This article first appeared in The Edge Malaysia Weekly on March 7, 2022 - March 13, 2022

LIKE other oil majors, Petroliam Nasional Bhd (Petronas) achieved an annual performance that exceeded pre-pandemic levels, with soaring oil and gas prices in 2021 the main fuel for earnings growth.

In the financial year ended Dec 31, 2021 (FY2021), Petronas’ profit after tax (PAT) came in at RM48.6 billion on revenue of RM247.96 billion, as the Brent crude oil price averaged US$70.91 per barrel and even exceeded US$86/bbl in the fourth quarter.

It was Petronas’ best performance since FY2018, when it booked RM55.31 billion PAT on RM250.98 billion in revenue, when Brent was averaging US$71.04/bbl.

The FY2021 PAT performance of RM48.6 billion was also higher than the RM47.61 billion recorded in FY2014, when Brent averaged 39.34% higher at US$98.99/bbl.

The company paid RM25 billion dividends to the government for the year. “The results were delivered under very challenging circumstances,” said president and group CEO Datuk Tengku Muhammad Taufik at the group’s results briefing on March 1.

“We managed to take advantage of oil price and market recovery, and we paired this with strong integrated operational performance to maximise our cash generators,” he said.

As oil prices doubled from US$55/bbl at the start of 2021 to over US$117/bbl at the time of writing, many suggest market fundamentals point to the range of US$70/bbl to US$80/bbl.

Both signal a recovery from the “lower-for-longer” prices of US$40/bbl to US$50/bbl that were first triggered in the 2014/15 crash.

However, local upstream oil and gas services and equipment (OGSE) players have yet to share the cheer of high prices, judging by their latest full-year results.

Take any listed upstream contractor with its main operations in Malaysia and the latest annual results are far off the previous high in 2019.

This was safe for T7 Global Bhd, which posted its highest net profit since 2013 driven by higher execution of works for clients such as Petronas Carigali Sdn Bhd, Repsol Oil & Gas Malaysia Bhd and Carigali Hess Operating Company Sdn Bhd.

Past Petronas Activity Outlook reports showed that across the board, upstream contracts were ongoing up until 2019, with renewals in the following years.

Unfortunately, the pandemic impacted the already modest work projections laid out for 2020. It also dragged into 2021 with lower utilisation of rigs, vessels and offshore maintenance, construction and modifications (MCM), although hook-up and commissioning (HUC) works increased while offshore installations rolled out as projected.

From a peak of RM28.2 billion in 2014, domestic upstream capital expenditure (capex) fell to RM9.9 billion in 2019, and further to around RM7 billion in 2021 (excluding gas and new energy investments).

Similarly, total capex fell from RM64.7 billion in 2014 to RM47.8 billion in 2019 and to RM30.5 billion last year.

Petronas said its capex execution was impacted by supply-chain disruptions, Covid-19 impact on human capital and movement controls, and forgone mergers and acquisitions transactions amid distortion in asset valuations in the period. Going forward, it sees annual capex returning to RM40 billion to RM50 billion.

An indicator of industry continuity is the successful Malaysia Bidding Round (MBR) in 2021, with six exploration blocks taken up by a combination of smaller and major players, with another 14 blocks on offer under MBR2022.

“This (the active bidding rounds) further demonstrates that Malaysia still has a vibrant oil and gas landscape,” Muhammad Taufik told the Petronas results briefing.

“We will not forget our role as a national oil company in growing the value pie for our stakeholders and the Malaysian OGSE sector so that both can thrive alongside Petronas.”

In the 2022-2024 Activity Outlook, published at end-2021, Petronas laid out improved demand in 2022 for the rig segment, HUC and well decommissioning. Ten greenfield projects and one brownfield project with structural installations are set to begin this year.

Across the group, it had RM63.35 billion in capex approved but not contracted, down from RM76.74 billion at end-2020, with another RM25.02 billion under its joint ventures, from RM36.28 billion.

But local upstream activities in 2022 still have some catching up to do relative to 2019 levels, especially for offshore fixed structure fabrication, and offshore MCM, to name a few.

Based on recent trends, it takes one to two years for Petronas’ capex to catch up with an increase in average oil prices.

Further, if price is not an issue, there is now another one: all the clients of the local OGSE companies have previously had no real pushback from the environmental perspective, unlike after 2020.

Where oil majors like BP and TotalEnergies are rushing to shed their carbon exposure, Petronas maintains that it is “not abandoning hydrocarbons” and will continue to strengthen its core portfolio.

“A decarbonised future is not a future entirely absent of hydrocarbons. The real challenge before the world is to deal with the true adversity that the climate faces — that is emissions,” said Muhammad Taufik.

However, the Petronas chief conceded that the national oil firm “can no longer operate under business as usual approach” and needs to take “bold and decisive action now” or miss the window of opportunity to navigate the energy transition successfully.

This year, it is setting up an independent entity focused fully on new energy solutions, just three years after establishing the Gas and New Energy division.

It is also forming a Carbon Management Unit, which will manage its entire carbon storage portfolio, and potentially establishing a regional carbon capture storage (CCS) hub as a future revenue generator.

Some 20% of Petronas’ capex in the coming years, or RM8 billion to RM10 billion annually, will be channelled into renewable energy, hydrogen ventures, green mobility and CCS.

Much has already been done.

Petronas’ global portfolio comprises 1gw of renewable energy capacity under execution, with a target of 3gw by 2024.

At home, it is on track to achieve the final investment decision on the Kasawari CCS project off Sarawak — part of Kasawari Phase 2 — which is one of, if not the biggest, offshore carbon capture storage facilities in the world. The first injection is targeted before the middle of this decade.

Another CCS project at the Lang Lebah sour gas field is being explored. In addition, Petronas and its partners also announced last year that it is studying the viability of CCS off Peninsular Malaysia.

The Activity Outlook also provided a lengthy introduction on the potential of green hydrogen currently being explored in Sarawak, with officials expecting first production by 2027/28.

“OGSE players are encouraged to collaborate in scaling up hydrogen in a coordinated way. An opportunity to diversify spurs new business growth while upskilling capabilities in line with charting our aspiration going into a low-­carbon economy,” Petronas said in its 2022-2024 Activity Outlook.

“As Petronas and the industry continue to collaborate and move forward together, it is aspired that industry players are able to provide solutions which contribute to lesser greenhouse gas (GHG) emissions and demonstrate strong commitment towards sustainability,” it said in another section of the report.

However, there are gaps in the technology required to successfully commercialise these ventures and deliver at a cost-to-serve.

“Only Malaysia Marine and Heavy Engineering Bhd, together with Ranhill Worley Sdn Bhd, have secured the contract for Kasawari Phase 2 front-end engineering and design (FEED). No other players have this expertise yet,” a senior analyst covering the oil and gas sector tells The Edge. Meanwhile, hydrogen technology is still five to 10 years away, particularly for commercial transport of pure hydrogen in liquefied form, the analyst says.

Petronas has assured that its transition to decarbonise operations will “be executed responsibly and sustainably”, and that it will continue to catalyse the OGSE sector and remain a responsible partner to the contracting industry.

Service providers are essential to Petronas’ existing and new ventures, as it has been in the local O&G ecosystem that was nurtured for nearly five decades since 1974.

While Petronas has hinted at its areas of exploration in the Activity Outlook, it remains to be seen how the actual road map will be for local OGSE companies, suppliers and vendors — which number in the thousands — to catch up with the changes in the national oil firm and the energy industry.

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