Conservative estimates suggest that in the wake of oil prices crashing in late 2014, the Malaysian oil and gas services and equipment (OGSE) sector contracted by at least 11%. Analysis of overall financials for the OGSE sector by the Malaysian Petroleum Resource Corp, an agency under the Prime Minister’s Department, reveal that revenue for 2015 fell by 11%, while profits contracted by a severe 52.3%. Including companies such as MISC, Sapura Energy, Dialog, Scomi, Bumi Armada, the numbers for 2016 are not available yet, but a glance over the financial reports released for the bigger players indicate that while sector revenue will probably be down for the year, profits maybe be up, after aggressive cost-cutting that included a tide of retrenchments.
So what is in store in 2017 and beyond?
If we go by the health of Petroliam Nasional Berhad, better known as Petronas, the word seems to be “cautiously optimistic”. The guardian and bellwether of Malaysia’s Oil & Gas sector, Petronas is one of the few major integrated state oil companies that is holding up fairly well during the current on-going oil crises. Petrobras is engulfed in debt, as is PDVSA, while Pertamina appears to be struggling with corruption and clarity of its long term investment direction while select Russian entities battle being used as political tools. Full year 2016 revenue for Petronas fell by 17.3% from lower sales coupled with weak crude prices but profit was up by a whopping 28% to RM16.95 billion (US$3.82 billion), just slightly behind Shell’s own profit for 2016. For 2017, Petronas projects better times ahead, promising no more staff redundancies and bolstering defences by pegging its 2017 capex expenditure at US$45/b, while it prepares to focus on natural gas - both at home in Sarawak and Sabah, and abroad in its Canadian LNG export project, and the recent go-ahead given to its massive US$27 billion RAPID refinery and petrochemicals project.
However if oil prices fall any further or just lingers within the US$50-55/b range, the so called recovery being experienced now, may just stagnate or not be strong enough to re-boot the industry to its previous glorious days and create the jobs badly needed for Malaysia. The threat of market oversupply is still there as US shale oil continues to grow unabatedly. The reality is low oil prices for (much) longer. The future prosperity of Petronas would depend on how much it can increase its productivity and lower production costs. Petronas has moved very decisively and embarked on intensifying its internal cost competitiveness through better collaboration amongst other upstream operators in Malaysia through the CORAL 2.0 project, and is beginning to see lower cost scenarios for its well engineering programs already. On the new technology front, Petronas is collaborating with MIT Innovation Sdn Bhd (MIT) to promote a smart and efficient technology that significantly lowers drilling costs. All moves in the right direction.
The weak link to Petronas’s current cost strategy and competitiveness globally could however be its very own local supply chain. As Petronas tries to prosper in the current climate, the industry that supports it needs to be similarly positioned to do the same - efficient and cost competitive. With the exception of a few large players like MISC, Sapura Energy and Dialog that have the width and breadth to survive challenging conditions like in 2015 and 2016, further down the supply chain, the smaller players many of whom are just agents or third-party equipment representatives do not necessarily own technology, are extremely vulnerable to volatility. (Debt is a particularly pressing concern in this end of spectrum especially in the offshore segment, with players like UMW Oil & Gas, Dayang Entreprise and Perisai Petroleum Teknologi facing recent problems in renegotiating their debt incurred during the good times. Those who can’t keep afloat will be targets for acquisition or forced mergers, like the recent merger between UMW Oil and Gas, Icon Offshore and Orkim.) In a recent business seminar, Malaysia Petroleum Resources Corp (MPRC) senior vice-president Syed Azlan Syed Ibrahim said that “although we foresee 2017 will not be far off than 2016, I do not think it will be worse. This is the opportunity for players to make the hard decision to restructure or reform. That time is now. They (local oil & gas supply chain companies) need to do it now so that when the market goes back up they will be ready” Calls for consolidation amongst local companies, especially in the upstream segment will help strengthen the industry, allowing for greater combination of resources for increased technological innovation and value creation that is urgently needed for Petronas to be competitive locally and overseas. Less reliance on foreign US dollar denominated technology or service providers will help Petronas achieve its low cost operations goal.
