Petronas’ 2018 priority is Rapid
Khairul Khalid 
Petronas is expected to spend some RM55 bil in capital expenditure this year

Despite the latest sterling financial results by Petroliam Nasional Bhd (Petronas), local oil and gas players hoping for a shot-in-the-arm might be in for a disappointment. This is due to prevailing uncertainties in the sector.

Moreover, while Petronas is expected to increase its overall capital expenditure this year, it will likely focus on completing its highly anticipated Refinery and Petrochemical Integrated Development (Rapid) project in Pengerang, Johor, which could benefit only a handful of players.

As a result, small oil and gas (O&G) companies will continue to face tough times this year. “Hopefully, Petronas’ recovery will continue to improve this year and lead to more projects for local players other than Rapid. Petronas’ new discovery of oil in Gabon is also great news,” the CEO of a local O&G company tells FocusM.

“But the sector will need more time to recover, especially the small players. There are still too few jobs. We don’t expect it to change anytime soon.”

This month, Petronas announced an FY17 profit after tax of RM45.5 bil on the back of RM223.6 bil revenue, an increase of 91% and 15%, respectively, year-on-year (yoy). The company attributed its improved revenue to higher average realised prices for major products coupled with the effect of the ringgit’s weakening against the US dollar. This was partially offset by lower sales volume for crude oil and condensate, and petroleum products.

Consequently, analysts expect Petronas to be cautious this year. Last year, its capital expenditure declined 12% yoy to RM44.5 bil. Spending for exploration and development also fell by 15% yoy to RM10 bil but rose 38% for the Rapid project which has reached a completion stage of 84%. Rapid alone accounted for 53% of Petronas’ capital expenditure last year, up from 34% in 2016.

Although taking a conservative approach, Petronas president and CEO Tan Sri Wan Zulkiflee Wan Ariffin is said to be eyeing investments in downstream operations, such as specialty chemicals and renewable energy solutions, including solar. However, this is not expected to be a major catalyst in the short term.

“While companies operating in the Rapid project (such as Dialog Group Bhd and Malaysia Marine Heavy Engineering Holdings Bhd) could secure fabrication jobs or off-take storage tanker contracts in Pengerang, the overall potential boost to the majority of domestic offshore operators will be minimal,” says AmInvestment Bank.

Higher revenues on the back of lower net impairment and oil well cost optimisation have resulted in better profits. In addition, cash flow from Petronas’ operating activities has also improved significantly to RM75.7 bil, up 41% yoy.

Going forward, Petronas’ contractors are likely to benefit from pan-Malaysian transport and installation/maintenance, construction and modification umbrella jobs.

Despite this, contracts awarded by Petronas declined 15% yoy to RM7.6 bil last year. But on a quarter-on-quarter basis, contracts awarded increased by 20% to RM1.6 bil. This was mainly the award of pan-Malaysian jobs to Sapura Energy Bhd.

“As these pan-Malaysian umbrella scope of works are mainly determined on a call-up basis, we still expect Petronas to maintain a cautious approach to upstream exploration and development expenditures,” says AmInvestment Bank.

TA Securities is expecting earnings for O&G upstream contractors to remain weak due to several factors. Tenders for greenfield developments could remain scarce, with compressed project margins due to intense competition and sustained cost controls by oil majors, says the research house. Furthermore, fleet utilisation and charter rates will remain weak due to asset oversupply, coupled with low demand.

On the other hand, the gradual recovery in oil price is expected to result in higher cash profit for exploration and production (E&P) players. Based on a mixed outlook, the research house maintains its “neutral” call on the sector with FY18/19 average oil price assumptions of US$60-65 per barrel.


Successful cost-reduction measures

AmInvestment Bank states that while Petronas’ overall capital expenditure will eventually grow this year, its primary focus will be the completion of Rapid.

“Petronas is targeting a 24% capital expenditure escalation to RM55 bil this year following its FY17 core net profit increase of 27% to RM46.6 bil amid higher crude oil prices and largely successful cost reduction initiatives.

“However, with Q4 capital expenditure decreasing by 14% qoq and 26% yoy to RM11 bil, we highlight that the overall exploration and development spending trend is likely to be proportionately lower than for Rapid, which remains Petronas’ priority as its completion is scheduled for Q1 2019,” says AmInvestment Bank.

The Rapid project is being built at an estimated cost of US$27bil. It was launched in 2012 and is set to begin operations by Q1 next year.

Rapid is also part of the 8,903ha Pengerang Integrated Petroleum Complex (PIPC), which includes a refinery and petrochemical complex with a capacity of 300,000 barrels per day and a combined annual chemical output capacity of 7.7 million tonnes.

The development of the PIPC also includes associated facilities such as the Pengerang Co-generation Plant (PCP), an LNG re-gasification terminal, a raw water supply project, the Pengerang Deepwater Terminal, as well as centralised and shared utilities and facilities.


Gabon boost

Petronas’ strong financial performance in FY17 ended Dec 31 was also boosted by its recent announcement of deep water O&G discovery in Gabon, West Africa.

On March 5, Petronas’ subsidiary PC Gabon Upstream S.A. (PCGUSA) announced new O&G discovery from its Boudji-1 exploration well in Block F14 (Likuale), located in South Gabon.

PCGUSA is the operator of Block F14 (Likuale), with Australia’s Woodside Petroleum Ltd holding a 30% interest. The ultra-deepwater exploration well, drilled in water depths of 2,800 metres, encountered 90 metres of gross high quality hydrocarbon-bearing pre-salt sands.

Petronas’ deepwater portfolio includes partnerships in the Gumusut-Kakap, Malikai and Kikeh deepwater fields located offshore Sabah. Additionally, there are two new upcoming deepwater development projects – the Limbayong field in Sabah and Kelidang Cluster in Brunei.

It also recently signed a farm-out agreement (FOA) with Australia’s FAR Ltd for a 40% interest in the offshore petroleum licences of Blocks A2 and A5, located offshore Gambia.


Dividends will depend on oil price outlook

What the future holds for Petronas will greatly depend on the pace of global crude oil price recovery. This, in turn, depends on the pace of oil production by the Organisation of Petroleum Exporting Countries (Opec).

AmInvestment Bank says oil production quotas initiated by Opec at the beginning of last year had a significant effect on US oil inventories.

The inventories fell by 21% from March 2017 to 423.5 million barrels, despite US daily oil production reaching above 10 million barrels.

The research house maintains its 2018-19 Brent crude oil projection of US$60-65 per barrel. As of March 7, Brent was trading at just a whisker below US$65 per barrel.

If crude oil price improves, Petronas will be expected to pay more dividends this year. It is targeting a 19% growth in dividends to RM19 bil, up from RM16 bil in both 2016 and 2017.

This article first appeared in Focus Malaysia Issue 275.