This article first appeared in Forum, The Edge Malaysia Weekly on February 21, 2022 - February 27, 2022

The growing number of creditors affected by the financial troubles of Sapura Energy Bhd reflects the fragile state of the country’s oil and gas (O&G) industry.

Despite Petroliam Nasional Bhd (Petronas) spending billions every year on nurturing resilient bumiputera-led O&G service providers, many companies have voiced concerns about the sustainability of their business should Sapura be unable to pay its dues.

One vendor, who claims he is owed more than RM5 million, says he has not been able to communicate with the management of Sapura, which is facing a cash crunch. His story is similar to that of another vendor, who is owed RM180,000 and says that he needs the money to survive. Sapura has about 1,500 local vendors and many more overseas.

The domestic O&G vendors’ dependence on Sapura casts doubts on the effectiveness of Petronas’ programmes to nurture financially strong bumiputera vendors in the O&G sector.

There are many bumiputera companies in the sector, but how many are really independent of work from Petronas?

Every year, Petronas awards a substantial number of contracts to bumiputera-owned O&G service providers under its vendor development programme. A number of these firms are well-connected because it is not easy to get on the national oil company’s list of accredited vendors.

Apart from fulfilling the bumiputera requirements, which are already stringent, the companies must be prepared to invest in O&G assets and have tie-ups with foreign partners. But for a company that makes the cut  as a Petronas vendor, the rewards are lucrative.

Contracts are awarded after a restricted tender, where they compete among themselves in a process that includes companies from Sabah and Sarawak. The Petronas vendors generally do not face competition from non-bumiputera Malaysian companies or foreign outfits.

The overall objective is to help nurture bumiputera companies in the O&G industry so they can develop a track record and build up their asset base to expand outside Malaysia. Over the longer term, the aim is that they do not depend on Petronas for jobs.

However, that desired outcome is far from being achieved.

Sapura is one of the few domestically nurtured O&G companies that have grown and ventured abroad. But the company itself is in financial distress now. With its current state of finances, its chances of revival probably lie in Petronas giving it more jobs.

Sapura has a global footprint and an enormous domestic presence because of its size. It has a fleet of vessels and other assets that none of the other domestic companies can offer.

Sapura’s leading position in the domestic O&G industry puts it in a favourable position for Petronas jobs, as well as new ventures or areas of development that the national oil company decides to go into.

For instance, when Petronas decided to open up marginal oil fields to local companies, Sapura and Kencana Petroleum Bhd were the first to be awarded a production sharing contract in 2011. The two companies, together with Petrofac, were the joint development partners for the Berantai marginal oil field.

Several other local companies such as Scomi Group were also awarded contracts to develop marginal oil fields after the award to Sapura and Kencana. But from 2015, following the crash in oil prices that started in June 2014, Petronas bought back the system of production sharing contracts.

It became uneconomical to operate marginal oil fields with the plunge in oil prices. As such, Petronas took the decision to relieve the vendor companies of these oil fields.

Sapura’s troubles appear to have started long after the 2014 oil crash. Based on its results, net cash from operations — which indicates its cash flow position — started to erode quickly in 2017.

In the financial year ended Jan 31, 2017 (which captures 11 months of 2016’s performance), Sapura’s net cash flow from operations was RM3.1 billion while its finance costs were RM824 million. This indicated the company’s comfortable cash flow position to service debts.

A year later, net cash flow from operations dropped to RM1.7 billion while finance costs were RM743 million. By the financial year ended Jan 31, 2019, Sapura’s finance costs were more than the net cash generated from operations.

Even a fundraising exercise completed in January 2019, which saw the company raise RM4 billion, was not enough to save it. Sapura Energy’s then group CEO Tan Sri Shahril Shamsuddin, who was its major shareholder until Permodalan Nasional Bhd stepped into the company following the fundraising, left in March last year.

Datuk Mohd Anuar Taib, who took over from Shahril, was reported to have said that the company would dispose of assets to beef up its balance sheet. He is not looking at expanding its order book but instead will ensure that each contract is profitable.

Order books do not mean anything in the highly intense O&G industry where mistakes and delays can be costly. It also means there are just too many players in the domestic O&G sector chasing the same jobs from Petronas, causing margins to narrow.

Since the 2014 oil crash, Petronas has been trying to get the domestic O&G players to consolidate as there are not enough jobs to go around. Its message is targeted especially at service providers with offshore support vessels (OSVs).

But so far, there does not appear to be any major consolidation moves. Many are still holding on to their assets and chasing the next contract.

It is a different case for non-bumiputera O&G companies. For instance, Bumi Armada Bhd has been selling its OSVs since 2015, stating that the business is loss-making. The latest vessels sold by the company were operating in the Caspian Sea.

On its own, Petronas has been unable to consolidate the domestic industry. The problems arising from Sapura’s financial distress and the exposure that local O&G vendors have to the company may make the much-needed consolidation happen.

M Shanmugam is a contributing editor at The Edge

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