US-China trade war hitting oil demand

The energy market is sufficiently supplied at the moment, but demand will exert a larger influence over the market


PETROLIAM Nasional Bhd’s (Petronas) project planning for 2020 will be based on a conservative mid-US$50 (RM208.50) per barrel range as the sector continues to be plagued by volatility and the US-China trade war hitting global demand.

President and group CEO Tan Sri Wan Zulkiflee Wan Ariffin (picture) said the energy market is sufficiently supplied at the moment, but demand will exert a larger influence over the market.

“On the supply side, the US is really increasing their production and there are a few (short-term) interruptions in certain parts of the world,” he said during Petronas’ financial briefing at its headquarters in Kuala Lumpur last week.

“But to me, what is more important is on the demand side. The trade war is really affecting and suppressing the demand (for energy),” he said.

He said the US Energy Information Administration is lowering its 2019 forecast for global demand for liquid fuels from 1.3 million barrels a day to only 900,000 barrels.

Oil prices are also expected to perform erratically for the remainder of the year on protracted trade uncertainties and the heightened risks of conflict in the Middle East, he added.

“We are conservative in terms of the number we use for our planning. It will be in the range of the mid-US$50 per barrel for next year’s budget.”

“What is important is to really have a robust plan and budget, so that any increase in oil prices is an upside for us,” Wan Zulkiflee said.

The expected oil price budget for next year is significantly lower than the US$66 per barrel (Brent) that Petronas — Malaysia’s national oil and gas (O&G) company — based its project planning for 2019.

For the first half of the year (1H19), Brent oil averaged US$66.02 per barrel and is currently averaging at just below the US$65 per barrel mark year-to-date.

Despite the oil market volatility and weaker commodity prices, Petronas’ net profit rose by 7.8% year-on-year (YoY) to RM14.69 billion for the second quarter ended June 30 this year (2Q19). The weaker ringgit boosted the earnings of the state-owned company.

Revenue for the quarter, however, came in flat at RM59.12 billion (down 0.2% YoY) on the lower average realised prices recognised for petroleum products and liquefied natural gas.

For 1H19, Petronas’ net profit was up 8.6% YoY at RM28.94 billion as turn- over grew 3.4% to RM121.12 billion over the same period, but this was largely owing to the weaker ringgit-to-US dollar exchange.

Revenue from both the upstream and downstream segments came in slightly weaker for the period due to the lower average prices, though revenue from gas and new energy was stronger on the higher sales volume noted.

Meanwhile, Petronas’ capital expenditure (capex) in 1H19 came in at only RM15.7 billion, significantly behind the company’s approximate planned expenditure of RM50 billion for the full-year 2019.

Executive VP and group CFO Tengku Muhammad Taufik Tengku Aziz said the amount deployed in 1H19 is a bit behind due to deferments and rephrasing of projects, especially upstream projects in Sabah and Sarawak, as opposed to project cancellations.

A number of international merger and acquisition deals are also under process, he added.

“We expect the overall capex will reach the planned levels that have been committed earlier this year,” he said, adding that Petronas’ servicing of its RM30 billion special dividend to the Malaysian government has been managed.

“This was a matter of contention with them (rating agencies). To clarify, this remains comfortable for us,” he said.

Petronas declared a RM30 billion special dividend, on top of a RM24 billion dividend, in respect to its 2018 fiscal year. This is to be paid throughout 2019 to the government.

Moody’s Investors Service Inc had downgraded Petronas’ domestic issuer and foreign currency senior unsecured ratings from A1 to A2 in June this year, citing the company’s credit linkages with the Malaysian government.

The credit rating agency added that the possibility of additional special dividends to the government cannot be ruled out and are among the risks facing the national O&G company.

Petronas’ management indicated that the dividend to be paid out next year is expected to be lower than 2019, but the company will wait on the 2020 budget to be tabled next month.

Meanwhile, the US$27 billion Pengerang Integrated Complex (PIC), a joint venture between Petronas and Saudi Arabian Oil Co (Aramco), was 99.7% completed as of June 30 this year and is on track to achieve commercial operations by 4Q19.

This is in spite of the recent attacks on major Saudi Arabian oil sites impacting Aramco’s crude oil production and the unfortunate explosion at the Johor-based PIC in April this year.

Wan Zulkiflee said Petronas will form a joint working committee to explore any “viable commercial opportunities” with Abu Dhabi National Oil Co (Adnoc).

This was in response to reports that the two national oil companies are looking at a maiden collaboration.

Wan Zulkiflee said he will be going to Abu Dhabi next month and that Petronas will assess each opportunity available to determine if it meets all the company’s economic thresholds.