Oil & Gas lead to wealth crunch, Malaysian Ringgit beaten and dropped!

PETALING JAYA: With the oil and gas (O&G) sector being the hardest hit in the current market rout, tycoons who own significant stakes in these companies have seen a huge loss in their net worth.

These tycoons had collectively had their shareholding in these companies valued at some RM15.89bil when O&G stocks were trading at their highest prices. The fall in global crude oil prices and the plunge in the value of O&G stocks on Bursa Malaysia saw the value of their shareholding cut by almost half to some RM7.86bil yesterday.

Accelerating the decline in share prices yesterday and the loss in their net worth was the decision by Petroliam Nasional Bhd (Petronas) to slash its capital expenditure (capex) by between 15% and 20% next year.

Petronas’ capex cut has spooked investors in the local O&G sector as many companies rely on the national oil company for work. Petronas’ huge capex, estimated at RM60bil a year prior to the planned cuts, was also a buffer for the domestic industry from the onslaught of crumbling crude oil prices and its effect elsewhere.

The largest of these companies, SapuraKencana Petroleum Bhd, has seen its share price dip by 48.78% year-to-date. At its peak, SapuraKencana was trading at RM4.81, translating to a wealth of RM4.85bil for Tan Sri Shahril Shamsuddin’s 16.84% stake in the integrated O&G concern.

SapuraKencana was the most actively traded counter yesterday, falling 10.36% to close at RM2.51. At yesterday’s market capitalisation of RM16.76bil, Shahril’s shareholding in the company was valued at RM2.53bil.

Another major shareholder of SapuraKencana is Tan Sri Mokhzani Mahathir, whose 10.25% interest has also seen a decline by almost half its value. At yesterday’s price, Mokhzani’s stake in SapuraKencana was valued at RM1.54bil compared to the RM2.95bil it was worth during its highest level.

Mokhzani had sold a block of 190.3 million shares in SapuraKencana earlier this year when the stock was trading at around RM4.30 per share, giving the entire sale a value of RM818.29mil. The shares were taken up by seven institutions.

Another stock in which Mokhzani has an interest in, Yinson Holdings Bhd, was also not spared from the bearish sentiment surrounding O&G stocks. Yinson’s share price has declined from its peak to close at RM2.45 on Dec 1. Based on yesterday’s price, Mokhzani’s stake in the company was worth RM235mil.

Billionaire Robert Kuok, T Ananda Krishnan, Tan Sri Ngau Boon Keat and Tan Sri Quek Leng Chan are also part of the list of value losers in this O&G stock meltdown.

Kuok owns 80% of PACC Offshore Services Holdings (POSH Semco), an offshore marine services provider that was listed on the Singapore Exchange in mid-2013 at a price of S$1.15 per share. POSH Semco closed yesterday at S$0.51, meaning that Kuok has lost more than half the value of his stake in that company.

Similarly, Ananda’s worth from his 42.3% shareholding in Bumi Armada Bhd has gone down by half the value it was during the peak of its share price. To be noted is that Bumi Armada had undertaken a rights issue in August this year that has seen the dilution of Ananda’s shareholding in the company.

Bumi Armada, Malaysia’s largest offshore support vessel firm, was relisted in 2011 at a price of RM3.03 per share. The stock dived into penny-stock territory yesterday, falling to a low of 98 sen before ending the day at RM1.01 per share. Based on yesterday’s price, Ananda’s stake in Bumi Armada was valued at RM2.06bil.

Dialog Group Bhd’s Ngau, meanwhile, has seen the value of Dialog’s stock fall. His stake was worth RM1.45bil based on yesterday’s closing price of RM1.26. This is about a one-third decline from the RM2.25bil his 23.2% stake was valued at when the stock had hit a high of RM1.96.

Stock investors such as Quek and his lieutenant Paul Poh are also edging into negative territory.

