This article first appeared in The Edge Malaysia Weekly on April 18, 2022 - April 24, 2022
SINCE the beginning of the year, Petroliam Nasional Bhd (Petronas) has been in the news for a variety of reasons. The cause for the fanfare includes Brent crude, the benchmark for oil prices, breaching US$120 per barrel in March, its highest level since mid-2014.
The high oil prices have resulted in a sterling financial performance for the national oil company, which chalked up a profit after tax of RM48.6 billion on the back of RM247.96 billion in revenue for the financial year ended Dec 31, 2021 (see table on FY2016 to FY2020 earnings).
This was followed by news of Petronas being linked to the bailout of ailing oil and gas (O&G) service provider Sapura Energy Bhd, which was subsequently denied.
While most of the news was positive, there were also allegations made by the Malaysian Oil & Gas Services Council (MOGSC) and Malaysia OSV Owners’ Association (MOSVA) that Petronas had been squeezing them to cut corners and, as a result, the national oil company generated huge profits at the expense of O&G players.
Both MOGSC and MOSVA wrote to Petronas in February, stating their grouses. The Edge, which was given a copy of their letters, ran a story on the issues raised by the two organisations last month.
In a recent interview over dinner at the Malaysian Petroleum Club, the company’s president and group CEO Datuk Tengku Muhammad Taufik Tengku Aziz said, “It’s unfortunate that MOGSC wrote to you [The Edge] and shared the letters because, typically, when you have a viewpoint, people will pitch opinions on either side, whether Petronas is brutal, tyrannical, making profits and squeezing everybody to die. But the other side of the story is that we’ve had RM1.5 billion worth of financing, where we work with banks to make it available to over 250 applicants. That dimension didn’t come through.
“First off, philosophy-wise, at Petronas’ board level, there is a very clear understanding. Petronas cannot perform, deliver, continue to exist without a robust and strong OGSE (oil and gas services and equipment) ecosystem.
“You don’t have to worry about us not recognising the fact or thinking, ‘Tak apa lah [It does not matter], whoever offers the service purely on cost competitiveness is what matters to us.’ I want to debunk that.”
Petronas met up with MOGSC officials last month to understand their grouses (see MOGSC’s statement).
MOGSC represents about 500 local O&G companies across the entire supply chain on the local OGSE spectrum. When The Edge met MOGSC officials, a question that was posed was whether they were shooting themselves in the foot by making their complaints public, considering that Petronas was responsible for dishing out contracts to the sector. One of the executives’ response was, “We are left with no choice … We are suffering.”
But how bad is the situation, and how much of their plight has been brought about by Petronas? And are the MOGSC members’ grouses valid?
While MOGSC was guarded in its response to questions from The Edge, some local O&G players say the picture being painted by Muhammad Taufik is a rosy one but the reality is quite different, and industry players are indeed suffering.
In early 2015, Petronas initiated a cost optimisation programme — Cost Reduction Alliance, better known as Coral 2.0 — to work with its petroleum arrangement contractors (PACs) and OGSE providers. In a nutshell, Coral 2.0 sought to reduce costs and improve efficiencies.
MOGSC says it played along and its members bit the bullet, as Brent crude traded in a volatile manner over the next few years, even falling below US$20 per barrel in April 2020.
On the cost-cutting exercise under Coral 2.0, Muhammad Taufik says, “Betul [Correct], in 2015, 2016, Coral 2.0 did ask for rate renegotiations. Because at that time, things were so dire that if we didn’t maintain liquidity, Petronas would have had to halt outright and they would have had no jobs at all.”
Now that oil prices have strengthened, MOGSC says Petronas should increase rates and contract values.
In an article on similar issues that was published in The Edge last month, the MOGSC executive committee said, “Ironically, the discounted price given by contractors during the oil price crash, with the intent to help the industry stay resilient, [has] now become a double-edged sword for them.”
MOGSC points out that oil prices have reached their highest level in seven years, but the rates of O&G service and equipment providers have not seen a similar rebound since Petronas made the request to lower rates as part of the Coral 2.0 initiative in 2015. They were looking forward to being compensated when oil prices recovered, but that has not been the case, it says.
To this, Muhammad Taufik says the contracts under Coral 2.0 have all lapsed. “We had Coral 2.0 in 2015. Practically all the contracts during that period lapsed in 2019. So, what we have now is predominantly priced against the market,” he explains.
To put things in perspective, oil prices shot above US$100 per barrel at end-February after Russia, the world’s third-largest oil producer, invaded Ukraine. Brent crude has averaged US$91.82 per barrel year to date, compared with US$51.09 in 2021.
