PETRONAS’ financial year results that ended 31 December 2016 have shown improvements despite the challenging market environment. This was the result of the deliberate sequential measures undertaken by the Group in response to the low oil prices which included the Group’s transformation efforts and its continuous pursuit to optimise cost and improve efficiency.
PETRONAS’ profit grew by 12 per cent to record higher Profit After Tax (PAT) of RM23.5 billion, from RM20.9 billion recorded in 2015. This was mainly due to lower operating expenditures and tax expenses partially offset by lower average prices.
The Group’s revenue for the year dipped by 17 per cent to RM204.9 billion from RM247.7 billion in 2015. The decrease reflected the lower average prices in line with the downward trend of key benchmark prices (Dated Brent and Japan Customs Cleared Crude) coupled with the impact of lower sales volume.
Cumulative 2016 Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) was RM70.4 billion compared to RM75.5 billion recorded in 2015.
Cash flows from the Group’s operating activities also decreased from RM69.6 billion in 2015 to RM53.8 billion due to lower average prices, partially offset by lower tax paid.
The Group’s continuous efforts to reduce cost had contributed in 8 per cent or RM4.1 billion decrease in controllable costs to RM49.1 billion compared to RM53.2 billion in 2015.
Total assets and shareholders’ equity increased to RM603.3 billion and RM380.3 billion respectively, contributed by the impact of weakening of Ringgit against US Dollar exchange rate and favourable movement on fair value of available-for-sale financial assets.
Gearing ratio increased to 17.4 per cent compared to 16.0 per cent recorded last year. This was due to higher borrowings following additional drawdown made during the year. Return on Average Capital Employed (ROACE) increased to 5.3 per cent compared to 5.1 per cent in 2015 in line with the Group’s higher profits.
Capital investments for the year was reduced by 22 per cent to RM50.4 billion following project deferment and rephasing as well as cost optimisation efforts.
Meanwhile, PETRONAS’ quarter four profits recorded a strong 85 per cent jump in PAT to RM11.3 billion from RM6.1 billion recorded in the previous quarter. The RM5.2 billion increase was primarily driven by higher average realised product prices and sales volume mainly from LNG and processed gas as well as impact of favourable exchange rate partially offset by higher taxation.
Revenue rose by 20 per cent to RM58.6 billion from RM48.7 billion in the preceding quarter.
EBITDA for the quarter also grew by 44 per cent to RM21.9 billion in line with the Group’s higher profits.
Upstream continued to focus on delivering its commitments across the oil and gas value chain while putting in measures to increase cash generation and optimise cost.
Malaysia and PETRONAS Group’s international total upstream production was 2,363 thousand boe per day in 2016, a three per cent increase compared to 2,290 thousand boe per day in 2015. This was mainly driven by the resumption of operations of the Sabah-Sarawak Gas Pipeline, higher facilities uptime in Malaysia and Canada, and higher production from Malaysia, Indonesia and Australia.
PETRONAS Group’s total Liquefied Natural Gas (LNG) third party sales volume for the year was 29.01 million tonnes, marginally higher compared to 28.49 million tonnes in 2015 mainly contributed by higher volumes from Train 9 in Bintulu and GLNG in Australia, partially offset by lower trading volume.
Average sales gas volume for Malaysia in 2016 was higher as compared to 2015 in line with higher demand.
Among notable achievements in Upstream for 2016 include acquisition of four international blocks which include two recently acquired blocks in Mexico and two in Myanmar, the commissioning and delivery of first LNG cargo from Train 9, and successful commissioning of PFLNG Satu.
Downstream Business managed the impact of depressed market growth, lower product prices and spreads to record only a slight decline in the Downstream’s PAT from RM8.4 billion in 2015 to RM8.3 billion in 2016.
The collaborative efforts undertaken across the value chain led to higher utilisation of the Group’s manufacturing units in 2016. PETRONAS’ refineries in Malaysia and South Africa recorded strong refinery utilisation at 90.5 per cent and 89.9 per cent respectively.
Meanwhile, its petrochemical plants set a new record in utilisation since incorporation of 95.7 per cent, an improvement from the previous record of 85.3 per cent in 2015. This led to an increase in petrochemical products sales volume by 14 per cent from 6.4 million metric tonnes to 7.3 million metric tonnes.
Rationalisation of marketing and trading strategies to drive value focused activities, resulted in higher margins despite lower sales volume. Total petroleum products sales volume was 268.1 million barrels, 14.5 million barrels lower compared to 2015, while crude oil sales volume was 189.3 million barrels, 24.6 million barrels lower compared to the previous year.
Downstream projects continued to progress well. The Pengerang Integrated Complex as at February 2017 is close to 60 per cent completion and is on track to commence operations by 2019. Recently, PETRONAS signed a Share Purchase Agreement with Saudi Aramco for a 50 per cent equity in selected ventures and assets of the RAPID project. Meanwhile SAMUR is expected to begin commercial operations within the first half of 2017.
The Group continues to maintain a conservative outlook for 2017 and expects prices to remain uncertain. PETRONAS will continue to focus on its group-wide efforts to reduce costs and further improve efficiency and sustain world-class operational efficiencies through collaborations within and outside the industry.
Datuk Wan Zulkiflee Wan Ariffin, President and Group CEO PETRONAS
"I am encouraged that PETRONAS has emerged from 2016 as a more resilient Corporation with strong underlying performance driven by our new structure, significant cost reductions and improved performance. We are in a stronger position heading into 2017."
