This article first appeared in The Edge Malaysia Weekly on July 23, 2018 - July 29, 2018
EXPLORATION and development activities are picking up in the oil and gas (O&G) industry globally. The steady climb in crude oil prices since last year has brought back some cheer to the O&G industry. Oil majors, including Malaysia’s Petroliam Nasional Bhd (Petronas), have seen rising profits.
Sadly, the cheer is not shared across the industry. Apparently, the offshore support vessel (OSV) segment is still in choppy waters, with no nascent sign of recovery in sight. Many vessels are currently chartered out at below operating costs.
“Our main grievances now is the charter rates … Petronas has not initiated any talk with us [to revise the charter rates],” says Malaysian OSV Owners’ Association (Mosva) president Mohamed Safwan Othman.
Safwan recalls that players were given a verbal assurance that the charter rates would be renegotiated when prices slumped in 2015. “Unfortunately, until now, the rates are still the same as per US$27/bbl,” he says, adding that costs have climbed due to the weak ringgit and the Goods and Services Tax.
To make things worse, Petronas has followed other oil majors in imposing a ceiling price in the invitation to bid (ITB) for the recently-awarded Integrated Logistic Control Tower (ILCT) packages.
The ceiling price — which sits below operating expenditure (opex) by 3% to 5%, according to Safwan — results in persistent cash flow pressure despite loan restructurings and higher vessel utilisation rates.
One third of OSV fleets operating in Malaysia — about 120 vessels — are affected by the ceiling price cap for the ILCT packages. Unfortunately, the operators are desperate and cannot afford to say no, lest they miss out on the contracts completely.
“Most of us, even if we have contracts now, we cannot even implement our maintenance programme because we don’t have enough financial resources,” Safwan says.
“[An increase of] 10% to 15% [from current rates] would be a great start for us to make sure we cover our opex, and so we can plan again,” he says.
Keeping the cash flowing
Petronas recorded profit after tax (PAT) of RM45.5 billion in FY2017 on revenue of RM223.6 billion. The government had more money in its coffers as the national oil company increased its dividend payout to RM19 billion from RM16 billion the year before.
“And we, unfortunately, see that the profit came from squeezing the service providers,” laments Safwan.
Against the backdrop of an improved operating environment, it begs the question: Should Petronas share a bigger slice of the pie with the supportive service industry? After all, it boasted that billions of ringgit were saved through the extensive cost-cutting programme, CORAL 2.0.
Industry sources indicate to The Edge that if Petronas increases its charter rate for all ILCT packages by 5% from the current level, its impact for a full year would be RM300 million to RM400 million.
O&G ecosystem at risk
In its latest Activity Outlook, Petronas points out that some OSV players may not achieve a return on investment (ROI) for their existing fleets, let alone acquire new ones to meet future demand.
The problem could extend beyond the OSV industry when oil majors operating in Malaysia take advantage of the current overcapacity scenario. Having low local participation will not affect the oil majors’ upstream operations much, as there are foreign players.
However, should this become the norm, the local ecosystem in the O&G industry would be jeopardised. From the economic perspective, this would increase the outflow of funds from the country as the oil majors need to deploy more services from foreign companies.
Operators in the neighbouring countries, such as in Singapore, will pounce on any job opportunities. They have travelled as far as Russia just to take up 50-day contracts to keep the ball rolling.
“New builds are very cheap now, compared with the charter rates. It is sustainable (for those who are building their capacity now),” says Safwan. But he highlights that the building price was much higher previously, so the existing fleet owners would not be as competitive due to the mismatch between the current low charter rates and high investment costs.
Most OSVs in the market, he shares, are more than 10 years old, while an ITB criterion is that vessels must not be older than 15 years.
“If your vessel cannot [be utilised] beyond 15 years, you cannot get ROI. How would you renew your fleet (without making profit from the existing fleet)?” he adds.
Safwan acknowledges that discussions between Mosva and Petronas have been fruitful. Petronas has made efforts to rationalise the number of licence holders, implement more rigorous background checks to limit foreign participation and increase long-term contract tenures to 3+2 years.
But there is room for improvement, argues Safwan. For one, the previous long-term contract tenure was 5+2 years — as practised right up to the time when charter rates were first revised downwards. The difference is important for the financial institutions, he explains. “They don’t want to have so many naked years (periods without charter contracts).
“Unless there is a change in the way financial institutions view the funding of the O&G market, I think this will be a stumbling block going forward,” he explains.
This is indeed a vicious cycle. The shorter contract tenure translates into tighter loan repayment schemes, which put financial pressure on players, whose chips are down.
Consolidation
Most OSV players believe that Petronas has a role to play in driving a consolidation that will make them stronger and more resilient.
Safwan says as contracts are not as plentiful as in the good old days, Petronas, being a key contract source, should award jobs in a way that will encourage consolidation.
“We want the contracts and support (from Petronas) to be given to the good, deserving ones — by merit. You should take into account their track records and maintenance programmes — not just technical and commercial [viability],” he adds.
By doing that, it could also eliminate rent-seeking practices. Taking as an example the consolidation of banks in the 1990s, Safwan says OSV players can also be rated based on the size, variety and reliability of their fleet — those with better ratings should be the preference of Petronas when giving out its contracts.
Petronas has long called for the local O&G players to venture outwards and reduce reliance on the local industry. That said, Petronas too has its national interest to safeguard. Growing the ecosystem is probably one.
Many OSV players are capable of becoming good operators that can survive on their own internationally, says Safwan, but adds that they still need support from industry stakeholders.
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.