Malaysia: Cloudy view for energy giant Petronas

Malaysia: Cloudy view for energy giant Petronas

Malaysia's state-run oil and gas firm has avoided a credit rating downgrade
and financial losses through sharp cost cutting that has crimped its future
plans and ambitions

Oil and gas wealth drove Malaysia's go-go modernization during the 1980s and
1990s, with state oil firm Petronas emerging as one of Asia's most
profitable companies. That success was reflected its shiny iconic twin
towers, once the world's tallest, in downtown Kuala Lumpur.

But after more than two years of stubbornly low global oil prices, with
prices falling from a per barrel high of US$145 in 2008 to a low of US$26 in
2016, Petronas is struggling to maintain its prominence as one of the
world's largest exporters of liquefied natural gas (LNG).

Last year, company revenue slumped to US$46 billion, around 17% lower than
in 2015. Petronas maintained profitability through heavy cuts to capital
investments and operating expenditures, including retrenchment of staff.
Managers have announced plans to trim US$11 billion in expenses from
2015-2019.

The company has also said it would review ongoing investment in various
global projects; Petronas has business interests in more than 50 countries
worldwide. The austerity measures so far have helped the state-owned firm
avoid a credit rating downgrade, unlike several other major oil firms.

However, Petronas plans to cut crude oil output by up to 20,000 barrels per
day in 2017, a 3% fall from last year. The cuts come as part of an agreement
reached in December by the Organization of the Petroleum Exporting Countries
(OPEC) and non-OPEC producers, which includes Malaysia.

The agreement aims at curtailing global petroleum output to limit oversupply
and raise prices. Petronas' president and group chief executive officer, Wan
Zulkiflee Wan Ariffin, meanwhile recently said that the firm is trying to
make cost efficiency "part of our DNA."

On other fronts, however, the company is still expanding. It recently
invested almost US$90 million to expand a lubricant-blending plant it
operates in China, while a floating liquefied natural gas (LNG) facility
there - the first of its kind in the world - is set to begin operations in
June.

Petronas also announced this month it aims to broaden its LNG business to
meet rising demand in India, Pakistan and Bangladesh, as well as some parts
of Southeast Asia, where it is currently the region's second largest
supplier of LNG.

Much hinges, however, on a major new joint venture with Saudi Arabia. In
February, when Saudi King Salman bin Abdulaziz began his tour of Asia in
Malaysia, the monarch oversaw the signing of an investment deal worth US$7
billion between the two nations' state-owned oil firms.

Saudi Arabian Oil, more commonly known as Saudi Aramco, is set to assume a
50% share in a new Malaysia-based petroleum refinery development, a
cornerstone project of the multi-billion dollar Pengerang Integrated Complex
(PIC), in the country's southern Johor state.

Started by Petronas in 2011, PIC aims to transform Malaysia into an
international petrochemical industrial hub. There is political noise around
the plan, though. There were widespread reports that senior Petronas
officials were against the Saudi investment, criticism Prime Minister Najib
Razak blamed on "unpatriotic people."

Critics of the scheme had apparently briefed the Saudis that Malaysia was
politically unstable and unable to pay civil servants' salaries and benefits
due to financial difficulties, unsubstantiated rumors that almost scrapped
the deal, according to reports.

"We had to meet them and correct the facts that Malaysia is among the best
countries in the world [for investors]," Najib was quoted saying by local
media. "When they were convinced, they finally agreed to invest with us."

Petronas group executive vice-president Md Arif Mahmood has denied there
were any misgivings among Petronas executives and said that discussions on
the deal with Saudi Aramco began in 2014, insinuating Petronas was not
strong-armed into the oil-importing venture, as some critics claimed.

As part of the deal's terms, Saudi Aramco will provide up to 70% of the
crude oil to be processed at the plant, which is expected to be operational
by 2019 and capable of processing 300,000 barrels of oil per day.

These developments will help but not necessary boost the Malaysian economy
back to fast growth. Due to a global oil glut, Malaysia has seen rising
unemployment, stubbornly high inflation and an overall slowdown in economic
growth.

While foreign direct investment (FDI) was up 64% year on year in 2016, due
largely to burgeoning ties with China, domestic investment fell by 5%. Trade
Minister Mustapa Mohamed told reporters that the decline was largely
attributable to a lack of new investments by Petronas.

As a state-owned firm, Petronas pays a dividend towards the government's
annual budget. Before the oil price crash, revenue from Petronas and the
wider oil industry accounted for as much as a one-third of state revenue,
according to media reports.

But that annual payout has diminished due to low fuel prices. For each US$1
drop in global oil prices, almost US$60 million is slashed from state
revenue, industry experts say.

Petronas has said it will pay the government around 13 billion ringgit
(US$2.9 billion) this year, its lowest annual dividend since 2007. That's
half the 26 billion ringgit (US$5.8 billion) it paid in 2015 and even less
than the 16 billion ringgit it (US$3.2 billion) handed over last year.

Falling oil revenues were a key factor in the government's 2015 introduction
of a goods and services tax (GST), which Najib heralded at the time as a
"savior" of the economy. The tax's critics say it takes money away from
private consumers just as austerity measures bite for the sole purpose of
boosting state coffers.

Falling oil revenues were a key factor in the government's 2015 introduction
of a goods and services tax (GST), which Najib heralded at the time as a
"savior" of the economy.

To be sure, Malaysia's economic woes mirror other oil-rich nations, many of
which have moved to diversify their economies to curtail the so-called
"resource curse." The 11th Malaysia Plan, an economic proposal laid out in
2015, aims to reduce the government's dependency on petroleum-related
revenue from around 33% to 15.5% by 2020.

It will be an uphill battle, analysts say, especially with an upcoming
general election due before August 2018. While tough economic decisions are
seldom taken in election seasons in Malaysia, Najib's coalition is already
campaigning on the notion it is better placed to solve economic problems
than the unproven opposition.

The Saudi investment will thus have come at an opportune time for both
Petronas and Najib. Despite criticism from some quarters, mainly from the
political opposition but also within Petronas, Najib has touted the refinery
project as a potential huge job creator, particularly in Johor, an important
swing state at the next polls.

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Link to Original Article:
http://www.atimes.com/article/cloudy-view-energy-giant-petronas/

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com