Petronas hit by lower crude and LNG prices

Saturday, 15 August 2015

Wan Zulkiflee (right): ‘It’s been an unrelenting difficult period. The next phases will really test the organisation’s stamina and endurance.’ With him is Datuk George Ratilal, the group chief financial officer.

CEO warns company’s ‘stamina and endurance’ will be really tested going forward

IN his second press conference for Petroliam Nasional Bhd’s (Petronas) quarterly results, president and group CEO Datuk Wan Zulkiflee Wan Ariffin began his presentation with a tongue in cheek comment that he’s had just about enough talking about the depressed state of oil prices.

But he wasn’t mincing his words when he said this: “It’s been an unrelenting difficult period. The next phases will really test the organisation’s stamina and endurance”.

Looking at the figures posted, you can see why. For the first half ended June 30, profits from its upstream business fell a whopping 57% year-on-year (y-o-y) from RM32.4 bil to RM14bil.

This was simply due to lower crude oil and LNG prices.

Asked if any international on companies are pulling out from Malaysia, he says he can’t speak on their behalf.

On a quarter on quarter basis though, it’s second quarter profits after tax fell a mere 3% to RM11.1bil, while revenues dipped 7% to RM61.3bil.

The numbers were dragged down by lower liquefied natural gas (LNG) volumes and prices.

The three-month average Japan Crude Cocktail reported a 14% fall in LNG prices at US$57 per barrel as compared to US$66 per barrel a quarter earlier.

LNG sales volume was down 14% to 6.9 million tonnes for the quarter compared to the first quarter. The lower LNG contribution was due partly to a planned plant shutdown in Bintulu and lower gas demand from the power sector, according to Petronas.

On the other hand, Brent crude was traded at 15% higher in the second quarter at US$62 per barrel on average compared with US$54 in the first quarter. US dollar was also stronger at 3.66 versus 3.62 a quarter earlier.

Petronas’ downstream division, which is much smaller in size, was the bright spot for the first half.

Profit after tax for the downstream division jumped 39% to RM5.3bil.

Petronas says that as an integrated company, it has benefited from lower input costs and better plant utilisation.

Wan Zulkiflee adds that refinery margins are much better, improving to a “double-digit” against US$8 per barrel last year.

But that did not help much as the oil giant’s operating cashflow fell a third for the quarter compared to same quarter last year.

And Wan Zul provides a sobering guidance on its capex and dividend payment ability as a result of this. “I do not expect our cashflow from operations this year to meet our capital expenditure and dividend commitments.

“This means we will have to persevere through with more austerity measures and will have to draw on our reserves. Cost management and efficiency will continue to be a key focus across the organisation,” he says.

Year-to-date, cash inflows amounted to RM56.7bil while outflows were RM49.1bil.

Of the RM49.1bil, 65% or RM31.8bil was for its capital investments. According to Petronas’ financial report, this was mainly for the purchase of Statoil’s Shah Deniz assets, domestic upstream capital expenditures, the Refinery and Petrochemical Integrated Development (Rapid) project and the LNG Train 9 project in Sarawak.

The other 35% served as dividends payments.

On the outlook for crude oil price, Wan Zulkiflee says he expects prices to remain depressed for the second half of the year due to a “chronic oversupply”.

“The confluence of events do not support a high crude price position.Crude production is at a 80-year high in the US,” he quips, adding that extra supply from Iran and Iraq also weighed prices down.

On a positive note, Wan Zulkiflee says Petronas managed to achieve cost savings of around RM640mil as at end June this year, from its Coral 2.0 programme, an industry-wide movement spearheaded by Petronas and involving 25 petroleum arrangement contractors (PACs), who are essentially contractors and partners to Petronas in production sharing contracts (PSCs) and risk service contracts (RSCs).

Through Petronas’ engagement with the contractors they look at things like the renegotiation of contracts and a reduction of work scope where necessary, after taking into account the new oil price levels.

Wan Zulkiflee has called on the Malaysian oil and gas industry to pursue consolidation to make them more competitive.

“I urge companies in the oil and gas industry to join forces for the greater good in this pervasive low oil price environment.

There are ample opportunities in the market for consolidation, leading ultimately to increase cost efficiency and competitiveness across the industry,” he says.

On the company’s operational and project milestones, Wan Zulkiflee notes that Petronas had achieved first hydrocarbons from three greenfields – two in Malaysia and one from the Bukit Tua field in Indonesia.

He says the company had its first steel-cutting ceremony for Petronas’ second floating LNG facility, the PFLNG 2 in Korea, putting them on track to deploy PFLNG 2 offshore Sabah in 2018.

“The integrated LNG project in Canada achieved a conditional Final Investment Decision (FID) in June, and to-date has successfully satisfied the first of two conditions, which is the legislated approval of the Project Development Agreement by the British Columbia government,” he says.

The second condition is for Petronas to get the approval of the Canadian Environmental Assessment Agency, which he said was already at the tail-end of the process.

On the downstream business, he says Petronas had begun construction for the Pengerang Integrated Complex, with the Rapid project expected to be completed by the first quarter of 2019.


About artidj

I started working as a field engineer in Oil & Gas industry back in 1996. I do this news clipping of the industry and the geography I am interested in, mainly for my own information. I'm glad you find it useful.
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