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Petronas on an upward trajectory

The company is balancing its upstream ambitions with government debt obligations, while finalising a key domestic downstream project

The Malaysian government is once again turning to state-owned energy company Petronas to help fill its coffers, almost a year since the Perakan Herapan coalition returned veteran Mahathir Mohamad to the prime minister's office.

This year the government is targeting a special dividend of MYR30bn ($7.5bn) to help settle excess tax refunds inherited from the previous administration, as well as a regular MYR24bn dividend. In total, proceeds from oil and gas activities are expected to comprise 30.9pc of government revenue in 2019, and 17.1pc of gross domestic product.

The prospect of increasing its royalty payments to Sarawak and Sabah, the country's eastern states, also hangs over Petronas. During last year's electoral campaign, the Perakan Herapan coalition had promised to raise oil royalties from the current 5pc to 20pc. Since winning the election, Mohamad has tried to downplay this promise, instead claiming it could be obtained from profits rather than net revenue. This proposal is unlikely to wash, though, as it would leave the states with less than they are already receiving.

Similarly, tensions were raised last year over attempts by Sarawak to wrest control of its oil resources away from the central government and, by extension, Petronas. The regional government aims to install its own state-owned oil company as operator and regulator of Sarawak resources.

Petronas lost a court battle when it tried to invoke the centralising national 1974 Petroleum Development Act, as trumping Sarawak's regional 1958 Oil and Mining Ordinance legislation. The firm could yet have another day in court.

But an adjudicator with extensive oil and gas experience thinks talks on a compromise continue, albeit quietly. "I think that negotiations are going on right now behind the scenes with a view to avoid future legal action. Bear in mind that the advisor to the Sarawak state government is Hassan Merican, who is intimately connected to Petronas and to [Petronas' chief executive officer] Wan Zulkiflee. The advisor to the Sabah state government is Shamsul Azhar, of whom the same can be said. The fact that nothing seems to have happened (publicly at least) since June is probably indicative of that," he says.

In reserve: offshore Malaysian gas fields and infrastructure Source: Petroleum Economist

But while the dividend obligations are considerable, and Petronas could yet be forced to follow the government's promise on increased royalty payments, the company's financial position appears healthy. At the beginning of March, it announced its fourth quarter and full year financial results for 2018. Total revenue increased 12pc year-on-year from MYR223.6bn to MYR251bn, while profit after tax improved 22pc yr-on-yr from MYR45.5bn to MYR55.3bn.

Petronas is financially equipped to cope with the increased dividends, says Sean Lim Ooi Leong, a research analyst at Malaysia's Hong Leong investment bank. "I do not think it will jeopardise Petronas' capex budget in 2019, as long as it is kept as a one-off item rather than a recurring way to squeeze Petronas. This is because Petronas' balance sheet still has a very strong net cash position."

Thus far, the company's capex plan looks to be unaffected. Wan Zulkiflee has said capex in 2019 will increase to just over MYR50bn — a MYR3.2bn boost over 2018. In the company's 2019-21 outlook, Petronas set a target of 1.7mn bl/d oe of new production over the next five years, comprising 20 greenfield and 30 brownfield projects. In 2018, total output grew to 2.36mn bl/d oe, up slightly from 2.32mn bl/d oe the previous year, driven largely by higher production in Iraq and Turkmenistan. Average gas volumes rose by 86mn ft3/d yr-on-yr to 2.78bn ft3/d in 2018.

Finalising key projects

This year will be crucial for the company's downstream business. Petronas expects to finalise and begin full operations at its giant Pengerang integrated complex (PIC) project in the final quarter of 2019. The $27bn Saudi Aramco joint venture, based in Johor near Singapore, is Malaysia's largest ever construction project. When complete the facility will produce 220,000bl/d in petroleum products and have a crude capacity of 300,000bl/d. Associated facilities at the complex will also include an LNG regasification plant, a deep-water terminal and a 1,220MW cogeneration plant.

The increased refining capacity will offer a significant boost to Petronas' current domestic refineries in Terengganu and Malaka, in addition to its South African refinery in Durban. Current refining capacity stands at 546,000bl/d, with 446,000bl/d in domestic capacity and the rest international. Petronas is also committed to upgrading its Malaka refinery by 2020. The government has agreed to implement the new Euro-5 grade diesel standard to help reduce atmospheric sulphur levels to a maximum of 10mg/kg.

