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This article first appeared in The Edge Financial Daily on December 5, 2017

KUALA LUMPUR: Petroliam Nasional Bhd’s (Petronas) move to disclose work viability in the local oil and gas (O&G) sector with the public release of the Petronas Activity Outlook (PAO) for the 2018 to 2020 period is seen as a positive step to help stakeholders better plan their resources to drive the sector along its recovery path.

However, an analyst at a local research house said the PAO indicated that only selective companies in the currently oversupplied industry will benefit from new contracts. “The new contracts are at best able to replenish the order book,” he told The Edge Financial Daily.

“For example, the requirements for new wellheads and central platforms in the PAO reiterated Petronas’ earlier statement that they only have enough jobs for two to three yards, out of a total of eight Petronas-licensed yards in Malaysia,” he said.

The report also reaffirms the view that capital expenditure by Petronas is not expected to recover in a big way, with the latest PAO indicating that the national oil firm’s activity plans are not too different from the previous outlook.

“Some of the works meant for the 2017/2018 period had likely been deferred by one year,” said the analyst.

However, there are still winners on the latest PAO, said the analyst. He expects more demand for topside maintenance, which will benefit maintenance, construction and modification contractors like Carimin Petroleum Bhd, Dayang Enterprise Holdings Bhd, Deleum Bhd and Petra Energy Bhd.

Also in favour are offshore support vessel operators with certain types of marine vessels such as fast crew boats, while there are also chances of fresh jobs for wellhead and central platform fabricators such as Malaysia Marine and Heavy Engineering Holdings Bhd and Sapura Energy Bhd.

The oil price slump  at the end of 2014 had forced global oil majors to cut capital expenditure, particularly for the upstream oil segment. Petronas is not excluded, and the company subsequently decided to increase its downstream portfolio to 30% to balance out the impact from the oil price decline, with a focus on its mega project, the Pengerang Integrated Complex (PIC) in Pengerang, Johor.

PIC is expected to be fully operational in 2019. The complex is Petronas’ largest downstream project to date, with a total expected cost of about RM97 billion. Its core facility, the refinery and petrochemical integrated development project itself is expected to cost RM57 billion.

On the other hand, Petronas also wanted the latest PAO to help investors and financial institutions better pinpoint promising work scope in the sector to participate in, instead of avoiding the whole sector altogether.

Participation of financiers have been lacking in what is still seen as a high-risk sector — over the last few years, a number of banks have been making impairments on non-performing loans for O&G services and equipment companies who have failed to weather the 2014 oil price crash.

“The PAO does help a bit in giving indications of work volume and timeline, but the sector is still unattractive for the banks,” said an analyst at a local investment bank. “The oil and gas sector is still perceived to see high credit risk.

“Banks are preparing for the implementation of MFRS 9 next year, so they want to avoid as much as possible from getting hit from higher provisioning or restructuring of the financial instruments at even higher credit cost moving forward,” said the bank analyst.

MFRS 9 is a financial instruments accounting standard, which will be enforced beginning Jan 1, 2018. Under the new standard, banks are required to estimate expected credit losses throughout the lifetime of the loans given.

Previous reports showed that Malaysian banks have significantly reduced their exposure to O&G loans to minimal levels since as early as 2016. Some has remained cautious about lending to companies in the sector, after being hit during the previous downturn.

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