UPSTREAM oil and gas players have seen a flow of lucrative contracts from Petroliam Nasional Bhd’s five-year RM300 billion capital expenditure plan, which largely aided exploration and production activities.

Now, however, it seems that the tide may turn, and downstream oil and gas players are likely to benefit from Petronas’ RM86 billion Pengerang Integrated Complex (PIC) project, comprising the Refinery and Petrochemical Integrated Development (RAPID) complex.

Likely beneficiaries of PIC include KNM Group Bhd, Pantech Group Holdings Bhd, Wah Seong Corp Bhd and Muhibbah Engineering (M) Bhd. They will mainly be required to manufacture and supply equipment, and possibly fabricate structures in PIC.

Most of these counters’ share prices have more than doubled in the past year, buoyed by the possibilities in Pengerang.

KNM’s share price has gained some 175%, hitting a one-year high of RM1.10 on Aug 4, from a low of 40 sen in October last year. The stock closed at 81.5 sen last Friday, which translates into a market capitalisation of RM1.33 billion.

Pantech’s shares hit an all-time high of RM1.11 on July 18, gaining 30.29% from 85.8 sen at end-March this year. The company ended trading at RM1.06 last Friday, giving it a market capitalisation of RM633.2 million.

Muhibbah’s and Wah Seong’s share prices have more than doubled over the past year, closing at RM2.86 and RM1.68 last Friday, with market capitalisations pegged at RM1.22 billion and RM1.3 billion respectively.

An analyst from Kenanga Research says, “It’s the process equipment guys and manufacturers that will have more play in PIC.”

She notes that the main engineering, procurement, construction and commissioning (EPCC) contracts have already been awarded. “[So] right now, it’s for them [the winners of the EPCC contracts] to give out the jobs to the local guys as sub-contractors.”

Out of the 13 contracts that Petronas has awarded for PIC, five are EPCC contracts for the refinery and steam cracker component. They were awarded in August to five international outfits from Taiwan, China, Spain, the UK and Japan, which in turn have joint-venture agreements with local players.

“Most local players are in the final stage of negotiation to undertake portions of the multi-billion ringgit EPCC packages as sub-contractors, and will likely conclude the talks either at the end of this year or early 2015,” says an industry executive.

Meanwhile, Pantech executive director Adrian Tan says the group is working closely with the EPCC contractors to meet their need for pipes, valves and fittings (PVFs). He adds that once PIC is completed, Pantech will look forward to supplying maintenance services to the complex.

“Health and safety are key … oil and gas companies’ requirements are very strict and the constant monitoring of the PVF for corrosion is mandatory,” he says.

Tan opines that Petronas has been looking to create more value in the downstream segment. “After the completion of PIC, I believe the business in the downstream segment will continue to flourish.”

Aaron Tan of MIDF Research says local fabricators alone do not have the capacity to construct PIC.

In fact, a local fabricator recently noted that even if all the yards in Malaysia were 100% dedicated to PIC, there would still be insufficient capacity. “Work has to be done overseas and there will be a spillover effect,” he says.

Located on a 6,242-acre site in Johor, PIC comprises the RAPID complex and its associated facilities, including the Pengerang co-generation plant, a regasification terminal and an air separation unit.

The multi-billion-ringgit project also includes a raw water supply project, crude and product tanks as well as central and shared utilities and facilities.

“However, before taking into account capacity, focus should first be on the individual company’s capability, financial strength and human expertise,” says MIDF’s Tan.

Meanwhile, the industry executive explains that foreign companies are the likely candidates for EPCC contracts because local players usually do not have the strong balance sheets needed to execute EPCC services.

“But it is not cost effective for these foreigners to bring in workers from overseas. It would be more cost efficient for them to hire local companies for execution instead,” the

industry executive says, adding that a fairly large amount of PIC jobs would involve civil construction.

The industry executive notes that even though the major contracts that are worth more have been awarded to foreigners, “local downstream players will find that a less than RM1 billion contract is sufficient to allow them to move forward and generate profits”.

Even though there appears to be a slowdown in the upstream segment, MIDF’s Tan does not think that the increase in PIC jobs will outstrip the demand for offshore fabrication services.

“At this point in time, we are not really bullish about offshore fabrication projects. There will still be jobs available, such as the Kasawari central processing platform that is worth

US$1 billion (RM3.26 billion), but the potential winners are just a minute few.”

The analyst from Kenanga has a negative view on the oil and gas offshore fabrication segment, but is bullish on Pengerang. “On the Pengerang side, it will be vibrant,” she says.

With offshore fabrication jobs hard to come by since late last year, she believes that there will still be jobs coming in but they will be in the fabrication space.

Other beneficiaries of PIC, apart from onshore fabricators, are construction companies such as WCT Holdings Bhd, Zelan Bhd and Gadang Holdings Bhd.

WCT had in July won a RM341.88 million contract for the construction of roads in RAPID while Gadang won a RM350 million package for the provision of preparation works for Phase 2 of RAPID. Meanwhile, Zelan secured a RM248.5 million contract to construct a jetty on the site.

This article first appeared in The Edge Malaysia Weekly, on October 13 - 19, 2014.

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