PETALING JAYA: The steady rise in global crude oil prices would have, under normal circumstances, set the tone for a recovery in the oil and gas (O&G) sector.
However, while oil majors are changing gear from “survival” to “growth” mode, many O&G services and equipment (OGSE) players are still reeling from the downturn the industry faced for three years.
OGSE players had bore the brunt of the prolonged three-year period of depressed prices from lower rates for their work and equipment, the dearth of new contracts, and forced efficiencies.
The plunge in crude oil prices that started in September 2014 to below US$45 per barrel from its heyday of above US$100 led to instability in the industry.
This prompted global oil majors such as Royal Dutch Shell and Exxon Mobil to cut their capital expenditures (capex), resulting in many service providers suffering huge losses and some even defaulting on their borrowings.
Petroliam Nasional Bhd (Petronas) was not spared either. It has reduced capex, investment in new projects and operating expenditure by close to RM50bil since 2015.
However, the steady recovery in crude oil prices over the past one year has yet to have a big positive impact on OGSE players.
This is partly because oil majors have yet to increase their capex in a big way.
The price of Brent crude oil, the international benchmark, has been hovering comfortably above US$70 a dollar in the past months, even briefly touching the US$80-a-barrel level.
The rally was driven by the members of the Organisation of the Petroleum Exporting Countries (Opec), Russia and some other non-Opec producers, which have curbed oil output since early last year.
The local OGSE industry is fragmented and highly competitive
The pact on cutting the global oil supply runs until the end of this year, and oil producers are meeting in Vienna on June 22 to discuss a potential extension.
The political and economic crisis in oil-rich Venezuela is further driving the crude oil rally.
However, despite the upward movement of oil prices, the question is how sustainable will the rally in the oil price be, especially with the increase in supply from the US shale industry.
Compounding the problem, the OGSE players are facing oversupply in the market, which has led to continuous pressure on the industry.
This situation is not only unique to Malaysia, but throughout the world, where OGSE players have had to take on lower rates and an estimated half-a-million people have been retrenched.
To put things in perspective, there are about 4,000 O&G companies that are registered with Petronas, the national oil company. Norway, which has similar-sized O&G deposits as Malaysia, has just around 700 players in this sector.
According to the industry, only 2,700 licence holders are very active in bidding for jobs, and interestingly, only about 10% of Malaysia’s OGSE revenue comes from export activities.
The most resilient to remain in the game
The local OGSE industry is fragmented and highly competitive, and the depressed oil prices and market do not easily give rise to consolidation in the sector.
The recent consolidation that failed to pan out was between UMW Oil & Gas Corp Bhd and Icon Offshore Bhd , and Icon Offshore and Orkim Sdn Bhd to create an integrated service provider in the O&G industry.
As such, consolidation has been the top agenda of Petronas, not only to address the overcapacity in the industry but also to grow the local OGSE companies to be more resilient and nimble.
To further push for consolidation among the players, Petronas has started to be transparent with the industry players about its plans over the next two to three years on the type of capacities it needs.
The national oil company is also slowly changing and moving towards alliance contracts and consolidation to set the tone for the OGSE players to learn how to operate by being lean and efficient.
The Petronas Activity Outlook (PAO) 2018-2020 stated that it would be looking to award contracts in what is known as “economies of scale” (EoS) contracts to reform the industry.
For instance, Petronas has awarded the integrated logistics control tower project, which requires various types of vessels with tenures of up to five years.
It is understood that the contract required about 100 marine vessels in the form of offshore support vessels for the production and operation of oil fields.
In a nutshell, the contract involved not only the requirement for Petronas, but also for 16 of its partners under the Petroleum Arrangement Contracts (PACs).
It is noteworthy that the contracts were not enough to cater to more than 300 marine vessels available in Malaysia.
A shrinking pie implies that weaker players might be weeded out.
Petronas has stated that in recent years, the marine vessel category has been faced with a critical oversupply situation and is unlikely to reach the historically high levels seen in 2013 and 2014.
“Market self-correction is gradually driving towards supply-demand balance,” it said in the PAO report.
This is the first time ever for Petronas to collaborate with its PACs on the marine vessel requirements, as well as allowing the players to win larger and more diverse contracts.
Through this initiatives, the contractors and service providers will have to realign themselves to cope with the demand.
Other sectors in the upstream segment that are facing oversupply are the offshore fabricators and hook-up and commissioning as well as the maintenance, construction and modification players.
At present, there are eight domestic offshore fabricators active in the market, out of which six are listed on Bursa Malaysia.
The public-listed fabricators are Malaysia Marine and Heavy Engineering Holdings Bhd , Sapura Energy Bhd , TH Heavy Engineering Bhd , Boustead Heavy Industries Corp Bhd, KKB Engineering Bhd and Muhibbah Engineering (M) Bhd .
The two non-listed fabricators are Labuan Shipyard & Engineering Sdn Bhd and Brooke Dockyard and Engineering Works Corp.
The consolidation in the OGSE players is crucial for their long-term growth, protecting their margins, as well as increasing their economies of scale to move up the value chain.
“We need to reshape the Malaysian O&G ecosystem so that the companies that operate there will be more efficient, with the size and economies of scale that will also make them more resilient and competitive globally,” said Petronas president and group chief executive officer Tan Sri Wan Zulkiflee Wan Ariffin in the PAO report.
On the global front, in 2017, two giants in the OGSE segment, namely, Baker Hughes and GE Oil & Gas, merged to create a “fullstream” company that delivers one integrated solution of oilfield services, technology and equipment supply.