Petronas sees three tough years ahead
Petroliam Nasional Bhd (Petronas) is bracing for two to three more tough years as the Malaysian state oil company grapples with crude at an 11-year low while seeking to keep its multi-billion dollar projects on track.
Oil may average US$30 (RM131.69) a barrel this year in a “low-price” scenario, Petronas chief executive officer Wan Zulkiflee Wan Ariffin said in an interview yesterday.
With a capital expenditure plan of as much as RM350 billion over the next five years, Wan Zulkiflee said, the company’s “good” cash buildup will help it through difficult times.
The world is awash in oil as members of the Organisation of Petroleum Exporting Countries (Opec) seek to increase market share by pressuring high-cost producers, rather than cutting output to support prices.
The deepening slump is adding fresh pain for Petronas, which is committed to long-term project investments for future growth and meeting dividend obligations to the government.
“We are using the challenging time as a window of opportunity to look at our internal processes and address our inefficiencies,” Wan Zulkiflee, 55 (
photo
), said in an hour-long interview on the 81st floor of the world’s tallest twin towers.
“The reversal in the price will happen. It’s only whether it will happen in three years, five years or in seven years’ time. But it will happen.”
Old assumptions
Just over two months ago, Petronas and the Malaysian government were assuming Brent crude averaging US$48 a barrel in 2016 for their planning and budgeting purposes respectively. It currently trades at about US$33 a barrel.
The drop in oil has in part led to international investors souring on Malaysia, with the ringgit slumping to a 17-year low in 2015. The net-oil exporting nation stands to lose RM300 million for every US$1 a barrel decline in crude, according to government estimates.
Moody's Investors Service lowered its credit-rating outlook for Malaysia yesterday, citing an external environment that has crimped government revenue despite Prime Minister Najib Abdul Razak’s efforts to improve the country’s finances.
Najib said last week he will amend the 2016 budget to take into account the lower price of oil.
Iranian sanctions
A forecast of about US$30 a barrel already takes into consideration the oil glut and the lifting of restrictions on Iran selling in the international market, said Wan Zulkiflee, a three-decade veteran at the company.
Petronas, which halted imports of crude from Iran in 2012, will explore possibility of buying from the Middle Eastern nation once again when sanctions are lifted, he said, declining to elaborate.
The slowing Chinese economy and its weakening yuan are having an impact on Petronas’ sales and operations in the North Asian nation, Wan Zulkiflee said.
In Canada, Petronas is still awaiting environmental approval from regulators to start construction on the Pacific NorthWest LNG project, which has faced resistance from groups, including indigenous organisations.
The C$36 billion (RM111.6 billion) proposal was “shovel-ready” and only awaits the permit, Michael Culbert, chief executive officer of the venture, said in October.
The company will review its decision within this quarter on whether to proceed because the project “can’t be held in abeyance indefinitely”, said Wan Zulkiflee. “The window is closing fast.”
Keep investing
It’s important for oil companies to continue investing even as low prices prevail, the chemical engineer by training said, citing projects such as a US$27 billion (RM118.54 billion) integrated refinery and petrochemical complex in the southern Malaysian state of Johor.
This development, known as Rapid, is expected to come onstream in 2019 and will require about 3,000 employees, he said.
“The longer we are in this difficult period, I think the steeper will be the recovery because people don’t invest,” the CEO said. “And when demand picks up, the whole industry may not be ready to meet the demand.”
Wan Zulkiflee said Petronas would continue to maintain its production levels as significant cuts would result in setbacks when there is a recovery. Petronas hasn’t got to the point where it needs to “right-size” permanent employees even as it reviews the status of contract workers, he said.
Spending cuts
It is also lowering spending by improving on procurement processes and cutting costs on business travel that saved the company 24 percent in operating expenditure, excluding salaries, last year, Wan Zulkiflee said.
The oil company reported a loss of RM565 million in the third-quarter, compared with net income of RM12.4 billion a year earlier because of impairments resulting from lower crude prices.
It is still committed to paying the government RM16 billion in dividends this year, down from RM26 billion in 2015, Wan Zulkiflee said.
Petronas raised US$5 billion by selling dollar bonds and Islamic debt in March.
While it has sufficient cash to go through the difficult period, Petronas also has “a lot of headroom” if it needs to tap the dollar market, Wan Zulkiflee said. The company has net cash of about RM88 billion at the moment, he added.
- Bloomberg
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