Enhancing its downstream capabilities is a key feature of Petronas' ongoing strategy. The firm is already one of the largest chemical producers in Southeast Asia, with production capacity of around 12.7mn t/yr, but plans to expand the current business by 25pc beyond 2020.

In the fourth quarter last year, its chemicals subsidiary reported record financial results. Revenue increased 12pc yr-on-yr to MYR19.6bn, driven by higher end-product prices and sales volumes for ethane products. Fourth-quarter profit grew by 24pc to almost MYR1.3bn, while full year net profit increased by 15pc to MYR5.06bn.

Oversupply risk

A wave of new Asian petrochemical capacity is due to come on line through 2019. The PIC facility, Brunei's Hengyi refinery and developments in China such as the Zhenjiang and Hengli refineries will add an estimated 3.4mn t/yr of benzene supply to markets, according to research by consultancy Platts Analytics. Demand has largely failed to keep pace with expanding supply, causing Asian benzene prices to fall towards the end of 2018. Fob Korea benzene stood at its lowest level in two years at several points through November and December.

30.9pc — estimated share of oil in 2019 state revenue

Asian ethylene prices may also face downward pressure over the next year or so. Fewer Japanese steam crackers will be closed for maintenance in 2019 — four compared to seven last year — and Chinese firms Fujian Gulei, Sinopec and SP Chemical will all bring online new steam crackers by 2020. South Korean operators Hanwha Total, LG Chem and S-Oil also plan to raise ethylene production capacity in their plants in 2019.

Petronas' monoethylene glycol (MEG) plant in Pengerang is expected to start up in either Q2 or Q3 2019, which will add an extra 740,000t/yr. Tariffs imposed on US importers by China may create opportunities for Petronas and other Asian MEG suppliers. Lotte's Calcasieu Parish facility will have a capacity of 700,000t/yr and Sasol's Lake Charles 220,000t/yr when fully operational in early 2019. But assuming the 25pc tariff imposed as part of the ongoing US-China trade spat remains in place, the US MEG will likely now go largely to South Korea. On the other hand, Chinese domestic supply of MEG has been boosted by several coal-based projects that increased capacity in 2018.

Unconventional approach

Petronas has several unconventional hydrocarbon projects in the pipeline and plans to capitalise on the resource's growing importance. Last May, Petronas revived plans to ship its Canadian shale reserves to Asian LNG markets by 2025. The firm agreed to acquire a 25pc stake in the LNG Canada export project led by Shell in Kitimat, British Columbia, having abandoned its own $28bn proposal to build and develop a Canadian west coast LNG export terminal after concerns over its economic viability.

With an export option secured, Petronas is finally moving towards developing and shipping its 52tn ft3 Montney shale assets — the firm resumed drilling at the field after a hiatus of two years. LNG Canada achieved FID at the end of last year and will become the largest private sector investment project in Canada's history. When complete, the facility will have LNG production capacity of 14mn t/yr from its two processing trains, with the option of upgrading to four trains in the future.

Petronas' current net Canadian production is around 70,000bl/d oe, but the firm aims to double that figure over the next five years. Last summer Petronas reduced its Canadian gas production by a reported 50-200mn ft3/d. The company pointed to poor market conditions as an opportunity to inspect and perform maintenance on its facilities, but expects to return production to its 620mn ft3/d capacity during the winter peak demand season.

Hitting the bulls-eye

Outside North America, Petronas has invested in the potential of Argentina's vast Vaca Muerta shale basin — the world's second-largest shale gas deposit and fourth-largest shale oil reserves. In December, state-owned energy company YPF agreed to a $2.3bn joint venture, over the next four years, to develop its La Amarga Chica block, in Neuquén province.

The aim is to boost output from under 10,000bl/d to 60,000bl/d by 2022. Both companies have said investment could grow to $7bn within 20 years to enable production ultimately to reach 75,000bl/d. An initial investment of $550mn has already been made to test its shale oil potential.

In 2018, Neuquén's ministry of energy and natural resources reported production rising 12.7pc to average 116,739bl/d — the highest in seven years. Shale output rose by 52pc yr-on-yr and La Amarga Chica in particular increased extraction by 126pc. In contrast, overall Argentinian conventional production declined by 12pc, mainly driven by falls in mature provinces in Loma La Lata, El Trapial, Chihuido de la Sierra Negra and Auca Mahuida Volcano. Nationally, shale gas output jumped by 193pc while conventional gas supply declined by 19pc.

