Page 5 - AsianOil Week 10

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existing long-term export agreements from the requirements.
Pertamina remains unfazed over the price crash affecting its upstream operations, how- ever, with upstream director Dharmawan Samsu saying this week that the company’s recently announced drilling expansion planned for this year will proceed regardless.
Pertamina was the first of the region’s major oil producers to draw a line in the sand over its upstream budget, but was joined in shortly order by Malaysia’s state-owned Petronas.
Staying the course
Petronas said on March 11 that it intended to continue with its planned expansion of total domestic capex despite the oil price collapse. The company intends to up its domestic spending from MYR25bn ($5.91bn) in 2019 to MYR28bn ($6.62bn) this year, with the increase based an oil price assumption of $50 per barrel.
That is not to say that the company’s plans are fixed in stone, however, with Petronas adding that it was keeping a close eye on international oil markets in case it needed to respond. Petronas said in light of the COVID-19 outbreak and the recent failure of the Russia-OPEC talks, it was “reassessing our plans and budget”.
Petronas president and CEO Datuk Wan Zulkiflee Wan Ariffin has been rigourous in his approach to trimming the fat following the 2014 price crash, overseeing the company’s first- ever staff cuts in 2016. The company has been focused on operational efficiencies in the years since and may yet decide to scale back its oper- ations should $30 per barrel oil prices become the norm.
UOB Kay Hian said this week that the com- bination of COVID-19 and the looming oil price war could force Petronas to scale back its activi- ties if cash flows are severely impaired in the first half of 2020.
The brokerage said the first upstream projects likely to feel the pinch were “some brownfield and maintenance activities”, while “sanctioned floating production storage and offloading [FPSO] projects are expected to be the least affected in the upstream value chain” based on an oil price floor of $30 per barrel.
Putra Business School associate professor Ahmed Razman Abdul Latiff told The Malaysian Reserve that Petronas’ margins would weaken, leaving little room for capex if the government insisted on a regular dividend payment. Petro- nas, for its part, has said it intends to maintain its 2019 dividend payout of MYR24bn ($5.63bn).
Déjà vu
China’s state-owned oil majors responded to the 2014 oil price crash by trimming their pro- duction by closing older and more costly fields in the name of improved efficiencies. The end result has been that national production fell from a peak of 4.31mn bpd in 2015 to 3.79mn bpd in 2019. Analysts now expect two of the country’s biggest producers to adopt a similar approach during this latest price trough.
A senior Hong Kong-based analyst at Sanford C Bernstein, Neil Beveridge, said in a research note this week that state-run Pet- roChina and Sinopec could be expected to trim production by 2-3% this year. Beveridge estimates PetroChina and Sinopec’s break- even costs at $50-60 per barrel.
Offshore specialist CNOOC Ltd may choose to maintain output levels, give that it trimmed its production costs from US$45 per barrel in 2013 to about US$30 during the first half of 2019, according to company documents.
“What makes things worse this time around is that we are facing a possible global recession amid the coronavirus pandemic,” Beveridge said. “It will take a few quarters to work this [oversupply correction] out.”
Sanford C. Bernstein reduced on March 9 its 2020 earnings per share forecast for PetroChina by 61%, by 41% for Sinopec and by half for CNOOC Ltd. Beveridge said he expected all three would reduce their dividend payments this year.
While China’s production may face a round of rationalisation similar to that seen following the oil price crash in 2014, the country’s crude imports are unlikely to see the same level of support. China’s commercial stockpiles of oil were already close to or at their limit thanks to COVID-19’s impact on demand for transpor- tation fuels – some estimates suggest 3mn bpd of Chinese demand had been wiped out by the start of February. There will be an opportu- nity for the country to add cheap crude to its strategic petroleum reserve (SPR), though the extent of those volumes remains a mystery, given that capacity is still under construction and the government has been reluctant to publish official volume figures.
The next few weeks will be crucial for the region’s oil producers and buyers, as they wait to see how the price war unfolds as well as the global economic impact of COVID-19. A more concrete response can be anticipated from oil producers across Asia as they come to grips with the twin market forces at play.™
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