Do not cry, Petronas. It is just a cycle…

Mankind has unquenchable thirst for oil and Malaysia’s only Fortune 500 company will return to the black


IN 2014, the world’s oil market crashed, sending the industry into tatters. The oil price plunge of 2014 came after more than six years of above US$100 (about RM415) a barrel oil price average.

After the spike of oil price after 2008, producers were demonised to ride the high price, pumping more oil and gas (O&G) from the ground, leading to an oil glut before prices fell like a meteor shower. Brent oil prices plummeted from US$120 to US$28.55 a barrel in January 2016.

It is a great plunge considering that crude oil spiked to more than US$160 per barrel after 2008.

Despite the rationales of rising demand in growing economies, such as China and India, and compounded by oil production cut by major producers, it was hard to comprehend when prices inched to US$150. But oil producers were not complaining.

Even natural gas spot prices throttled from under US$3 per one million British thermal unit (MMBtu) to over US$12 per MMBtu in the decade of 1998-2008.

That was the end of the oil supercycle. It was also the end of Petroliam Nasional Bhd’s (Petronas) record profit. By the last quarter of 2014, Petronas was in the red, largely due to impairment and provision. Petronas continued to struggle for the next few quarters.

Tan Sri Wan Zulkiflee Wan Ariffin was appointed as president and group CEO in early April 2015. He witnessed the collapse of oil price to about US$28 a barrel in January 2016.

However, he healed the state-owned oil company to profit after a painstaking cost management, including releasing about 1,000 staff.

Oil prices did return to above US$80 a barrel in 2018 and with an average cost of production below US$20 a barrel, Petronas returned to profitability.

Last Friday, Petronas announced a loss after tax of RM21 billion for the second quarter ended June 20, 2020, as revenues plunged 42% year-on-year to RM34 billion. It was larger than the net losses of RM7.3 billion in the final three months of 2014 and RM2.96 billion in the same quarter of 2015.

Petronas president and group CEO Tengku Muhammad Taufik Tengku Aziz, who was just recently appointed to helm the Fortune 500 company, had to be the messenger of bad news.

He highlighted the very challenging first half of the year and Petronas expects its performance to be affected by the volatility of oil prices, which continues to be exacerbated by the ongoing Covid-19 pandemic.

Just like his predecessor Wan Zulkiflee, it was Tengku Muhammad Taufik’s baptism of fire at Petronas. (It is becoming a trend to see a changing of guard at the national oil company during each oil price crash.)

Images of fire and brimstone seem to dominate the O&G sector.

The coronavirus has brought the world to its knees. Billions of people have been put on “a voluntary house arrest” since the pandemic swept the world like fire at a savanna during a hot summer.

Thousands of commercial planes from the estimated 24,000 aircraft have been grounded and continue to lie idle on the tarmac. Millions of cars were taken off the road during the lockdown. Life in many countries has yet to return to normal.

It is estimated that oil demand dropped as much as 22 million barrels a day due to the pandemic.

But like any commodity, the cycle will return and Petronas should not be too absurdly worried.

There are about 1.4 billion vehicles on the road. These fossil-fuel guzzlers will return to the streets. The planes will fly again once international borders open.

Even the worries that electric cars will reduce oil demands will not come anytime soon. According to figures, there are about seven million electric cars in stocks and it will take decades to put hydrogen cells on all types of vehicles.

Demand will increase. Mankind has this unquenchable thirst for oil and Malaysia’s only Fortune 500 company will return to the black.

Like any commodity price cycle, you must take the good and the bad and move on, and say: “I was there when it fell to US$15 and I did not cry.”

Mohamad Azlan Jaafar is the group MD and editor of The Malaysian Reserve.