Quek had bought his 9% in TH Heavy Engineering Bhd (THHE) in 2013 at a price of 45 sen per share, enjoying gains for most of this year – the stock had hit a high of RM1.03 on Feb 19 this year. THHE closed yesterday’s trade at 40.5 sen a share, giving Quek a paper worth of RM38mil for his shareholding in the company as opposed to RM80mil as at the end of last year.

In April, Quek and Poh also took a block of 15.5% in Alam Maritim Resources Bhd at RM1.35 a share. They are sitting on a paper loss of some RM80mil today, or a decline of over 40%.

By: GURMEET KAUR The Star/Asia News Network

Ringgit Slides With Stocks as Oil Slump Poses Risk to Revenues



Malaysia’s ringgit posted the biggest two-day decline since the 1997-98 Asian financial crisis and stocks slumped on concern a protracted slide in crude will erode the oil-exporting nation’s revenue.

The currency weakened 1.5 percent to 3.4340 per dollar in Kuala Lumpur, according to data compiled by Bloomberg. The ringgit has dropped 2.5 percent in two days, the steepest decline since June 1998. The benchmark FTSE Bursa Malaysia KLCI Index of shares fell 2.3 percent in the worst one-day performance in 22 months.

Brent slid to a five-year low after OPEC’s decision last week not to cut production to shore up prices, which have slumped 41 percent from a June high. The potential revenue loss may make it harder for Prime Minister Najib Razak to lower the fiscal deficit to 3 percent of gross domestic product next year from 3.5 percent.

“Malaysia is probably most affected by oil prices in the Asian space,” said Andy Ji, a Singapore-based strategist at Commonwealth Bank of Australia. “The ringgit could fall to 3.45 this week.”

A 1997 devaluation of the Thai baht triggered the Asia financial crisis and prompted Malaysia’s government to adopt a pegged exchange rate to the dollar in 1998. The ringgit was fixed at 3.8 until the policy was scrapped in 2005.

The currency dropped to 3.4392 earlier, the lowest level since February 2010, when it last traded at 3.45 and went on to reach 3.4545 on the 5th of that month, data compiled by Bloomberg show.

Stocks Fall

Oil-related industries account for a third of Malaysian state revenue and each 10 percent decline in crude will worsen the nation’s fiscal shortfall by 0.2 percent of GDP, Chua Hak Bin, a Bank of America Merrill Lynch economist in Singapore, wrote in an Oct. 22 report.

The FTSE Bursa Malaysia Index was dragged down by oil, gas and plantation stocks. The gauge has dropped 6 percent from its 2014 high in July.

SapuraKencana Petroleum Bhd., Malaysia’s biggest listed oil and gas services company by market value, fell 10 percent, the most on record. Dialog Group Bhd. (DLG), a contractor in the same industry, dropped 15 percent.

“We are watching the stocks closely,” said Gerald Ambrose, who oversees the equivalent of $3.6 billion as managing director at Aberdeen Asset Management Sdn. in Kuala Lumpur. “There are a lot of oil and gas companies that meet our quality and criteria but there was no upside previously. Now prices are falling.”

Bonds, Exports

Malaysia is already seeing a deterioration in its terms of trade. The current-account surplus narrowed to 7.6 billion ringgit ($2.2 billion) in the third quarter, the smallest gap since June 2013. A Dec. 5 report may show the nation’s exports declined 0.3 percent in October from a year earlier, according to the median estimate in a Bloomberg survey. That would be the worst performance since June 2013.

The nation’s sovereign bonds fell. The yield on the 4.181 percent notes due 2024 rose three basis points, or 0.03 percentage point, to 3.89 percent, data compiled by Bloomberg show. That’s the highest since Nov. 24. The five-year bond yield advanced five basis points to 3.81 percent.

“Hopes for Malaysia have rested on the fiscal consolidation story,” said Tim Condon, head of Asian research at ING Groep NV in Singapore. “Markets need to be re-priced for diminished hopes on that front.”

