petronas is ready to do its part to facilitate this important effort and work together with industry and government to deliver a transformed OGSE sector.”

Accenture Strategy managing director Sven Ruytinx says the Coral 2.0 programme is a good opportunity for Petronas to bring together the operators and service providers in Malaysia to address the industry situation.

In light of the challenging oil prices, Petronas leveraged on its unique dual role in Malaysia as regulator and operator to kickstart the Coral 2.0 programme in 2015.

“It was a good opportunity for Petronas to bring together the operators and service providers in Malaysia to address the industry situation. In Coral 2.0, Petronas has worked with PACs and service providers to create a collaborative environment that drives optimization in the Malaysian upstream O&G industry,” says Ruytinx.

“More importantly, it has also changed the mindset of the industry to be more cost conscious and transparent in its way of working. This is the outcome of unwavering commitment from Petronas, as well as the high level of participation across all the operators and O&G service providers in Malaysia.”

Seamog Group managing director and CEO Sofiyan Yahya says the opportunities given by Petronas in terms of projects for local participation, as diverse as from upstream to downstream, is fertile ground for the range of local players to grow and gain valuable experience.

Having key projects overseas, Sofiyan says the ability of companies like Seamog which were garnished from winning jobs locally, is clear testimony that local experience is relevant and exportable. He adds that Petronas’ vision of spreading the work to a plethora of companies has been instrumental in the development of a broad-based and capable OGSE segment.

He says regular engagements is a necessity (and strategic) so that the messaging by all parties and stakeholders are on the same page. “Petronas has clearly undertaken the role to engage with industry either with different sectors of industry or with industry associations,” he says, adding that the activity outlook is extremely important for OGSE players to strategise for the coming year.

“It gives advance warning for business preparedness,” he says.

Petronas has said that it plans to continue with efforts to control costs even when the price of crude oil is on the mend, as its efforts have saved RM5bil through cost-cutting initiatives.

Some local equity analysts remain bearish on the overall outlook of the sector and are more upbeat on the prospects of the downstream companies.

They say that crude oil prices are still trading way below their days of US$100 a barrel, and until they go up significantly from where they are now, that will put a lid on future large exploration projects.

Also, the fallout from the drop in the price of crude oil has prompted oil majors to shift their investments into the downstream sector. The downstream sector of the O&G industry involves the refining of crude oil and natural gas, as well as the marketing and distribution of products from crude oil and natural gas.

Nonetheless, the oil markets could be poised for another wild ride with the development of shale oil set to continue as well as geopolitical tensions in oil-producing countries.

The message has been that in order for the industry to survive and strive, all players in the O&G industry must transform to ensure the sustainability of the industry. To push this, Petronas has started to be transparent about its activities in the next two to three years on the type of capacities it needs.

But low oil prices are not the only thing that will shape the O&G sector, moving forward. Market liberalisation, digitalisation and a new market environment should be part of the industry’s drive to reinvent itself.

Oil & Gas , Corporate News , Petronas , outlook

   

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