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The opportunities and the outlook of the Malaysian oil and gas industry

August 2016, The Malaysia’s oil and gas industry, which began over a century ago, has flourished over the years to become among the region’s most dynamic owners of oil and gas reserves, and among the world’s largest producers of liquefied natural gas (LNG).

National oil company Petroliam Nasional Berhad (PETRONAS), which was formed in 1974 as a custodian for the country’s oil and gas resources, is now among the largest corporations on Fortune’s Global 500 list.

Today, the global oil and gas industry is going through difficult times, largely due to a chronic oversupply situation, which caused crude oil prices to plunge.

Rampant supply, coupled with weak global demand amid concerns over slowing growth in China pushed the price of crude oil down by about 50% since mid-2014 from its heights of about US$100 per barrel.

However, prices have nearly doubled from a 12-year low of US$28 per barrel in February 2016, and experts point out that there are still plenty of opportunities for Malaysian oil and gas players to explore.
Taking advantage of Opportunities

Sunway University Business School's Professor of Economics Dr Yeah Kim Leng says there are horizontal and vertical integration opportunities during periods of low oil price, whereby the former entails looking at related product or service offerings and adding new market segments.

The latter, he says, involves moving into new areas such as downstream activities.

Some firms may find it timely to explore diversification opportunities particularly in renewable energy, which currently makes up only about 1% of the country's energy mix, he says.

Dr Yeah cites the country's green economy initiative as the next big driver of economic growth and transformation.

This will be particularly appealing to traditional energy players looking at gaining a foothold into the fast emerging renewable energy sector, he tells InvestKL in an interview.

AmBank Research Senior Vice-President for Equity Research, Alex Goh agrees that oil and gas players should explore opportunities in the downstream sector as this segment is shielded from the impact of lower crude of prices.

He points out that there are significant opportunities for service providers in projects such as the Refinery and Petrochemical Integrated Development (RAPID) in Pengerang, Johor and the Sabah Ammonia Urea project in Sipitang, Sabah for storage and petrochemical prospects.

Goh adds that companies, especially service operators, should focus on cost reduction programmes, consolidation of operations, disposal of non-core segments and merger and acquisition strategies in order to strengthen their balance sheet and further capitalise on synergies and scale advantages.

MIDF oil and gas analyst, Aaron Tan adds that Malaysia is likely to benefit during times of low oil price as the currency, land cost, office rentals, manpower costs are generally lower than most developed countries.

In addition, he points out that Malaysia’s human capital is aplenty, and the English language is the most common language used in business here.

 “I think that companies, especially those involved in exploration and production can take advantage by selecting vendors or service providers which can offer the most affordable vessel charter rates, fabrication fees and overall services fees as there is currently a glut in offshore support vessels, yard space and utilisation rates,” he adds.
An opportunity for consolidation

Dr Yeah says that opportunities during low oil price periods arise mainly from industry consolidation.

“This is where the stronger firms, particularly cash-laden ones, can acquire weaker firms at low or competitive prices.

“It is also an opportune time to refurbish or upgrade facilities, skills and expertise to position the firm at the forefront when the industry turns around,” he says.

He says there is no doubt that the low oil price will result in an industry shake-up as the smaller and weaker firms exit the industry.

“The market-driven consolidation is desirable so long as it is not disruptive to oil and gas supplies, as well as the functioning of the market.

“In fact it is welcomed to the extent that bigger and stronger oil and gas industry players emerge to compete for the region's investment opportunities in the oil and gas sector, both in upstream and downstream activities,” he says.

Tan concurs that the call for consolidation is a positive step.

“I do agree that to be competitive on a regional or global level, small service providers do need to consolidate to form larger entities with stronger balance sheet in order to bid for higher value jobs globally,” he says.
Malaysia’s cost competitiveness

According to a report by the Financial Times, multinational corporations have been moving their staff from Singapore to Malaysia, to benefit from the lower cost structure here.

The report states that the oil and gas firms including McDermott, Technip, and Subsea 7 have been relocating their staff to Kuala Lumpur after being hit by the slump in crude oil prices.

With the move, the companies are looking at lower rental costs for office buildings as well as housing, as property prices in Malaysia are significantly lower than its neighbouring country, Singapore.

The companies are also set to benefit due to the weaker Ringgit, which has made Malaysia increasingly attractive to foreign investors.

US oil and gas services company McDermott said the relocation was to take advantage of a “more favourable cost base”, while French oilfield services company Technip said the rationale behind its move was to rationalise costs and consolidate regional operations at a single base.
An industry outlook

Dr Yeah says the oil and gas industry will continue to be an important component of the Malaysian economy due to its extensive secondary and tertiary activities.

The secondary activities include the manufacturing of petroleum and related products while the tertiary activities relates to exploration, production and various support and ancillary services.

“The longer term outlook is conditioned by global supply and demand developments but given its non renewable nature and declining number of large oil field discoveries in the world, the longer term prognosis is for oil price to move higher as global demand strengthens,” he says.

Goh says in Malaysia, oil and gas remains the life-blood of the global economy.

“If global economic growth accelerates or supply is disrupted by geo-political concerns, there may be a recovery in oil prices in the next two to three years,” he says.

He says Ambank Research’s oil price forecast for 2016 is between US$40 and US$45 per barrel.

According to Tan, MIDF is still positive on the downstream oil and gas industry although it remained cautious on the upstream segment, and has average forecast for Brent crude oil at US$45 per barrel in 2016.

In a recent report, the Organisation of the Petroleum Exporting Countries (OPEC) painted an optimistic outlook for the oil market in 2017, saying global demand will rise to exceed current production.

A survey by Reuters also recently found that Brent crude oil could average at US$45.20 per barrel in 2016, US$58.20 per barrel in 2017 and US$65.20 in 2018, while JPMorgan expects Brent and WTI crude oil prices to average at US$56.75 per barrel in 2017.
Emerging stronger after the crisis

Opportunities still exist even in the toughest situations, and it is no different for the oil and gas industry.

Consolidation, diversification into new segments and cost cutting measures are among the key strategies outlined by experts, for oil and gas players to ride through the current oversupply situation in the market.

If Malaysian oil and gas firms play their cards right, and are able to survive the storm, there is little doubt that they will emerge stronger when oil prices recover in the future.
Source: InvestKL