No way out but to consolidate

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This article first appeared in The Edge Financial Daily, on March 6, 2017.

 

KUALA LUMPUR: Consolidation in the Malaysian oil and gas (O&G) industry — which had 3,956 Petronas-licensed companies as at 2015 — is deemed necessary to brave the current industry downturn.

“Malaysia is an O&G country and it is fundamental for us to develop the industry so that it can remain strong even post-downturn,” Malaysian Offshore Vessels Owners’ Association president Amir Hamzah Azizan told The Edge Financial Daily during an exclusive briefing organised by Malaysia Petroleum Resources Corp.

“Not all companies will survive because there is just not enough [work] to help them sustain. We should encourage the right partnerships to support and build capable local O&G players to compete and survive in this sphere,” he said.

To elaborate, Amir said when a big cake has shrunk to be a cupcake, the share would have to go to the efficient players so that they would be stronger to shape up the industry.

Meanwhile, consolidation — while it is necessary — is a concept that needs to be understood clearly, said Malaysian Oil & Gas Services Council president Sharifah Zaida Nurlisha.

Consolidation is not restricted to physical integration such as mergers and acquisitions. It may also involve work performance alliance, forging partnerships through memorandums of understanding and even joint ventures, she said.

“The industry is reacting towards the limited projects available. Players and stakeholders are now forced to look at ways to do things differently amid the down cycle of the industry,” she added.

Consolidation would be a painful process for over 3,000 companies in the country.

On this, Amir opined that for industries which are “overbuilt”, it is fundamental to identify the most capable players with high utilisation and exclude those that do not add value to the supply chain.

This, Amir said, includes placing lesser priority on companies which only contribute to more inefficient costs such as agents or middlemen.

“Take out that layer which they have built from the chain and you will see improvements in your cost structure. You will then be able to see which companies, of the 3,956 in total, fit nicely in the chain,” he stressed.

“If you can chip off entities that do not fit into the ‘combined strengths’ agenda, you will have others which will only become stronger with their ‘integrated capabilities’,” he added.

As rationalisation and cost adjustments cannot be avoided where integration is concerned, the bright side of carrying out such exercise is that it encourages innovation and self-determination.

Malaysian Oil & Gas Engineering Council president Ir Rashid Sidek said that an upside to consolidation is the start of the “collaborative phase”, specifically between companies with different expertise.

“You will see companies with different strengths and capabilities coming and working together to solve specific problems faced within the industry,” said Rashid.

“Our engineers would need to take on new roles and responsibilities for our industry to get out of this down cycle. But this also means that they will be pushed to do things on their own and differently,” he said.