Although regulated, the domestic O&G industry is a crowded field. Despite Petronas calling on the industry to consolidate since 2015, the industry has hardly seen major mergers.
ANOTHER blow for the domestic oil and gas (O&G) industry is the latest warning from Petroliam Nasional Bhd (Petronas) that the rollout of projects in and outside Malaysia could face some slowdown due to the prolonged lockdowns worldwide.
The national O&G company in reply to questions stated it would strive to maintain its domestic spending for this year, but anticipated disruptions due to the breakdown in the global supply chain from service providers as a result of the lockdowns to contain the Covid-19 pandemic.
Petronas is expected to spend between RM26bil and RM28bil in capital expenditure (capex) this year. Its spending drives the highly regulated local O&G industry that is largely controlled by bumiputra-owned companies.
Although regulated, the domestic O&G industry is a crowded field. Despite Petronas calling on the industry to consolidate since 2015, the industry has hardly seen major mergers.
The reason is because probably many of the companies are comfortable with the margins of the contracts being dished out and presumably earn decent profits. A few listed companies have yet to restructure their financials since the 2014 June crude oil crash and have had their names struck off from the list of Petronas contractors for not performing up to the mark. However, the industry continues to attract new companies.
Petronas’ calls for the industry to consolidate have not been effective. Under such circumstances, a possible delay in the rollout of capex, if it happens, amid a fragile price outlook for oil could just be the push factor for a market-driven industry consolidation.
In fact, it is surprising that Petronas has not revised its capex for this year, as most oil majors have cut their spending by between 20% and 30% following the latest crash in prices. Saudi Aramco has revised its capex from US$35bil to US$25bil, Brazil’s Petrobras has cut its expenditure by 29% to US$8.5bil, while Shell and BP have slashed their spending this year by 20%, respectively.
Moreover, the global oil scenario does not look good for this year and next.
The US-based Energy International Administration (EIA) in a report last week predicted oil demand to drop to 95.5 million barrels per day (b/d) this year, from an average of 100.7 million b/d in 2019. It expects Brent crude to average US$33 per barrel this year and US$46 the next.
The Paris-based International Energy Agency (IEA) paints a better picture, expecting demand this year to drop by 90,000 b/d to an average of 99.9 million b/d. In the worst-case scenario on the assumption that the Covid-19 pandemic is not contained by the third quarter, the IEA forecasts demand to drop by up to 730,000 b/d.
To prevent a further spiraling down of oil prices, an agreement was reached by members of the Organisation of the Petroleum Exporting Countries (Opec) and non-Opec members to cut production by close to 10 million b/d. US President Donald Trump reckons that the oil production would be cut by up to 20 million b/d.
Even the state of Texas in the US is looking at cutting down on production, the first time since the 1970s, as it anticipates weak demand for oil.
The Covid-19 pandemic has virtually caused an upheaval to any form of transportation. Petrol kiosks are seeing less sales because most people stay at home, airlines are grounded because there is no passenger traffic while cruise ships are docked.
For years, Petronas has been using gentle suasion methods to consolidate the players in the domestic O&G companies. The disruptions due to the Covid-19 pandemic and the risk of Petronas delays in rollouts may just be the panacea for industry consolidation.
https://www.thestar.com.my/business/business-news/2020/04/15/unrestricted-thoughts---blow-for-og-industry
