Petronas to focus on PIPC at the expense of global assets

The company adjusts its operations and budgeted spending for 2017 to capitalise on downstream segment locally


Petroliam Nasional Bhd (Petronas) will invest on local downstream projects and abandon highly capitalised ventures with low returns as worries of a possible drop in global oil prices linger.

An industry analyst said the state energy company would likely reduce its global footprint and exit the expensive, but low-margin upstream projects.

“We expect the firm to remain prudent and conservative in its spending, and to reduce exposure to high-cost, low-margin upstream assets,” BMI Research oil and gas (O&G) analyst Peter Lee said in his email reply.

Petronas has adjusted its operations and budgeted spending based on the average oil price of US$45 (RM189) per barrel for 2017 and wants to capitalise on the downstream segment in Malaysia for long-term growth.

“Doing so will allow Petronas to focus its capital spending on higher-priority down-stream projects in the domestic market, notably the US$27 billion Pengerang Integrated Petroleum Complex (PIPC),” Lee said.

Media reports suggested that the state-owned oil company planned to divest non-strategic assets after embarking on a major cost reduction exercise including staff retrenchment.

The global oil market has improved with the Brent oil trading at US$58 a barrel, but far from the highs recorded in 2014.

Petronas plans to sell its 30% stake in the Majnoon oilfield in Iraq after Royal Dutch Shell plc, a major stakeholder in the project, announced it was pulling out of the project.

Petronas has also put several of its Alberta-based assets for sale via its Canadian unit Progress Energy Canada Ltd. The company already pulled the plug on the US$29 billion liquefied natural gas (LNG) facility in British Columbia in July this year.

As Petronas’ largest down-stream investment in Malaysia, the Johor-based PIPC project consists of the 300,000 barrels per day capacity Refinery & Petrochemical Integrated Development and six associated facilities. Refinery start-up is slated for 2019.

“These projects are closely aligned with Petronas’ long- term strategy to move up the downstream value-chain and will significantly improve Malaysia’s self-sufficiency in refined fuels and petrochemicals over the coming years,” Lee said.

Petronas president and group CEO Datuk Wan Zulkiflee Wan Ariffin had warned

that the LNG sector is heading for stagnation, if producers and consumers failed to collaborate to ensure growth and sustainability of the industry.

“Today, players are cancelling and delaying projects in tandem with the LNG prices. Without sufficient investments, both buyers and sellers face an uncertain future in terms of business sustainability and energy security,” he was reported as saying.

Gas prices have plummeted from a high of US$5.39 on Jan 29, 2014, to US$2.96 on Tuesday. Petronas is the world’s third-largest producer of LNG.

Petronas recorded lower revenues last year at RM204.9 billion, representing a 17.3% decline from its finanical year 2015 (FY15), with petrochemicals being the only segment to post stronger turnover at a 6% rise to RM14 billion due to higher sales volume.

The LNG division posted the largest decline at 27% to RM39.5 billion over the same period.

For the fourth consecutive year, international operations remained the largest revenue contributor to the group at RM78.7 billion, or 38%, of the total RM204.9 billion raked in last year.

However, the segment posted a decline of 23% from the RM102.1 billion posted in 2015, marking the fourth straight drop in revenue contribution since 2012.

The downtrend is largely attributable to the lower average prices and lower sales volume.

Petronas also cut RM29 billion and RM2.2 billion in capital and operating expenditures for the company’s upstream business in FY16 due to the lower oil and LNG prices observed that year.

The majority of Petronas’ upstream projects are concentrated in the African and Asia-Pacific regions. Its presence in the Middle East is made up of four ongoing projects in Iraq — the Garraf, Badra, Halfaya and Majnoon oilfields.

Lee said Shell’s decision to exit the Majnoon oilfield was due to the performance penalties slapped by the Iraq’s Ministry of Oil in May this year.

“This adversely impacted the commercial viability of the already limited technical service contracts.

“Petronas is under the same agreement. Thus, this would have had a bearing on the firm’s decision as well,” he added.

Petronas’ operations in North America comprise development and production activities in Canada and exploration of deepwater blocks in Mexico.

With assets in East Malaysia, Canada, Australia and East Africa, Petronas expects the group’s overall LNG supply would increase by 55% to 42 million metric tonnes (MT) annually in 2022 from the 27 million MT per year achieved in 2013.