Muhammad Taufik continues, “When oil prices go up, at some point, costs will also go up. But if you tie your rates directly to oil prices, what we lose out [on] would be competitiveness. Because in the region, we have to be competitive as well.
“So, if a contract [value] just escalates [and] de-escalates because of oil prices, where is that competitiveness that we’re trying to bring? We don’t want to have foreign direct investment not coming into Malaysia just because it’s expensive.
“So, I think it goes through — yes, recognising the cost, we also have to benchmark it [against] the region; typically, how much are the rig costs, vessel costs, and those two cannot lari banyak sangat [differ much]. If not, you don’t have a benchmark. Takkan lah [It cannot be that] your cost just goes up because all prices go up? It doesn’t make sense, right?”
Another grouse that MOGSC has is the delays in Covid-19 compensation. It has been on the record to state that its survey of 30 member companies found direct and tangible Covid-19 costs of more than RM78 million, and indirect and intangible costs of more than RM134 million, but Petronas’ reimbursement was only 13% of direct costs, which has had an adverse impact on cash flows.
However, Mohammed Taufik says, “You’ve got to be fair to us. You submit a single-line indirect costs explanation. How am I going to tell [the other oil companies operating in Malaysia], ‘Ni Covid ni, bayar aje lah’ [Just pay the Covid claims]? … The other thing also is to understand, if you talk about project costs, that project payment is based on progress payment — you hit 80% completion, [then] 80% is paid. All that [has already been] paid.
“These Covid and other claims that are coming are over and above that. You can take all your invoices, related or not, [and] push it in, because this one is over and above the project progress cost. All that goes through a process of validating, and there are just two points: One, is it really for this project? And two, is it [of] a valid nature? — if it’s Covid and so on.
“So, what we’re also trying to do is, technically, let’s say someone claimed Covid expenses, [doing a] Covid test with the PCR [method]. What do you ask? I want to see receipts, names and amounts. It starts with that.”
Companies such as Sapura Energy had racked up as much as RM460 million in Covid costs as at last November. For its financial year ended Jan 31, 2022, the O&G player suffered a net loss of RM8.89 billion from RM4.13 billion in revenue. In the previous financial year, it saw a net loss of RM160.87 million on the back of RM5.35 billion in sales. Sapura Energy had racked up accumulated losses of RM13.52 billion as at end-January this year.
Other than Sapura Energy, which is 40%-controlled by state-owned Permodalan Nasional Bhd (PNB), the other casualties in the O&G sector include Perisai Petroleum Teknologi Bhd, which was delisted from Bursa Malaysia in January 2020 after failing to regularise its financial condition, and Barakah Offshore Petroleum Bhd, whose stock is still trading on the local bourse but which remains in the cash-strapped Practice Note 17 category. The company has been in PN17 status since May 2019.
Many of the smaller O&G companies that are having financial problems were subcontractors and vendors of Sapura Energy and Barakah Offshore, and have been left reeling as a result of non-payment by the two players.
Another previously high-flying O&G company that is in the doldrums is Serba Dinamik Holdings Bhd, which has been grappling with accounting issues and is now in the cash-strapped PN17 category. Its issues are not related to volatile oil prices, though.
Minister of Finance Inc unit Urusharta Jamaah Sdn Bhd has a 64.45% stake in fabricator TH Heavy Engineering Bhd, which has been in the PN17 category since early May 2017.
Malaysia Marine and Heavy Engineering Holdings Bhd has suffered four financial years of losses. It is a 66.5%-owned unit of shipping company MISC Bhd which, in turn, is a 51% subsidiary of Petronas.
Another O&G company in the PN17 category is Scomi Energy Services Bhd, which was once a politically connected outfit.
Muhammad Taufik’s predecessors had been beating the same old drum over the past decade or so, pushing for consolidation in the O&G industry. However, apart from the merger between SapuraCrest Petroleum Bhd and Kencana Petroleum Bhd in 2012 (which formed Sapura Energy) and Dayang Enterprise Holdings Bhd taking over a controlling stake at Perdana Petroleum Bhd, there have been no major consolidation exercises in the sector.
In 2017, Velesto Energy, in which PNB — both directly and via its units — has a shareholding of 54.16%, was slated to merge with another government-controlled entity, Icon Offshore Bhd, in which Yayasan Ekuiti Nasional has 56.1% equity interest. However, the deal fell through.
“Maybe I’ve been speaking Hokkien to a Latin-speaking group because I don’t think they are getting the hint [to consolidate]. Not only me, but my predecessors as well,” says.
“Everyone is waiting for the other person to blink first. Nobody wants to come forth and say, ‘I have x assets, you have similar; let’s get together.’ No one is making the first move. So, like I said, we can be encouraging and we can even tell you all the benefits of scale in doing that, but we can’t put you together. If something goes wrong, guess who gets blamed — the matchmaker [Petronas].”