Media Relations Department
Group Strategic Communications
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Supply chains are currently in crisis. They have been for a long time now, ever since the start of the Covid-19 pandemic reshaped the way the world works. Stressed shipping networks and operational blockages – coupled with China’s insistence on a Covid-zero policy – means that cargo tanker rates are at an all-time high and that there just aren’t enough of them. McDonalds and KFCs in Asia are running out of French fries to sell, not because there aren’t enough potatoes in Idaho, but because there aren’t enough ships to deliver them to Japan or to Singapore from Los Angeles. The war in Ukraine has placed a particular emphasis on food supply chains by disrupting global wheat and sunflower oil supply chains and kicking off distressingly high levels of food price inflation across North Africa, the Middle East and Asia. It was against this backdrop that Indonesia announced a complete ban on palm oil exports. That nuclear option shocked the markets, set off a potential new supply chain crisis and has particular implications on future of crude oil pricing and biofuels in Asia.
A brief recap. Like most of Asia, Indonesia has been grappling with food price inflation as consequence of Covid-19. Like most of Asia, Indonesia has been attempting to control this through a combination of shielding its most vulnerable citizens through continued subsidies while attempting to optimise supply chains. Like most of Asia, Indonesia hasn’t been to control the market at all, because uncoordinated attempts across a wide spectrum of countries to achieve a similar level of individual protectionism is self-defeating.
Cooking oil is a major product of sensitive importance in Indonesia, and one that it is self-sufficient in as a result of its status as the world’s largest palm oil producer. So large is Indonesia in that regard that its excess palm oil production has been directed to increasingly higher biodiesel mandates, with a B40 mandate – diesel containing 40% of palm material – originally schedule for full implementation this year. But as palm oil prices started rising to all-time highs at the beginning of January, cooking oil started becoming scarcer in Indonesia. The government blamed hoarding and – wary of the Ramadan period and domestic unrest – implemented a Domestic Market Obligation on palm oil refineries, directing them to devote 20% of projected exports for domestic use. Increasingly stricter terms for the DMO continued over February and March, only for an abrupt U-turn in mid-March that removed the DMO completely. But as the war in Ukraine drove prices even further, Indonesia shocked the market by announcing an total ban on palm oil exports in late April. Chaotically, the ban was first clarified to be palm olein only (straight refining cooking oil), but then flip-flopped into a total ban of crude palm oil as well. Markets went haywire, prices jumped to historical highs and Indonesia’s trading partners reacted with alarm.
Joko Widodo has said that the ban will be indefinite until domestic cooking oil prices ‘moderate’. With the global situation as it is, ‘moderate’ is unlikely to be achieved until the end of 2022 at least, if ‘moderate’ is taken to be the previous level of palm oil prices – roughly half of current pricing. Logistically, Indonesia cannot hold out on the ban for more than two months. Only a third of Indonesia’s monthly palm oil production is consumed domestically; the rest is exported. An indefinite ban means that not only fill storage tanks up beyond capacity and estates forced to let fruit rot, but Indonesia will be missing out on crucial revenue from its crude palm oil export tax. Which is used to fund its biodiesel subsidies.
And that’s where the implications on oil come in. Indonesia’s ham-fisted attempt at protectionism has dire implications on biofuels policies in Asia. Palm oil prices within Indonesia might sink as long as surplus volumes can’t make it beyond the borders, but international palm oil prices will remain high as consuming countries pivot to producers like Malaysia, Thailand, Papua New Guinea, West Africa and Latin America. That in turn, threatens the biodiesel mandates in Thailand and Malaysia. The Thai government has already expressed concern over palm-led food price inflation and associated pressure on its (subsidised) biodiesel programme, launching efforts to mitigate the worst effects. Malaysia – which has a more direct approach to subsidised fuels – is also feeling the pinch. Thailand’s move to B10 and Malaysia’s move to B20 is now in jeopardy; in fact, Thailand has regressed its national mandate from B7 to B5. And the reason is that the differential between the bio- and the diesel portion of the biodiesel is now so disparate that subsidy regimes break down. It would be far cheaper – for the government, the tax-payers and consumers – to use straight diesel instead of biodiesel, as evidenced by Thailand’s reversal in mandates.
That, in turn, has implications on crude pricing. While OPEC+ is stubbornly sticking to its gentle approach to managing global crude supply, the stunning rebound in Asian demand has already kept the consumption side tight to match that supply. Crude prices above US$100/b are a recipe for demand destruction, and Asian economies have been preparing for this by looking at alternatives; biofuels for example. In the past four years, Indonesia has converted some of its oil refineries into biodiesel plants; in China, stricter crude import quotas are paving the way for China to clamp down on its status of a fuels exporter in favour of self-sustainability. But what happens when crude prices are high, but the prices of alternatives are higher? That is the case for palm oil now, where the gasoil-palm spread is now triple the previous average.
Part of this situation is due to market dynamics. Part of it is due to geopolitical effects. But part of it is also due to Indonesia’s knee-jerk reaction. Supply disruption at the level of a blanket ban is always seismic and kicks off a chain of unintended consequences; see the OPEC oil shocks of the 70s. Indonesia’s palm oil export ban is almost at that level. ‘Indefinite’ is a vague term and offers no consolation to markets looking for direction. Damage will be done, even if the ban lasts a month. But the longer it lasts – Indonesian general elections are due in February 2024 – the more serious the consequences could be. And the more the oil and refining industry in Asia will have to think about their preconceived notions of the future of oil in the region.
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