January production in Neuquén reached 133,335bl/d of oil and 60mn m³/d of natural gas — a growth of 28pc and 13pc yr-on-yr respectively and the highest oil production for the province since November 2009.

Australian shortages

Beyond the Americas, Petronas is a participating partner in an Australia coalbed methane (CBM) project. In January, total LNG exports across all three liquefaction plants on Curtis Island, including Petronas' Gladstone project, was around 1.73mn t, a 5.1pc increase yr-on-yr. But, according to a report by consultancy Energy Quest, Gladstone average throughput was just 65pc capacity in 2018 and a reserves shortfall could lead to a partial shutdown within six years. Petronas has a 27.5pc stake in Gladstone and an agreement to offtake 3.5mn t/yr for 20 years.

Targeting gas

Despite a shaky fourth quarter, Petronas' LNG business enjoyed a strong 2018. Higher average prices drove revenue to MYR156.6bn in 2018, a 13.7pc increase over 2017. Total LNG sales for the year dipped slightly from over 30.7mn t in 2017 to just below 28.95mn t in 2018, in part due to technical issues at the firm's Bintulu export plant and in part to lower Asian spot prices towards the end of the year. The 24mn t/yr Bintulu complex was hit by a leak in the Sabah-Sarawak pipeline, which was discovered in January, and by a fire in February.

Last year, Petronas completed ten LNG deals and delivered cargo to several new customers in Asia. In November, the firm agreed to supply 0.8mn t/yr of LNG to trader Vitol in a 15-year contract. Shipments will begin in 2024, sourced mainly from the LNG Canada project in Kitimat, on both a Des and Fob basis. The company also delivered its first LNG cargoes to Japanese firms Hokuriku Electric, Hokkaido Electric and Tokyo Gas, as well as South Korean refining company S-Oil.

Industry first: Petronas will launch a second FLNG by 2020

As part of the PIC project, Petronas' regasification terminal Pengerang (RGTP) received its first LNG cargo in November. The recently constructed LNG jetty can now receive carriers of up to 260,000m3 and has two units of LNG storage tanks with 260,000m3 capacity each. Kairos, the world's largest LNG bunker supply vessel, berthed at the terminal on its journey from South Korea to European markets.

Petronas already has one floating LNG liquefaction facility, the PFLNG Satu, but will be following it up with a second. Although originally scheduled to begin operations in 2018, Petronas' second floating LNG project will now be launched in 2020. The project, dubbed PFLNG Dua, will have a capacity of 1.5mn t/yr and last 20 years before it returns to dry dock. The platform is being constructed in South Korea and will be stationed over the Rotan gas field, off the coast of Sabah, when completed.

Petronas wants to take a bigger role in other aspects of the LNG sector and boost its portfolio. US independent Cheniere and the Malaysian company agreed to a 20-year deal for Petronas to offtake roughly 1.1mn t/yr of LNG from Cheniere's US Gulf Coast Sabine Pass liquefaction terminal. The agreement will help finance the construction of a sixth train in Louisiana, with the price linked to Henry Hub, plus a liquefaction charge. Petronas will also aim to benefit from Egypt's huge natural gas reserves. The Idku LNG facility, in which the Malaysian firm has a 35.5pc stake, already averaged around 300mn ft3/d in LNG exports across 2018. Shell, the plant's operator, said Idku shipped 12 cargoes in 2018 and aims to exceed that number this year.

Petronas also aims to maintain its position at the forefront of LNG innovation and flexibility. RGTP, as well as the company's first LNG break bulking ship-to-ship transfer in Brunei Bay, achieved in June, helped the company move away from the traditional model of long-term supply in favour of immediate short-term options. Other LNG bunkering projects set for launch in 2019 include RGT1 (SG Udang, Melaka), RGT2 (Pengerang, Johor), KSB (Kemaman, Terengganu) and Asia Supply Base (ASB) at WP Labuan.

The company also utilised GLX, an online LNG trading platform, to sell cargoes for the first time in 2018. Petronas says the platform will help streamline the LNG sales process and improve pricing transparency.

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