Catch the rebound: The impact of the oil price shift in Malaysia

Malaysia

Following a period of rising capital expenditure in Malaysia’s domestic upstream sector, a drop in oil prices has set a remarkably different tone for 2015. PwC Malaysia partner for oil and gas Nurul A’in Abdul Latif analyses the impact of oil prices on the local hydrocarbons industry, including the potential impact on exploration and production and the labour force.

How has the oil and gas investment climate changed over the past year?

In 2013 and 2014, the local industry was optimistic, although this was a sentiment of cautious optimism, choosing to invest strategically in projects that would yield higher returns. Petronas had refocused investment on big oil and gas projects in Malaysia, from marginal fields to deepwater exploration, and oil and gas was a key industry in the government’s Economic Transformation Programme.

Throughout the first part of 2014, oil and gas players continued to be listed on Bursa Malaysia (the local bourse), and Petronas announced the investment decision on its multi-billion-dollar Refinery and Petrochemical Integrated Development Project in the southern state of Johor.

As oil prices began to slide, the tone has shifted from talking about how much the industry has grown to discussing how companies are delaying projects, cutting nonessential budgets and managing to stay afloat while oil prices remain low. The question on everyone’s mind is: How long will this last?

How might lower oil prices impact some of the new upstream players in Malaysia?

At a glance, the upstream business will obviously suffer from lower prices in general. However, for companies that have the appetite and cash, this could be an opportune time to acquire assets cheaply. Based on historical trends, oil prices do rise and fall, and a rebound from the low will be expected.

The current situation may also be of benefit to new market entrants looking to invest. Even prior to the latest oil price slump, international oil companies, such as US-headquartered Hess, Murphy Oil and Newfield, were disposing of many of their assets in the Asia-Pacific region to concentrate attention on projects at home, especially with the renewed interest in unconventional oil and gas in North America.

This has opened up opportunities for local players to enter the upstream sector. We saw Malaysia’s SapuraKencana Petroleum acquire Newfield’s block in 2014. With lower oil prices, it may be a good opportunity for more services providers and special purpose acquisition companies alike to make acquisitions at more reasonable prices.

The market will also continue consolidating, with larger international oil companies acquiring smaller players to match the scale and efficiency of major regional players.

Now is also a good time for local players to look at optimising different aspects of their business such as re-evaluating the strategy of their business, particularly focusing on cost optimisation for long-term benefits; revisiting tax structures, planning and cash flow; and revisiting the working capital management and financing strategy of their company.

Will there be longer-term repercussions from low oil prices on Malaysia’s upstream industry?

As long as prices rebound in the next few years, the industry here can weather the storm. We have sound infrastructure, skilled labour and hydrocarbons resources. Obviously lower crude oil prices will be challenging in Malaysia at least in the short term. Unlike the Middle East, where abundant onshore reservoirs are cheap to exploit, the cost of extracting oil offshore, and especially from deepwater fields or mature reservoirs, is much higher.

In the short term, companies in Malaysia will be able to weather these losses, but to be a sustainable industry in the longer term, we will need to see the oil price climb back towards $60-$80 a barrel. If the price remains low for a few years, the impact will be keenly felt, not just by oil companies, but the whole related supply chain.

It has been an employee’s market in terms of high demand for skilled labour in Malaysia’s oil and gas industry. Do you think demand will change with the early-2015 oil price?

As companies look at cutting their operational expenditures, we may see job losses. The market may shift to favour employers, especially if prices remain low for a longer period.

Companies will need to retain staff to ensure that if and when prices rise and projects come back on stream, they are ready to resume work immediately. Employees need to avoid the short-term, knee-jerk reactions seen in previous downturns or risk damaging the long-term future of the industry.

That is the employer’s challenge. New employees may indeed be hired at lower rates than a year ago, when prices were high. During the last price dip in Malaysia in 2008, working hours were slashed by 20 percent or more.

This may be a good opportunity for employers to develop the skills of their employees. For example, there may not be any deepwater exploration while it is not economically viable to drill and produce from deepwater wells, but companies can look into building the deepwater expertise of their staff so that when prices rebound, a skilled team will be in place to take on new projects.

About PwC Malaysia: A global provider of tax, assurance and advisory services, PwC operates in Malaysia from six locations, in Kuala Lumpur, Pulau Pinang, Ipoh, Melaka, Johor Bahru and Labuan with a staff strength of 2,000. It provides oil and gas consulting services including risk management, contract compliance, mergers and acquisitions, capital control, project management and strategy among others. PwC Malaysia helps manage construction delays and cost overruns, governance (supervision and control) issues and loss of contract value.

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