The looming recession, China’s recovery and Russia’s behaviour make 2023 a volatile year still for O&G industry
by S BIRRUNTHA / pic BLOOMBERG
THE oil and gas (O&G) sector is expected to run into twin headwinds this year, characterised by the volatility in the energy market and the slowdown of the global economy.
Oil prices were steady and closed higher last Friday, ending 2022 on a gain despite concerns due to weakening demand from top crude importer China and the growing risk of a global recession. This marked a second straight annual gain in a volatile year marked by tight supplies because of the Ukraine war and China’s lockdowns.
One bright spot for Malaysia is Petroleum Nasional Bhd (Petronas) and the overall positive sentiment towards
its activities for 2023-2025, as well as the national oil giant’s third-quarter net profit which almost doubled to RM30.8 billion from the RM16.3 billion reported in 2021.
In its Activity Outlook report for 2023-2025, Petronas high- lighted that uncertainty in the energy market is still expected to continue, hence, industry players need to be more agile.
Asia School of Business assistant professor of business and society Dr Renato Lima de Oliveira concurred and said it will be a year of uncertainty for the O&G sector, mainly for three reasons — the looming recession, China’s recovery and Russia’s behaviour.
De Oliveira, who teaches courses on energy markets and directs the research at the Centre for Technology, Strategy and Sustainability, highlighted that the O&G demand closely follows economic growth.
“But how fast will the world economy decelerate in 2023 after so many central banks across the world raised interest rates to combat inflation?
“If we have a general economic slowdown, commodity prices will likely suffer, including oil,” he told The Malaysian Reserve.
He added that the second unknown factor is how fast will China’s economy rebound after its zero-Covid policy pivot, as the Asian country is the biggest oil importer in the world.
De Oliveira noted that China’s dramatic policy shift after generalised protests is definitely welcomed for the rebound of economic activities.
“However, the question remains whether they have prepared the health system for a surge (in Covid cases) after the lifting of restrictions. Have they offered the best vaccines available to their population?
“In the short term, how they deal with this sudden policy shift will be key to understanding the demand dynamics of the coming year,” he said.
De Oliveira also pointed out that another unknown which might affect the outlook of the O&G sector is Russia’s behaviour.
He said Russia has been the wildcard of 2022 with its invasion of Ukraine and shifting strategic objectives. He added that Europe and the US had reacted on many fronts, militarily and strategically, in the energy markets.
Comfortable Price Band
“We now have an additional strong reason to phase out fossil fuels: Promote energy security in the form of locally generated low carbon sources.
“In that regard, the US approved a very significant package to boost renewables in the form of the Inflation Reduction Act, signed by US President Joe Biden on Aug 16, 2022, allocating close to US$400 billion (RM1.77 trillion) in favour of energy efficiency and investments in renewables.
“Europe has been a leader in climate change policies and cutting dependency from Russia’s fossil fuels is now an economic and military objective.
“How strong and effective will Russia’s reaction be to the US$60 oil price caps? Will their president Vladimir Putin come up with any new surprise for 2023 or withdraw?
“Regardless, in the long term, the war only emphasised the need to accelerate the energy transition.”
Commenting further, de Oliveira said the price of oil is determined by supply and demand, each with its own dynamics.
He noted that a global recession will lower the demand, but China coming out of prolonged lockdowns may compensate for part of the demand loss from other markets.
According to him, on the supply side, 40% of oil comes from OPEC countries. So, if the cartel is able to tighten its grip on the supply, it will be able to manage its share of volume that comes to the market and, thus, indirectly set oil prices.
“This is because investments in new oil fields had gone down (in the last) few years. As the world embraces energy transition, it is unlikely we will have a supply glut coming from significant new volumes found outside OPEC, (like what) happened in earlier decades.
“So, it seems plausible that oil will trade between US$60 and US$100 in the short run, a comfortable band for most producers,” he added.