As Petronas announces fewer projects in 2017 compared to pre-2014 levels, local service player will need to compete and work outside Malaysia for revenue and business growth. It will be useful here for the local oil industry to emulate the success in the Norway. As we have seen and witnessed the growth of Statoil, Norway's national oil company, as a global player in the oil industry, it is backed-up with a group of highly matured and capable technology and services providers. The grouping is now known as Norwegian Energy Partners or NORWEP in short. NORWEP looks beyond the shores of Norway for new business, and compete for projects globally. It independently (without Statoil’s direct assistance) builds relations with other governments and strategically partners with other state controlled oil companies. To date, it has achieved a respectable track record in developing new technologies in enhanced oil recovery methods as well as strong health & safety in its operations.
Looking into the future of energy, the argument for diversification into how energy will be generated, distributed and utilised also seems compelling. Shell is convinced that the next phase of fossil fuel energy will belong to gas. Petronas is well positioned in the gas business, as it continues to be within the top 3 exporters of LNG globally with strong gas reserves and infrastructure locally as well as internationally, especially in Canada. However the argument for energy diversification goes further from fossil fuels. During the 2017 CERAWeek, the fossil fuel big annual conference, most speakers proclaim a long and prosperous future for their industry. But companies and countries that rely on oil and gas income are recognizing that renewable forms of electricity are gaining traction as prices come down and their popularity rises. Oil executives are adapting their portfolios to add cleaner fuels and moderating their rhetoric on climate change. "A low-carbon future will reshape the energy space. Some see this as a threat to our industry, but we should rather look for and act on the opportunities it offers," said Eldar Sætre, CEO of Norway's Statoil. "We have to respond more forcefully to the challenge of climate change." The oil and gas industry has clearly recognized that its monopoly on transportation fuels is weakening for the first time since automobiles replaced horse-drawn carriages. To be fair, Petronas has embarked on feasibility projects in renewable energy space with the commissioning of a Solar Independent Power Plant (IPP) project in Gebeng in Kuantan. The Solar IPP project came on-stream in 2013 has a capacity of 10 megawatt peak (MWp). However this venture seems to be dwarfed by recent announcements especially from the gulf operators. Saudi Aramco is planning to produce 10 gigawatts of power from renewable energy sources including solar, wind and nuclear by 2023 and transform Aramco into a diversified energy company. The kingdom also plans to develop a renewable energy research and manufacturing industry as part of an economic transformation plan announced by Deputy Crown Prince Mohammed bin Salman. Shell, Europe’s largest oil company, has also recently established a separate division, called New Energies, to invest in renewable and low-carbon power. The new division brings together its existing hydrogen, biofuels and electrical activities. Should Petronas make bigger investment in-roads into the renewable energy sector now rather than later? Shell is projecting that it will not make any money from renewable investments at least for another 10 years. Getting ahead in the game will certainly help any new player. Noting of course that there are other players in Malaysia in the renewable energy scene, for example Tenaga Nasional Berhad or TNB is growing its portfolio in solar energy aggressively.
In conclusion, Petronas seems to be generally on the right path in evolving its energy mix and growth strategy in the energy sector. Being a state controlled company, it will require undivided political support to transform its local supply chain and embark on a commercially driven low cost structure. If the large dividends that Petronas pays annually to Government are to continue, it should be an incentive for the Government for more action to reform the industry’s supply and support base.
Petronas being a large and complex business, reforms typically take time. However due to the prolonged nature of the low oil price climate, the pace of change impacting the industry seems to be moving faster compared to previous downturns. As the oil business is global and fairly transparent in terms of revenue and cost structure, Petronas is unfortunately unable to dictate it’s not own timeline in reforming itself and the industry that supports it. “Faster the better..lah” seems to come to mind. Easier said than done.
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When it was first announced in 2012, there was scepticism about whether or not Petronas’ RAPID refinery in Johor was destined for reality or cancellation. It came at a time when the refining industry saw multiple ambitious, sometimes unpractical, projects announced. At that point, Petronas – though one of the most respected state oil firms – was still seen as more of an upstream player internationally. Its downstream forays were largely confined to its home base Malaysia and specialty chemicals, as well as a surprising venture into South African through Engen. Its refineries, too, were relatively small. So the announcement that Petronas was planning essentially, its own Jamnagar, promoted some pessimism. Could it succeed?