To illustrate, MOSVA has 24 members, but about 80 companies own and operate vessels in Malaysia. Similarly, only a few companies have been given fabrication licences, but there are a number of small players as well.
“Petronas recognises the duty [to nudge consolidation], but it can only go so far. We can only do so much,” says Muhammad Taufik.
Datuk Tengku Muhammad Taufik Tengku Aziz is a tad late for dinner with The Edge at The Malaysian Petroleum Club, which is excusable since he is president and group CEO of Petroliam Nasional Bhd (Petronas).
On his way in, he is greeted by one of the serving staff at the restaurant. The two exchange pleasantries and even share a joke.
Muhammad Taufik is different from his predecessors. He is more down to earth, warm, friendly and engaging, without any hint of arrogance. And while being humble, he comes across as sharp, with a no-nonsense attitude.
At only 48, he could be at the helm of the national oil company for a long time. The affable former accountant spent a good 1½ hours with The Edge, discussing certain concerns in the industry. Here are excerpts from the interview.
The Edge: There have been a lot of complaints about Petronas from the industry — the Malaysian Oil & Gas Services Council (MOGSC) and the Malaysia OSV Owners’ Association (MOSVA) — that it is not doing enough to support the local players.
Datuk Tengku Muhammad Taufik Tengku Aziz: There’s this unfair painting that Petronas made money, didn’t spend capex (capital expenditure), had huge profits and allowed everyone else to die. In 2020, the flipside is, when [oil] prices fell, we didn’t drop our contract rates.
Roughly every year, just upstream O&M (operations and maintenance) opex (operating expenditure) is RM17 billion to RM20 billion, never changed. So, the persons who have to maintain offshore [assets] are definitely our local players, right? About 88% went to our domestic players because you want the ability to access the local ecosystem. Unfortunately, that dimension didn’t come out.
It’s predominantly new capex that did not get through the threshold, but it didn’t get through because of the outlook for price. So, if the outlook for price is unfavourable, you cannot sanction a project. So, it has nothing to do with supporting [the players]. It’s just that if the project doesn’t work, it goes through our board, and it wouldn’t get [approved].
Because it doesn’t make business sense?
Yes, because you know what happened post-2016. Prices dropped off. The entire oil and gas sector, unfortunately, decided to underinvest and this is where we are today with an energy crisis. Very few projects were sanctioned.
Nobody had a good view of what the future of oil prices would be when we were in the thick of Covid, so the assumption became quite conservative. So not many projects were sanctioned. That’s why whatever capex we had was deferred.
But as borders started to open, our view of the future became better. So, when the view is better, and the view [of prices] is higher, that’s when more [projects are sanctioned].
So, you will see that there is catch-up in a way, but our maintenance capex and opex [is] to keep everything safe and running; production is not interrupted. We’re transparent — last two years, RM33 billion and RM30 billion in capex on the back of an outlook that was severely dampened. And now, everybody is playing catch-up.
The last two years registered the lowest number of discoveries. Why? Energy transition, depressed outlook on price.
The other bit, the other dimension, just to give you a fuller picture, is this — we have not only been spending upstream, but that little behemoth you call Pengerang. Don’t forget, from 2015 to 2019, that’s where the focus of our capex went. Roughly RM20 billion, RM25 billion every year was deployed. So, we did spend, and there were local vendors [involved]. They were just not MOGSC.
So, there is no merit to what MOGSC said?
Let’s expound on this. For a given risk, all things remaining equal, if I have to put in money to get my returns — one region offers longer-term cost clarity, and competitiveness versus the other where there is an interest group that pushes, and I may find myself captive to a local OGSE — where do you think [the money will go?]
Very clear, right? Which is why we try to manage them. This is why the vendor development programme is in place, to make you competitive. Please grow in scale. My predecessors have been hinting and dropping strong innuendos — cost-based consolidation, economies of scale.
The last time when prices went down, I helped you. Now prices have gone up. Okay, I’ll start benchmarking against where escalations exist for our critical services. But if the inherent problem is that you bought a vessel at the wrong part of the cycle, and you can’t serve your interest, how do I help?
This is going to sound like a broken record. We haven’t really moved from the 4,000-vendor ecosystem.
So, there’s still overcapacity?
I think let’s be fair to all sides. I know everybody’s hurting. We will intervene. But insofar as allowing the ecosystem to fail? Not on our agenda at all. In fact, the absolute opposite has to happen.
If they are not consolidating, does it mean that things are not that bad actually?
Actually, if you don’t consolidate, you take more risks, because you are not creating complementarities and lowering costs. It’s not efficient.
