Cover Story: ‘We can nudge, but the market will play itself’

The Edge Markets

27 December 2018

Cover Story: ‘We can nudge, but the market will play itself’

AFTER two years, Petronas’ call for consolidation in the oil and gas (O&G) industry to improve the resilience of the players has gone largely unanswered.

The push was first mooted in 2016 amid the industry downturn — and it has been “difficult” to do, concedes president and group CEO Tan Sri Wan Zulkiflee Wan Ariffin.

“There’s a whole suite of issues, I understand,” he tells The Edge. “Some are [family-owned] companies. And a lot of times, there is redundancy of functions [within the merged entity]. It takes a lot of will [to undergo consolidation].”

However, he has not given up. Petronas’ intervention to uplift the whole industry continues, although it is now more about developing the ecosystem, which involves the participation of other stakeholders.

“We have a whole spectrum of companies,” says Wan Zulkiflee. “We have got really, really big, competitive companies that can go overseas but on the other side, we have those which are very small and fragmented.

“We’ve got a median line in the spectrum. I know we can’t all grow big; the whole idea is to push [the line higher].”

Building the players and the ecosystem

For one, Petronas has upped the ante by expanding its 26-year-old Vendor Development Programme (VDP), which has successfully transformed 64 companies up until mid-2017.

UnderVDPx, as it is called, Petronas roped in 18 firms — comprising six petroleum arrangement contractors and 12 successful Malaysian O&G firms, including former VDP ‘graduates’ — to act as second-tier anchors to nurture small and medium enterprises (SMEs) in the sector.

The programme also involves agencies that offer general business inputs. One example is the Association of Chartered Certified Accountants Malaysia (ACCA), which is tasked with assisting participating SMEs in preparing their books.

Other initiatives include the SME Vendor Financing Programme, a collaboration between Petronas, Bank Islam Malaysia Bhd and Syarikat Jaminan Pembiayaan Perniagaan Bhd (SJPP) announced in May.

Under the programme, SJPP will provide credit guarantees of up to 70% to eligible Petronas vendors to enable them to obtain financing facilities at low interest rates.

Separately, Malaysian Petroleum Resources Corp (MPRC) had in mid-2018 updated the list of financing schemes provided by the Malaysian government via 14 institutions for O&G services and equipment (OGSE) companies on its official website.

‘This cycle is not the first, and it will not be the last’

The industry is now recovering from the nightmarish 2015 oil price crash, which brought even the biggest OGSE companies to their knees.

Petronas has announced that the capex allocation for its local upstream segment will rise to RM14 billion to RM15 billion next year, from RM12 billion this year as it increased its oil price assumption for planning purposes to US$60 to US$70, from US$50s to US$60s previously.

The Petronas Activity Outlook 2019-2021 report, released last week, entails an upward revision for many upstream segments, including offshore drilling, marine vessels, line pipes, offshore installations and decommissioning activities.

In hindsight, some argue that the trickle-down effect has been slow and that Petronas has not revised rates and increased the number of contracts as soon as it could amid its earnings recovery.

“I suppose there will be margin compression as well for those involved in the value chain,” concedes Wan Zulkiflee. “[But] it was not only painful for the service providers, it was also painful for Petronas.

“Our PBT (profit before tax) margin in 2016 is half what it was in 2008. And this was after our intervention [to lower costs and improve efficiency]. So you tell me, what would be a right response by the management [at the time]?”

Petronas’ PBT margin fell to 16.43% in FY2016 from 42.81% in FY2008. However, it improved to 28.91% in FY2017 and further to 31.1% in the first three quarters of FY2018, in tandem with higher revenue as well as its ongoing drive towards higher efficiency.

Wan Zulkiflee notes that industry cycles are inherent characteristics of the O&G sector. “This [2015] cycle is not the first, and it will not be the last. “That is why I felt compelled that the organisation, and also the Malaysian O&G services industry, must ride these times.”

On Petronas’ side, he says, it has opted to spread out contracts over time to ensure continuous flow of work activities, and avoid peaking of projects and the necessary resources.

“In the long run, if we don’t [improve], I think it will still happen over time — smaller companies tend to drop off, banks will be more critical about giving financing … it’s the whole suite.”

Malaysia has around 2,700 active O&G companies out of over 4,000 registered with Petronas. The country has three times the number of players compared with Norway, although both nations own hydrocarbon deposits of similar size and nature.

The national oil corporation is using tools such as contract structures to “force” the establishment of partnerships and consortiums among smaller companies in order to qualify for jobs in the hope that they will consolidate in the long run.

“Gone are the days of fragmented companies, gone are the days of being agents,” Wan Zulkiflee asserts.

“In the end, yes, definitely, we have to leave it [industry restructuring] to the market. We will do whatever we can to nudge, but the market will play things out by itself.”

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