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http://biz.thestar.com.my/bizweek/story.asp?file=/2008/7/26/bizweek/1642045&sec=bizweekWhither O&G sector?Most corporate figures from the sector scoff at the notion that jobs will dwindle with retreating oil prices. At present, the situation is one where oil and gas (O&G) service support companies are trying their best to cope with demand. Service providers basically provide their services based on an agreed scope of activities to be undertaken within a specified time-frame, for which a contract is developed. Therefore, the upward or downward trend of oil prices has no impact on the contract value.
“However, it must be noted that when oil prices are ‘high’, there is a likelihood of increased activities upstream, resulting in more contracts to be issued, and when prices are ‘low’, contracts would still be issued to ensure proper support and maintenance activities of all O&G facilities offshore,” says Ibrahim. Mokhzani says that earnings and margins for Kencana should continue to be on the uptrend for the next few years, not only because of the current order book but because it has already announced plans to diversify into other O&G support services.
“The oil majors will continue with their development programs at this fast pace until the oil price drops significantly below US$100/barrel. We saw a surge in E&P activity when oil rose to US$60/barrel and beyond. I don’t believe this level of activity will subside which means Kencana’s services will continue to be in demand,” says Mokhzani. Ibrahim says that as part of the nation’s growth vehicle, O&G exploration & production activities, which includes refurbishment of ageing fields and possibilities of revival of marginal fields will continue irrespective of oil price. “It is the same for the region where more E&P activities including brown field activities will continue to be the mainstay of activities. Coupled by the demand for offshore marine services, it is therefore safe to conclude that it is highly likely that we would be kept busy over the next few years and safe to say that it doesn’t really matter what the oil price is pegged at, so long it is above the extraction cost,” he says.
Presently, Petra‘s vessels are operating in both shallow and deep waters in the Asia Pacific Rim. Although increased exploration, production and development activities especially in deep waters were somewhat obvious in recent years, demand for Petra’s vessels have been gradually escalating over the years. One of the main reasons for this is scarcity of supply. “This demand has caused the charter rates to escalate. In 2007, our average vessel utilisation was 75%, and in 2008 and beyond, we expect a higher utilisation given higher exploration and production activities and revival of marginal fields. In fact, our market reach includes both new and developing and ageing O&G platforms, which number more than 250 in the country, and over 600 in the region,” says Ibrahim. Azmi says that perhaps, if oil corrected significantly, it would then have an impact on demand and defer certain expenditure programmes,” he says.
“At US$35 per barrel, Petronas was already drilling for oil. Furthermore, even if oil prices come down, demand for oil consumption is still up.” He says that in Alam Maritim’s case, the cost of fuel for its vessels are passed on completely to the oil major. “We are benefiting from the increased activity in the sector. This in turn increases demand for our offshore vessels. For every project that we go into, we ensure that we can make decent profits. Alam is well positioned in this environment, as our contracts span between 3 to 20 years,” he says. Azmi says that while the attention is on deepwater exploration, production in shallow waters still need to go on.
“In today’s environment, people are rushing to bring out oil. It is this activity and urgency that is causing marine vessels charter rates to increase. Some vessels are more than 20 years old, needs to be replaced, and this creates a vacuum between the demand and supply, and is another factor why charter rates increase,” he says. On this note, Alam Maritim is spending some RM400mil to buy 12 new vessels, to be delivered in the years until 2010. The group will take delivery of 10 new vessels this year, and the two remaining vessels by 2010. The new buildings will increase the company’s fleet size to 34 by 2010.
Meanwhile, Yusof says that Dayang has been generating revenue of over RM100mil over the last seven years even when oil prices were at much lower levels. “Of course there is slightly more work when oil prices are high, as the oil majors don’t want disruption of their planned production.” “But when oil prices were at much lower levels, there was still scheduled maintenance works to be done. So no, we’re not at all affected,” he says. Dayang too, is looking to acquire more vessels in the near term to complement its network of three accomodation work boats, and one supply boat. Another accomodation work boats, with a 189-pax capacity, will come on stream by the first half of 2009.
Summing it up, Mokhzani points out that as long as the oil majors find it viable to explore, develop and produce oil, Kencana will have a market to cater to. “We provide engineering and fabrication services just like any other construction company. The fluctuation in the price of oil effects the oil majors more than it does us. Having said that, should the price of oil drop to very low levels, that the oil majors will review their exploration and production program, which then would effect us. Our margins are quite consistent but the amount of work varies with the oil price,” he says.
Breakeven point?
Mokhzani says he is unsure at what level would the oil majors find it not viable to explore for oil. “In the last few years the emphasis has been on deep water exploration, which is very expensive. Large reserves discovered in Malaysia and Brazil have renewed interest in the O&G industry and have seen some huge investments being made for marine vessels and equipment to work these deep water projects. To make these investments pay, the oil majors will be looking at keeping the prices of oil relatively high,” he says. Anand says a breakeven level for production of oil would probably be at about US$30 which might rise a little more due to the heavy capital expenditure and costlier sources such as deepwater and oil sand being tapped. “If oil prices continue to go down, it will not affect our margins or our ability to secure projects unless it goes well below US$50.”
Ibrahim says that the extraction cost of crude oil could vary from US$20 to US$35 depending on various circumstances in the extraction logistics. “Any price above this rate would make it viable and profitable for oil majors. So even if the prices head downward, it would still be viable and lucrative for oil majors to extract so long it does not breach the extraction cost for that field,” he says. Of course, given lesser prices, hence lesser margin, Ibrahim says there would inevitably be a change in strategy, in terms of lesser quantum for investments and capital expenditure, and increased focus on maintenance-type activities. “Such a scenario would benefit Petra Perdana which is involved in offshore marine services in both the green and brown field sectors,” he concludes.
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