De Oliveira said a higher oil price will further slow down the global economic growth, adding to fears of stagflation. He noted that a price lower than US$60 will start putting fiscal pressures on many oil-exporting countries’ fiscal revenues, including Malaysia.
Not New to Disruptions
Meanwhile, Deloitte opined that the crude oil and natural gas industry is not new to supply disruptions and price volatility.
In its latest 2023 O&G Industry Outlook report, the firm said over the past seven years, the industry has seen several peaks and troughs, from above US$100 per barrel in 2014 to -US$37 per barrel in 2020.
“But the situation is unique today.
“A confluence of several economic, geopolitical, trade, policy and financial factors have exacerbated the issue of underinvestment and triggered a readjustment in the broader energy market.
“All three components of a balanced energy equation — energy security, supply diversification and low-carbon transition — are under severe pressure or facing a ‘trilemma’ of concerns,” it said.
Additionally, it noted that the O&G industry has followed the investor’s mandate for measured investment and financial discipline, but this approach has reduced capital expenditure (capex) and contributed to the tight market seen in 2022.
Deloitte said the disruption of energy trade between Europe and Russia has also driven global gas markets to new highs — reaching six to ten times of the US Henry Hub prices.
Furthermore, it said the shortage of agricultural products for renewable fuels and supply chain challenges for low-carbon technologies have impacted the progress of energy transition.
“Although the immediate impact of this imbalance is high energy prices and record cashflows for O&G companies, how and where the industry will invest in the future remains uncertain.
“The industry’s investment trajectory in 2023 will likely be determined by many of the actions and decisions being taken today, namely the balance that O&G producers strike between increasing investment and continuing capital discipline, the role of O&G companies in accelerating and securing the energy transition, the dynamics of natural gas demand and the resultant policy environment, the refining industry’s adaptation to the readjustment in energy markets and the trajectory for dealmaking amid the interplay of energy security and transition,” it noted.
According to Deloitte, the O&G industry likely enters 2023 with its healthiest balance sheet yet and with continued capital discipline.
It added that this could help companies overcome the energy underinvestment of recent years and help enable an accelerated energy transition.
It also highlighted that the results of Deloitte’s 2023 outlook survey shows that 93% of respondents remain “positive to cautiously positive” about the industry in the coming year.
Research Firms Stay Cautious
According to Public Investment Bank Bhd (PublicInvest Research) analyst Nurzulaikha Azali, oil prices used to be predictable in response to global demand and supply, as well as seasonal swings.
She said nevertheless, in 2023, crude oil prices will continue to be dictated by geopolitical conflicts.
“Therefore, we expect oil prices will lack direction in 2023, though averaging a lower US$90 per barrel due to concerns over global oil demand and some disruption in supply due to global geopolitics,” she said in a recent note.
Nurzulaikha added that while economic recovery from the pandemic is well underway, the global oil demand is threatened by fears of global recession due to high inflation and slower economic growth.
She noted that areas of concern are China and the US in particular, the world’s top two energy consumers.
“Oil consumption in China represents ~14% of global oil supply, while consumption in the US is about ~20%.
“Overall, oil demand is currently forecasted to expand by 2.1 thousand barrels of oil (mbbls) per day in 2022 before slowing to 1.7 mbbls per day next year, to be around 101.6 mbbls per day,” she said.
RHB Investment Bank Bhd (RHB Research) analyst Sean Lim maintains a positive stance over the outlook of upstream maintenancy-related players, namely Dayang Enterprise Holdings Bhd, Carimin Petroleum Bhd and Petra Energy Bhd. For higher hook-up and commissioning and maintenance, construction and modification projections in 2023 and domestic drillers, RHB Research is positive on Velesto Energy Bhd.
In a recent note, Lim said higher total offshore support vessel (OSV) demand in 2023 is likely to result in better vessel utilisation, benefitting OSV players such as Perdana Petroleum Bhd and Icon Offshore Bhd. “On the other hand, what caught us by surprise was the sharp reduction in well-decommissioning projections, which may not bode well for Uzma Bhd.
