This article first appeared in The Edge Malaysia Weekly on December 11, 2023 - December 17, 2023

PETROLIAM Nasional Bhd’s revelation last week of an increase in hydrocarbon discoveries for the whole of 2023, compared with recent years, exemplifies its continued effort to grow local resources after a period of slower exploration and production (E&P) activities.

The discoveries, which contributed more than one billion barrels of oil equivalent (bboe) to the country’s new resources, also signal the national oil and gas (O&G) company’s growing long-term investment needs, with more of the resources located in deeper waters and having higher contamination.

Petronas and its petroleum arrangement contractors (PACs) recorded 19 exploration discoveries in 2023, compared with 10 in 2022 and eight in 2021, according to Petronas’ past media releases and financial operational reports.

From a best estimate of contingent resources (2C) perspective, this adds 10.5% to Petronas’ domestic 2C resources of 9.51 bboe recorded at the start of 2023.

The announcement is “positive and accretive” to Petronas’ existing resource base, says S&P Global Ratings analyst Minh Hoang who covers the company.

While the discoveries are “in line” with the global trend of ramping up drilling programmes in the last 12 to18 months, they also “speak of the success of Petronas’ intensified exploration programme in the mature fields of the Sarawak Basin”, says Minh Hoang.

However, any upside to production, earnings and ratings is likely limited in the near term, he adds. The resources still need to undergo further appraisal and drilling before they can be converted into commercially recoverable reserves.

“Moreover, to pursue conversion in the future, Petronas would require additional capex (capital expenditure) to both appraise and, ultimately, develop the resource and reserve base.

“Petronas’ long-term investment needs are rising, given the need to replenish its existing reserve base while diversifying its portfolio to address energy transition risk in the O&G sector,” says Minh Hoang.

At the same time, the company will need to maintain its dividend obligation of RM40 billion to RM50 billion per annum to the government, the analyst adds.

“We forecast that discretionary cash flow (operating cash flow after working capital, capex and dividends) could remain broadly neutral to modestly positive over the next two years if our Brent oil price assumptions of US$85/bbl are maintained.

“With oil prices currently trending below US$75/bbl, our focus will increasingly be on how Petronas balances its investment needs with weaker cash flow, should prices remain soft.”

O&G exploration is a costly and technically challenging endeavour and it is not always that oil is struck or can be taken out. For example, it was recently reported that Petronas Carigali Sdn Bhd (PCSB) abandoned an exploratory well in Block SK306 off Sarawak due to technical operational challenges.

Sweet hydrocarbons — oil or gas with less contaminants that are less costly to process and fetch higher prices — are harder to find in mature fields.     

“While the size of the findings is significant, the quality of the assets needs to be determined, as well as whether they can be converted into actual reserves in order to make a meaningful assessment of Petronas’ fundamentals,” an analyst covering the company says. Resources with high carbon dioxide or contaminants may be insignificant to Petronas, another opines.

Nonetheless, while the findings may seem like business as usual, it “would be great for the O&G supply chain” in the light of expected sustained or higher activities moving forward, says an economist with a local institutional fund.

A higher O&G resource base “provides us with significant leeway to do things right” in terms of addressing the net zero transition road map, he adds, as it provides a lever to take on additional risks.

The global net zero ambition will require Petronas to be in a stronger financial position to take on new and expensive emission-focused projects, such as carbon capture and storage (CCS), and hydrogen value chain development in the future.

Petronas’ annual capex rebounded post-pandemic to RM50 billion in 2022 and RM34.3 billion in 9M2023. 

Cash generated from operations after deducting capex and dividends has been in line with historical trends. At end-September, the company was in a net cash position of RM96.68 billion. 

Cash generated from operations in the first nine months after deducting dividends of RM40 billion and RM45 billion capex estimate stood at RM6.47 billion compared with a 10-year average of RM24.2 billion.

In total, Petronas’ local and international 2C resources amounted to 15.5 bboe before the new discoveries and net production in 2023 — more than 60% of which are in Malaysia — which could last the national O&G company another 18 years based on the average production rate of the last five years.

Certainly, Petronas must continue to maintain the right balance between rewarding its shareholder and investing for the future in order to continue reaping the benefits of the country’s O&G reserves for the long term.

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