Any idea when you are going to intervene?
We have already spoken to MOGSC. We have already engaged. The contention is that Covid claims have been unreasonably withheld. There are two points — direct and indirect costs. Direct costs [such as] quarantine, I put them on watch, keep them aside. They had to take PCR tests per my entry requirements into my assets. Direct. Very clear. 50-men team, 50 PCR tests, two to three times throughout the project duration, they stayed in a hotel room.
The difficult one is the indirect costs. They say because of the standby, one of my ships couldn’t be fully crewed, therefore there are standby charges. How do I know your ship was actually on standby or because you didn’t arrive on time? If there was already a delay underlying the job, even before Covid hit, some other purpose, the ship was delayed, whatever the case may be, and you just now pack it all in. How do I know? Am I paying for valid Covid costs, or am I also defraying prior inefficiencies?
The other nuance is this. The ones who really incur the Covid claims are the subcontractors. So, they will go to the main contractors to claim. Main contractors say, ‘Hang on, I will get Petronas to pay first, [then] only I pay you because I have no motivation to pay you early.’
So, there’s no urgency on their part — the main cons?
None, on the part of the main cons. So, there are also a lot of instances where actually this is stuck at the main con. The main con, by right, should pay the main con claims. But they don’t want to because they want to manage their working capital.
Regionally, are other oil companies also facing similar issues?
Yes, but do you know what’s the difference? Ours is probably 20 times more voluminous than that — the biggest jobs, projects, quantums are with Petronas.
How was MOGSC when you met them? How did it go?
It was a conversation. The point here is, you want to talk to certain parties, certain disgruntled OSV (offshore support vessel) owners, T&I (transport and installation) players, hook-up contractors. [When you go to the media,] you’re putting me up against a wall. Because now, if I have to reveal that you guys don’t run things as efficiently, or as transparently as you should…
I just want to tell you we are already acting. We have four work streams … helping with the financing, looking at the benchmark costs that need to go forward … With regards to this Covid claim, there is a dedicated task force in Petronas but for some reason, people have avoided talking to the task force. And they have been claiming they went to their main con.
What about Sapura Energy Bhd’s claims?
We are also expediting. We’ve actually worked through a huge chunk of theirs. But they don’t only claim from us. They also claim from others. So, what we can do is limited to what is claimed from us.
One of the other issues mentioned by MOGSC is the contract structure in terms of main contractors — the umbrella contracts.
That’s what I just mentioned. So, they want us to look at different contracting strategies, how we package it. I’ll tell you there’s a reasonable argument here. That’s why I want to engage.
I could be very cynical here — you can’t hold on to a vessel for too long? Why? Because you don’t schedule correctly? You don’t design how contracts interface correctly? You can’t afford to pay the standby rates for vessels? You have got to improve. It cannot be me.
We hear Hess Corp has aborted a project here. I was told Petronas tried to push them to give it to Sapura. Do you do things like that?
I don’t nominate a contractor, but I will tell them things which I’ve just repeated to you. This is the kind of conversation I would have [with] these CEOs — we thank you for operating, you are contractually obliged to get oil to me, condensate and gas, by a certain time frame because that is how we manage the delivery. You don’t want to take risks, understood. You have your own governance in considering the kind of cost competitiveness and safety and technical standards that you need to attain, and so on.
But as the operator I need you to be mindful of this. If you systematically move away from working with Malaysian OGSEs — this is a line I’ve used many times — what’s going to happen is we’re not going to have an OGSE system. If they listen, they will know what I mean, that they have to actually steward and shepherd the local contractors to make sure they’re a lot more robust. If they don’t want to listen, I have to respect it because that’s what we are, as a regulator. We give them a fiscal structure that makes sense to them.
On comments that Petronas or Khazanah Nasional Bhd should step in to save Sapura Energy?
I have to be very, very careful. While it has not been revealed, Petronas has already been aiding Sapura in the form of milestone payments, accelerated credit terms, reducing performance guarantees so they don’t have to pay as much. We have not touched their existing contracts.
To say that we are allowing the vendor ecosystem under them to go and die is also wrong. Because there have been instances where not only us, but also other PACs have stepped in to pay subcontractors directly. So, Petronas and Khazanah should step in? I think Petronas has already stepped in. We just don’t beat the drum about it.
Here’s the risk — if I can give you perspective — there’s a risk of the project being disrupted. If that happens, the first hydrocarbon date moves. There’s a risk of financial problems and servicing materials, salary. So, first and foremost you go, ‘Which risk do you want to manage?’ We say, ‘We cannot let go of our first hydrocarbon date. That one we have to take care of. The project cannot be disrupted.’
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