This article first appeared in The Edge Malaysia Weekly on September 23, 2024 - September 29, 2024

THE Malaysian Oil, Gas & Energy Services Council (MOGSC), the largest industry association representing the interests of the oil, gas and energy players, is hoping the federal government will support the oil and gas (O&G) players with a RM3 billion allocation to assist them in obtaining financing from local financial institutions. The financing will help speed up the recovery of these service providers, battered by a double blow of the Covid-19 pandemic and low oil prices due to a production war, and provide them with better liquidity to take up new projects.

This is part of MOGSC’s wish list, which has been sent to Finance Minister II Datuk Seri Amir Hamzah Azizan, for the upcoming national budget that will be tabled in parliament on Oct 18.

“It (the RM3 billion allocation sought by MOGSC) is basically contract financing. At the moment, we feel the O&G sector has been given the least priority in terms of funding [by Malaysian financial institutions]. So if there’s some push from the government, it would be good for us,” MOGSC president Syed Saggaf Syed Ahmad tells The Edge in an exclusive interview.

 The allocation is over and above the funding national oil company Petroliam Nasional Bhd (Petronas) guarantees under its vendor financing programme, which was introduced in 2018. 

“Currently, due to strict ESG (environmental, social and governance) compliance, more often than not, applications for funding [by O&G companies] are rejected,” he laments.

In Petronas’ activity outlook for 2024 to 2026, it is stated that its target is to sustain and grow the country’s O&G production of two million barrels of oil equivalent per day by 2025 and beyond, hinging on various projects in the pipeline, such as Rosmari-Marjoram, Lang Lebah, Kasawari and Jerun, offshore Sarawak, Gumusut-Kakap and Belud Clusters in Sabah, and Bekok, Tabu and Seligi located in the peninsula, among other oilfields.

“They (Petronas) are close to [the target], but they need to ensure the current assets are operating well, and new streams from new assets are secured. The ageing platforms will not be able to really support this [two million barrels a day] ambition so they (Petronas) need new oilfields to come online. I think maybe 50% of the [existing oilfields] are 30 to 40 years old, and have been sustaining with enhanced oil recovery programmes,” he explains.

Earlier this month, Petronas had indicated that its capital expenditure (capex) for 2024 would be RM25.7 billion, which will be used mainly for development and exploration activities in the upstream business. It revealed that its domestic capex increased 18% from the same period last year.

A study by MOGSC of 32 publicly traded O&G companies showed that their trade payables in 2021 stood at RM14 billion, escalating more than 28% to RM18 billion in 2022 and more than 11% to RM20 billion in 2023.

“If there are RM20 billion in trade receivables in these companies’ books, there will also be RM20 billion in trade payables … This is indicative of how bad the liquidity issue is,” Syed Saggaf explains.

One of the worst hit O&G companies is Sapura Energy Bhd (KL:SAPNRG), which has been languishing in the cash-strapped Practice Note 17 (PN17) category since May 2022.

Sapura Energy is 42% controlled by Permodalan Nasional Bhd (PNB) and its various funds. The company remains financially stressed even after a rights issue to raise RM4 billion. PNB pumped in RM2.68 billion via the cash call.

At end-April 2024, Sapura Energy had trade and other payables of RM5.85 billion, up from RM5.51 billion at end-January.

It had accumulated losses of RM17.23 billion as at April 30, 2024. It posted a net profit of RM82.13 million from revenue of RM1.18 billion for its first financial quarter of FY2025 ending January while its finance cost for the three-month period was a whopping RM204.65 million. It is also worth noting that Sapura Energy’s bottom line received a boost from a RM52.42 million foreign exchange gain.

MOGSC is asking the government to directly intervene with a RM1.5 billion payment to Sapura Energy’s sub-contractors, vendors and suppliers.

In January 2023, MOGSC had written to Prime Minister Datuk Seri Anwar Ibrahim, who is also the finance minister, to seek government intervention in its members’ recovery of as much as RM3.3 billion in debts owed by Sapura Energy.

The vendors and suppliers of Sapura Energy are in a precarious position as in the overall supply chain, they are deemed unsecured creditors and the last to be paid, and likely have to take haircuts of as much as 70% of what is owed to them.

Syed Saggaf contends that financial institutions have stronger balance sheets to treat losses. “This might sound like an old broken record but we are saying help Sapura Energy ... We want Sapura Energy to survive. I mean, from the industry’s perspective, I think it’s important that a company like Sapura Energy survives, but some help is needed. So our wish is that at least the government pumps in the money to pay the vendors,” he says.

“If it goes to the creditor scheme of payment and whatnot, there will be a haircut [for the vendors]. That [haircut] would be a disaster for the industry. Because you’re talking about 700 vendors and subcontractors that have already performed the [required] job.”

Sapura Energy is currently facing various suits for unpaid bills.