“That said, one possible explanation could be that Petronas is looking to extend the life of the wells to leverage current high oil prices.
“This may eventually benefit Uzma as the company also focuses on brownfield rejuvenation,” he added.
Maybank Investment Bank Bhd (Maybank IB) projected that the O&G market will continue to face the energy trilemma issue — namely demand strength (consumption recovery post-pandemic), supply disruption (structural under-investment in the past cycles) and rising geopolitical risks (Russia-Ukraine crisis) — which gave rise to much volatility in the market so far.
It noted that the oil market will continue to remain buoyant, but volatile.
“Our in-house oil price (dated Brent) sees 2023’s crude oil price averaging at US$100 per barrel.
“We see upside risk to our oil price assumption (commodity cycle run) should the global energy crunch worsens amid rising geopolitical tensions.
“That said, global capital spending will continue to rise, guided by capital discipline and investment returns,” it noted.
Maybank IB added that an increase in capex spend is not a surprise, as it comes off a low base in 2020 to 2021 and is nowhere near 2014’s levels.
It said correspondingly, a higher oil price outlook tends to lead to higher costs and greater volatility in the price, adding that this will be a setback and a concern to a sustainable recovery in the market.
Hong Leong Investment Bank Bhd (HLIB Research) analyst Jeremy Goh believes that oil prices should remain sideways in the first half of 2023 (1H23) as both demand and supply dynamics are expected to be at parity over the next few months.
He said the research house also lowered its Brent crude oil forecast to between US$85 and US$90 per barrel for 2023, from US$93 and US$98.
“We also view that the petrochemical supercycle is now behind us as product spreads are seen to be coming off their respective peaks,” he said in a research note.
Goh also added that HLIB is positive on Petronas’ newly-released activity outlook 2023-2025 report as key value chains — such as the drilling rigs, offshore hook-up and commissioning, maintenance, construction and modification, as well as the OSV segment — are expected to see improved activity levels in 2023.
“We believe 2023 will be a golden year for O&G services and equipment sector, which was a laggard to the elevated oil price environment for the past year,” he said.
HLIB maintains an ‘Overweight’ call on the O&G sector.
According to Goh, HLIB also expects global oil demand and supply to be at parity at 100 million to 102 million barrels per day in 1H23, but this could see an upside risk with China’s reopening.
The research firm expects Petronas’ capex spending to be maintained at the RM40 billion to RM50 billion level annually between 2023 and 2025, with about 15% of its annual capex allocated to renewa- ble-energy initiatives.
“Petronas has pledged to a net-zero carbon emission goal by 2050, but believes that O&G would still form 50% of the world’s energy mix for the next 20 years to 30 years,” he said.
Petronas Expects Steady Biz Conditions
In its recent activity outlook 2023- 2025 report, Petronas highlighted that the local upstream O&G industry can anticipate a positive outlook for drilling rigs, well services and underwater services in the next three years, due to the repair and maintenance activities required.
The national O&G company also anticipates a steady outlook for subsea facilities, supply of line- pipes and heavy lift barges, given the steady number of projects requiring wellhead platforms.
However, Petronas said it expects the uncertainty in the energy market to continue.
It added that industry players have to be agile in responding to the changing energy landscape and embrace innovation, as well as new solutions towards a lower-carbon future.
According to a statement by Petronas VP (group procurement) Freida Amat, Petronas is committed to working together with its partners as the industry accelerates its efforts to decarbonise operations, as part of a wider energy transition.
“The transition into clean energy needs to happen now, to meet the changing energy landscape projected by 2050, which calls for greater collaborations among industries towards creating efficient solutions for better cost management, heightened customer centricity, value-creation and innovative solutions.
“This is crucial to avoid missing the window of opportunity to navigate the energy transition successfully,” she said.
- This article first appeared in The Malaysian Reserve weekly print edition