This article first appeared in The Edge Financial Daily, on May 27, 2016.

KUALA LUMPUR: Shell Refining Co (Federation of Malaya) Bhd (SRC), which returned to profit in the last financial year ended Dec 31, 2015 (FY15), may not be out of the woods yet, as the refining margin is expected to remain under pressure, no thanks to the weak recovery in crude oil demand.

“The refining margin has come off from the peak of an average US$7 per barrel in 2015 to about US$4.96 per barrel in the first quarter of this year due to the softening demand in crude oil,” SRC chairman Datuk Iain Lo told a press conference yesterday after the group’s annual general meeting.

“We expect the margin to continue to be under pressure if the demand does not pick up but oil price [continues to] recover,” said Lo.

Notwithstanding that, Lo said the group will continue to fulfil its mission of delivering value to all stakeholders, though noting that the margins will continue to be volatile.

According to its Annual Report 2015, the refining margin widened to US$7 per barrel in 2015 on a current cost of supplies basis compared with US$2.65 per barrel in 2014.

To recap, in February, China state-owned enterprise Shangdong Hengyuan Petrochemical Co Ltd announced that its investment vehicle Malaysia Hengyuan International Ltd (MHIL) was buying a 51% stake in SRC from Royal Dutch Shell plc’s wholly-owned unit, Shell Overseas Holdings Ltd, for US$66.3 million or 43 US cents a share (RM274.98 million or RM1.80 a share based on the exchange rate then).

SRC’s share price plunged as the transaction price was substantially lower than the market price. The stock tumbled from the RM4.90 level to a low of RM2.72. It closed at RM3.06 yesterday.

Under the acquisition, MHIL will also take over SRC’s debt amounting to RM1.4 billion, and will refinance the debts later. The acquisition of the shares is expected to be concluded by the end of September.

Besides no job cuts, according to Lo, who is also the chairman of Shell Malaysia Ltd, SRC will remain as one of the strategic fuel suppliers to Shell Malaysia, which runs the petrol station chain in the country, to ensure security of supply.

“SRC has sealed a 10-year long-term offtake agreement with Shell Malaysia Trading. The contract is likely to commence after the change in its shareholdings,” he added.

Lo said the priority of SRC is to upgrade its existing refinery plant to ensure its products are able to meet the Euro 4 and Euro 5 standards.

In the longer term, Lo said, MHIL intends to make SRC a regional refinery and petrochemical company by moving the group’s value chain to the trading of fuel and petrochemicals that it produces.

“MHIL has told us their intention is not to invest in compliance of Euro 4 and Euro 5 specifications, but to move the value chain to the trading of fuel and petrochemicals that SRC makes. Maybe in the future, [SRC may] get into petrochemicals as well; they are well experienced and they see opportunities there,” he added.