More upstream activities as oil prices at 4-year high

Petronas, Hibiscus, Reach Energy among local O&G players seen benefitting


Rising oil prices will be a boon to the local oil and gas (O&G) sector as production is expected to rise and producers seek to pump more crude from the available and new wells.

Analysts also expect oil companies to free up more of their budget for upstream activities after four years of doldrum and expenditure slashing.

Oanda Corp head of trading for Asia Pacific Stephen Innes said despite the Brent crude price optimism of reaching the US$100 (RM414) per barrel level will be a “short-term phenomenon”, it will facilitate more upstream activity globally.

“Higher oil prices will attract more capital to offshore rigs, which are expensive but profitable near current levels, result in pipeline infrastructure improvement from the US Permian basin, and allow Russia and OPEC to ramp up production

“I think this will be a boon to the industry as a whole and we see the green shoots in Malaysian O&G sector,” he told The Malaysian Reserve (TMR) yesterday.

Oil prices rushed to the highest level in four years as worries over US sanctions against Iran will start next month.

Iran, OPEC’s third-largest producer, is facing a challenging future as more oil buyers are already talking about reducing purchases from the Middle-East country.

Brent crude rose above US$83 per barrel yesterday, with oil traders already setting their sights on US$100 per barrel. Re-imposition of US sanctions on Iran on Nov 4 will see approximately 1.5 million barrels of oil per day wiped off from global oil markets.

The market expects the US$100 a barrel is within reach as OPEC’s leading producer Saudi Arabia would not be able to meet the vacuum when Washington’s sanction on Tehran starts next month.

Fitch Solutions Inc O&G analyst Peter Lee said a strong oil price should boost capital expenditure (capex) across the industry, but any spending will not be isolated to drilling works.

“Although most of the industry has gotten accustomed to spending discipline over the past few years and weaker oil prices, significantly stronger prices would most likely lead to stronger spending by oil firms,” Lee told TMR.

“However, spending need not be purely funnelled towards drilling activities. It would also focus on improving returns for shareholders and investing in technology or green space.”

Innes said: “If the market senses that Saudi Arabia’s capacity is tapped out at 10.5 million barrels per day despite their fabled bottomless well, oil prices will rocket higher with the flashy US$100 per barrel price tag indeed a reasonable sounding target.”

However, Lee said the US$100 per barrel level by year-end requires a “perfect supply and demand-side storm” of Iranian exports declining to threadbare levels; production disruptions in Venezuela, Libya and Nigeria; and very strong winter demand for oil.

Malaysia is set to benefit from the higher crude oil prices. The stronger oil price will also help support the ringgit as a host of emerging-market currencies come under pressure from rising US interest rates.

Upstream players that will benefit include Petroliam Nasional Bhd (Petronas), Hibiscus Petroleum Bhd and Reach Energy Bhd.

However, there is a lag between higher crude oil prices and capex rollout by oil majors, erasing a fast boom.

Offshore supply vessel companies continue to face depressed charter rates. Petronas has indicated its intention to increase upstream capex to about RM14 billion to RM15 billion in 2019, from RM12 billion this year.