It has. The RAPID refinery – part of a larger plan to turn the Pengerang district in southern Johor into an oil refining and storage hub capitalising on linkages with Singapore – received its first cargo of crude oil for testing in September 2018. Mechanical completion was achieved on November 29 and all critical units have begun commissioning ahead of the expected firing up of RAPID’s 300 kb/d CDU later this month. A second cargo of 2 million barrels of Saudi crude arrived at RAPID last week. It seems like it’s all systems go for RAPID. But it wasn’t always so clear cut. Financing difficulties – and the 2015 crude oil price crash – put the US$27 billion project on shaky ground for a while, and it was only when Saudi Aramco swooped in to purchase a US$7 billion stake in the project that it started coalescing. Petronas had been courting Aramco since the start of the project, mainly as a crude provider, but having the Saudi giant on board was the final step towards FID. It guaranteed a stable supply of crude for Petronas; and for Aramco, RAPID gave it a foothold in a major global refining hub area as part of its strategy to expand downstream.
But RAPID will be entering into a market quite different than when it was first announced. In 2012, demand for fuel products was concentrated on light distillates; in 2019, that focus has changed. Impending new International Maritime Organisation (IMO) regulations are requiring shippers to switch from burning cheap (and dirty) fuel oil to using cleaner middle distillate gasoils. This plays well into complex refineries like RAPID, specialising in cracking heavy and medium Arabian crude into valuable products. But the issue is that Asia and the rest of the world is currently swamped with gasoline. A whole host of new Asian refineries – the latest being the 200 kb/d Nghi Son in Vietnam – have contributed to growing volumes of gasoline with no home in Asia. Gasoline refining margins in Singapore have taken a hit, falling into negative territory for the first time in seven years. Adding RAPID to the equation places more pressure on gasoline margins, even though margins for middle distillates are still very healthy. And with three other large Asian refinery projects scheduled to come online in 2019 – one in Brunei and two in China – that glut will only grow.
The safety valve for RAPID (and indeed the other refineries due this year) is that they have been planned with deep petrochemicals integration, using naphtha produced from the refinery portion. RAPID itself is planned to have capacity of 3 million tpa of ethylene, propylene and other olefins – still a lucrative market that justifies the mega-investment. But it will be at least two years before RAPID’s petrochemicals portion will be ready to start up, and when it does, it’ll face the same set of challenging circumstances as refineries like Hengli’s 400 kb/d Dalian Changxing plant also bring online their petchem operations. But that is a problem for the future and for now, RAPID is first out of the gate into reality. It won’t be entering in a bonanza fuels market as predicted in 2012, but there is still space in the market for RAPID – and a few other like in – at least for now.
RAPID Refinery Factsheet:
Tyre market in Bangladesh is forecasted to grow at over 9% until 2020 on the back of growth in automobile sales, advancements in public infrastructure, and development-seeking government policies.
The government has emphasized on the road infrastructure of the country, which has been instrumental in driving vehicle sales in the country.
The tyre market reached Tk 4,750 crore last year, up from about Tk 4,000 crore in 2017, according to market insiders.
The commercial vehicle tyre segment dominates this industry with around 80% of the market share. At least 1.5 lakh pieces of tyres in the segment were sold in 2018.
In the commercial vehicle tyre segment, the MRF's market share is 30%. Apollo controls 5% of the segment, Birla 10%, CEAT 3%, and Hankook 1%. The rest 51% is controlled by non-branded Chinese tyres.
However, Bangladesh mostly lacks in tyre manufacturing setups, which leads to tyre imports from other countries as the only feasible option to meet the demand. The company largely imports tyre from China, India, Indonesia, Thailand and Japan.
Automobile and tyre sales in Bangladesh are expected to grow with the rising in purchasing power of people as well as growing investments and joint ventures of foreign market players. The country might become the exporting destination for global tyre manufacturers.
Several global tyre giants have also expressed interest in making significant investments by setting up their manufacturing units in the country.
This reflects an opportunity for local companies to set up an indigenous manufacturing base in Bangladesh and also enables foreign players to set up their localized production facilities to capture a significant market.
It can be said that, the rise in automobile sales, improvement in public infrastructure, and growth in purchasing power to drive the tyre market over the next five years.
Headline crude prices for the week beginning 14 January 2019 – Brent: US$61/b; WTI: US$51/b
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