This article first appeared in The Edge Malaysia Weekly on July 31, 2017 - August 6, 2017
LAST week, the usually quiet Petroliam Nasional Bhd (Petronas) made two significant announcements. The first, made early last Wednesday morning, said the national oil company was putting on hold plans for the development of a US$29 billion gas facility on Lelu Island, British Columbia, Canada. It had been grappling with the plans for five years or so.
Then the next day, it announced that its unit, PC Vietnam Ltd, will be handing over Blocks 1 and 2 at the Cuu Long basin, offshore Vietnam, to Vietnam Oil and Gas Group, the host authority, when the 26-year production sharing contract (PSC) for the blocks expires in September.
“[Despite all that has happened,] it’s business as usual, these are purely commercial decisions,” Petronas president and CEO Datuk Wan Zulkiflee Wan Ariffin tells The Edge in an exclusive interview last week.
“Even here [in Malaysia], we give up blocks when PSCs come to an end,” he says, adding that there were discussions on extending the PSCs but the terms were not favourable enough.
He stresses repeatedly that Petronas is not leaving either countries. In the case of Canada, the measure is more a temporary one pending an improvement in gas prices, which have been on a downward spiral lately (see “Uncertainty with LNG “ on Page 58).
“We are definitely not exiting Canada. [It’s] just this monetisation option is not being sanctioned because of challenging market conditions. We really want to dispel any notion that we are leaving Canada. This is just one option that is not pursued because of economic reasons.
“Our commitment to Canada remains, we still hold a world-class gas resource that is the second largest to our domestic market — our Malaysian resources,” he explains.
PSC in Vietnam ends
As for Vietnam, Wan Zulkiflee says, after pouring US$2.8 billion into the country over the past 26 years for Blocks 1 and 2, “we have produced 105 million barrels of oil since the first production in 1998. This has been a remarkable PSC for us”.
“Vietnam is a market with 80 million people. It’s a thriving economy and a good market for some of our products,” he says, declining, however, to put a number on Petronas’ earnings over the years. He adds that, instead, that oil price fluctuated from below US$20 a barrel in December 1998 to US$145 in July 2008.
Pegging the average oil price to US$48 as a rough calculation indicates that Petronas could have made in excess of US$5 billion (RM23.54 billion) from the Vietnamese investment.
Wan Zulkiflee seemed a little sentimental on relinquishing the blocks as “it was one of our earliest international ventures”, with the PSC signed in 1991.
Putting the brakes on Canada
As for Canada, while some analysts speculate that there will be impairments and provisions, Wan Zulkiflee is tight-lipped.
All he says is that “I will have to check on the PNW side”, referring to Vancouver-based subsidiary Pacific NorthWest LNG Ltd.
A market watcher The Edge spoke with says there should be no impairment as the project may be revisited.
While Petronas may have put a stop to its plans to build an export terminal and a 900km pipeline, among others, domestic operations under Nova Gas Transmission Ltd, producing 500 million standard cubic feet per day (mmscfd), are still proceeding.
“The domestic market doesn’t change. It’s ongoing. For the first half of this year, we got just under RM900 million in revenue. We are generating cash flow from our sales in the domestic market in Canada, [so] we will continue to supply to the domestic market.” Wan Zulkiflee says of the Canadian operations.
For its financial year ended December 2016, Petronas registered an after-tax profit of RM23.5 billion on revenue of RM204.9 billion.
Canada may be much less of a contributor to Petronas earnings at present, but it is likely to play a bigger role in the future.
“It’s just that the market and our project costs for the LNG project don’t match. But we are confident we will monetise at the right price at the right time and make money,” Wan Zulkiflee says.
“[Meanwhile,] we will look at investing in other pipelines with better reach.”
One option is to sell the gas to neighbouring US, which is a much larger market than Canada, using existing pipeline grids.
“You know, it is close to the American market. The US is a 70 bcf (billion cubic feet per day) market and Canada is a 14 bcf a day market, and they are already gas links to these markets,” Wan Zulkiflee says.
For Petronas, holding back on the Canadian investment could be a good move, considering its other large investments.
AmInvestment Bank Bhd oil and gas analyst Alex Goh notes that Petronas’ total investment of C$6 billion (RM20.47 billion) accounts for half of Petronas’ FY2016 core net profit of RM40 billion.
Pengerang and other expenditure
In February, Saudi Arabian Oil Co (Saudi Aramco) inked a US$7 billion deal to take up a 50% stake in a refinery and cracker project in the Pengerang Integrated Complex in Johor, partnering Petronas. According to reports, the plant is slated to begin operations in 2019.
The plant is part of Petronas’ Refinery and Petrochemical Integrated Development within the US$27 billion Pengerang Integrated Complex. The complex is a single tract measuring some 20,000 acres that will house oil refineries, naphtha crackers, petrochemical plants as well as an LNG import terminal and a regasification plant.
Petronas made the final decision to invest in Pengerang in April 2014, citing the strengths of the project as, among others, its naturally deep waterway of 24m and strategic location, across from Singapore, which could result in a hub like Amsterdam-Rotterdam-Antwerp in Europe.
According to reports by the Performance Management and Delivery Unit on the Economic Transformation Programme, the Pengerang terminal could generate RM1.6 billion in gross national income by 2020.
Thus, Petronas is likely to have its hands full over the next few years with this huge development down south in its home turf.
Other than the Pengerang development, Petronas may also be required to bolster the government’s coffers.
In February, Petronas chairman Tan Sri Mohd Sidek Hassan said the oil company may increase its dividend payments as crude oil prices strengthen.
However, nothing more has been mentioned on this since then.
According to news reports, Petronas has committed as much as RM13 billion in dividends this year, down from RM16 billion last year. The previous year’s figure was a 40% drop from the RM26 billion paid in 2015, reflecting the current low oil and gas price environment.
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