KUALA LUMPUR: The prolonged health crisis and European oil majors' admission that tapping some oil fields no longer makes economic sense may put a heavy toll on Petroliam Nasional Bhd (Petronas) and its supporting oil and gas vendors.
Market observers said Covid-19 had discouraged exploration as oil players were not certain on whether the demand for fossil fuel would be sustainable to pursue upstream activities, dragged by low oil prices averaging about US$45 per barrel.
OANDA senior market analyst for Asia Pacific Jeffrey Halley said exploration activities were dependent on the cost of extracting oil and accessibility (geographical area) onshore and offshore of the oil field.
"If companies can do it at the right price, then it would be commercially viable for them to continue pursuing this activity," Halley told the New Straits Times (NST) recently.
However, he said the current situation would be extremely expensive for exploration activities.
"Hence, cutting back capital expenditure (capex) for exploration activities would be sensible for companies to undertake because the current crisis makes the oil fall to uneconomic level," Halley added.
Market observers said fossil fuel could be cheaper in the near term as the Covid-19 crisis had caused severe disruptions due to lockdown in the global economies, prompting consumers to hasten their shift to cleaner renewable energy, while emitting the carbon would get more expensive.
European oil players reportedly made some "uncomfortable" admissions recently that tapping some fields were no no longer make economic sense, and halted billions of dollars of exploration and extraction activities.
Rystad Energy AS projected that about 10 per cent of the world's recoverable oil resources, averaging some 125 billion barrels would become obsolete.
Maybank Investment Bank Bhd (Maybank IB) associate director of research Liaw Thong Jung said all oil majors had responded swiftly and aggressively to the Organisation of the Petroleum Exporting Countries (OPEC) cuts and breakup in March that led to a fallout in oil price and subsequent price war.
"They have cut capex and operational expenditure, undertook impairment, cut dividends to preserve cashflows," he told the NST.
Liaw said the current situation was a "touch and go" as investment decision would unlikely to change until oil price surpasses US$50 per barrel and stays steady thereafter.
Hong Leong Investment Bank (HLIB) analyst Low Jin Wu expects crude oil prices to trade sideways from its June average price in the third quarter (Q3) of 2020 at US$43 per barrel on slower demand recovery arising from potential re-emergence of lockdown measures from Covid-19.
"We believe the oil market will be closer to its equilibrium in the fourth quarter of 2020 at US$50 per barrel," he wrote in a recent report.
Low said Petronas would remain conservative on its capex spending, expecting the figure to come above the national oil company's planned capex cuts of 21 per cent or by about RM10 billion due to the crash in oil prices.
"We do not rule out the possibility of this going beyond its 21 per cent pledged capex and our base case assumes a 30 per cent cut," he said.
Low said Malaysian O&G services players were predominantly dependent upon Petronas' spending for their survival.
Any capex cuts from Petronas would directly impact most listed O&G players in Malaysia, he added.
"We expect fabrication, engineering works to be deferred, significantly lower utilisation for jack-up rigs or offshore support vessels and deferrals of maintenance, construction and modification, hook-up and commissioning and plant turnaround contracts," he said.
Low said the majority of these contracts were previously awarded on an on-call basis and Petronas had the prerogative to halt or postpone projects if the need arises.
"We are negative on companies which are heavily reliant on Petronas' capex spending as we believe that Petronas would be conservative on its capex spending at least until the first half of 2021. We remain neutral to positive on companies less reliant on Petronas' capex," he said.
Petronas had pledged to spend about RM50 billion on capex in 2020. Of the total, RM26 billion to RM28 billion were allocated for the domestic market.
"We expect Petronas' capex for the year to stand at about RM35 billion instead of RM40 billion which was previously announced given the negative outlook in the O&G industry as fear of Covid-19 mounts," Low said.
Of the RM35 billion of capex spending, HLIB expects about 60 per cent to be spent in Malaysia.