Interestingly enough, Sapura Energy, on its prospects said, “Sapura Energy and its subsidiaries reported a net gain of RM82 million in 1QFY2025. Free cash flow generated in 1QFY2025 is about RM132 million ... The ongoing lack of access to working capital and bank guarantee facilities remains a strain on the group as it navigates its turnaround journey.”

Another item on MOGSC’s wish list is incentives for the fragmented industry to consolidate.

“If you want the industry to consolidate, what would be the incentive? We propose a tax incentive, we don’t ask for handouts, just for some tax breaks if they (companies) consolidate,” Syed Saggaf says.

Since 2015, when Tan Sri Shamsul Azhar Abbas was president and group CEO of Petronas, he had mooted consolidation in the fragmented sector, but little headway was made.

Other than SapuraCrest Petroleum Bhd and Kencana Petroleum Bhd in 2012, which morphed into Sapura Energy, and topside maintenance player Dayang Enterprise Holdings Bhd (KL:DAYANG) taking a controlling stake in offshore support vessel company Perdana Petroleum Bhd (KL:PERDANA) in 2015, there has been no major consolidation in the sector.

In 2017, PNB-controlled Velesto Energy Bhd (KL:VELESTO), was slated to merge with Ekuiti Nasional Bhd (Ekuinas) -controlled Icon Offshore Bhd (KL:ICON), but the deal fell through as there was little incentive offered.

Other O&G companies that are in the PN17 category include offshore support vessel outfit Alam Maritim Resources Bhd (KL:ALAM) and pipe laying barge operator and hook-up and commissioning player Barakah Offshore Petroleum Bhd (KL:BARAKAH).

Meanwhile, companies such as Perisai Petroleum Teknologi Bhd, Sumatec Resources Bhd, Serba Dinamik Holdings Bhd and Tabung Haji Heavy Engineering Bhd have been delisted after being unable to revive their fortunes.

As a result of the downturn and lack of activity during the Covid-19 pandemic, some companies have been sold or taken over, including Icon Offshore. State-controlled private equity outfit Ekuinas sold a controlling 50.22% stake to the Lim family’s vehicle Singapore-based Liannex Corp (S) Pte Ltd. The Lim family’s flagship company is floating, production, storage and offloading or FPSO player Yinson Holdings Bhd (KL:YINSON). Johor Corp Bhd hived off 51% of EA Technique (M) Bhd (KL:EATECH) to Voultier Sdn Bhd, a firm controlled by businessmen Datuk Wira Mubarak Hussain Akhtar Husni and Datuk Lai Keng Onn.

The consolidation mantra also stems from the need to have larger O&G companies that can then venture abroad from a position of strength.

Another ongoing discussion between MOGSC and Petronas involves the industry players piggybacking the oil major and venturing abroad to countries where it has a presence. Petronas is currently present in more than 100 countries and explores and develops hydrocarbon resources and operates O&G production assets in Malaysia and 20 other countries.

“We are asking that Petronas, in its activity outlook which lists all its capex for domestic exploration requirements, to expand it to include its international capex so that local O&G companies can explore [the possibility of venturing abroad].

“Obviously, there are many requirements that these countries impose [such as] partnerships, so we want to know how we can participate in countries where Petronas already has a presence,” he explains. 

However, Syed Saggaf concedes that one such escapade about two decades ago was a disaster, where a number of companies ventured into Sudan on Petronas’ coat-tails.

One of the worst hit in Sudan was Ranhill Bhd’s O&G arm. Another O&G casualty in the Middle Eastern region was conglomerate Sime Darby Bhd (KL:SIME), which has since exited the industry.

“As far as MOGSC is concerned, we are playing a role. We collaborate with Matrade (Malaysia External Trade Development Corp) or we collaborate with several agencies to explore other countries. People have been talking about Guyana, we are exploring South America [and] we [need to] start looking for overseas opportunities,” Syed Saggaf says.

His push to venture abroad hinges on Malaysia being part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Under the CPTPP, Malaysia inked a bilateral trade agreement last week with the UK, which will allow Malaysian exports — palm oil, electrical and electronic products, cocoa, rubber, chemicals and machinery, among others — to benefit from duty-free treatment.

Other than Malaysia and the UK, the CPTPP involves Japan, Singapore, Chile, New Zealand, Vietnam and Peru.

“Because we ratified the CPTPP, it opened the door for businesses to come into our country but MOGSC sees this as an opportunity for us to go out. So what we have been saying to Petronas is, whatever trade agreements you have, and if you already have a presence in a country, why not come up with a programme that will allow us to go to these countries, give us some guidance to ensure that we have some opportunities in these countries as well … so that’s what we have been asking Petronas to help us with,” Syed Saggaf adds.

“Protection is not a nice word to hear but as an association, we definitely want some protection for our local ecosystem.”

MOGSC has been growing in prominence, with its membership standing at about 640, up by 170 companies since 2022.

“The Malaysian O&G industry has been resilient since the beginning. It has seen many cycles, ups and downs but no ecosystem can be sustained without help from the stakeholders,” Syed Saggaf concludes.

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