Source: Bloomberg By Liau Y-Sing and Choong En Han

Beating for KLSE and ringgit



PETALING JAYA: The stock market and the ringgit have taken a beating from falling oil prices, which have sunk below the US$70 per barrel mark.

The benchmark FBM KLCI, which measures the key 30 stocks of Bursa Malaysia, was down 42 points or 2.34% at its close at 5pm, marking its worst performance since mid-October, while the ringgit declined to 3.4340 against the US dollar, a four-and-a-half-year low.

At 5pm, Brent crude oil was down 94 cents to a five-year low of US$69.21 while US light crude oil – better known as West Texas Intermediate (WTI) – fell US$1.09 to US$65.06 as markets continued to be spooked by the plunge in oil prices.

The plunge follows an Opec decision not to cut production despite a huge oversupply in global markets.

The technical indicators are all pointing to even lower oil prices.

Technical analysts said the WTI – the benchmark oil price used by Bank Negara to calculate the economic indicators – should find some support at US$64 per barrel.

If it goes below that level, it could plunge all the way to US$32.40 per barrel – the lowest recorded price in recent years when it hit US$32.40 per barrel on Dec 19, 2008, before rising to US$114.83 on May 2, 2011.

Taking the cue from the plunging oil prices and a chilling warning issued by Petronas on declining revenues, oil and gas stocks on Bursa Malaysia also faced a rout which affected market sentiment as a whole.

Yesterday, some 981 counters declined compared to 82 gainers while 150 were unchanged.

Petronas president and chief executive Tan Sri Shamsul Azhar Abbas had said on Friday that the national oil corporation was cutting its spending for next year by between 15% and 20% and asserted that its contribution to the Government’s coffer in the form of taxes, royalties and dividends could be down by 37% to RM43bil from RM68bil this year.

Analysts said the selling could be over-done and expected a relief rebound when oil prices settle.

Oil prices fell to their lowest in five years yesterday due to the production war between Opec and the American oil boom from shale oil producers.

In recent months, the United States has become a major producer of shale oil and gas – fuel that’s extracted from rock fragments – threatening the position of Saudi Arabia as the dominant oil-producing country.

In response to the threat, Opec, which is influenced by Saudi Arabia, has vowed to continue production of oil in a market where supply has outstripped demand.

This has led to a free fall in global oil prices that have declined by more than 40% since July this year.

Late last night after the opening of the US counters, oil price fell to below US$65 a barrel.

Saudi Arabia hopes to break the back of shale oil and gas producers by making their operations not financially viable.

It had been reported earlier that at prices below RM80 a barrel, shale oil producers would go bust.

However, Bloomberg reported that only about 4% of US shale oil output needs US$80 a barrel or more to be economically viable.

Among the top losers of the Bursa yesterday were SapuraKencana Petroleum Bhd, Bumi Armada, Dialog Group Bhd, UMW Oil and Gas Bhd and Petronas-related counters.

The paper wealth wiped out due to the rout on the oil and gas stocks was close to RM8bil.

The selling pressure also spread to plantation stocks, with crude palm oil for third month delivery down RM63 to RM2,109 per tonne. The fall in crude oil prices would make biodiesel less viable as an alternative at current prices.

However, low-cost carrier AirAsia Bhd bucked the trend as it stands to benefit from weaker oil prices. AirAsia rose 21 sen to RM2.79.

Investors were also worried about the impact Petronas’ reduced payout would have on the Government that counts on the national oil corporation as a key source of funding for its expenditure.

UOB Kay Hian Malaysia’s head of research Vincent Khoo said a much lower crude oil price scena­rio would bring negative implications on the ringgit and the Federal Government’s ability to spend its way to pump prime the economy.

The head of research, products and alternative investments at Etiqa, Chris Eng, said that based on the weakening of the ringgit, foreign funds could be behind the selling.

“However, today’s selling was over­­done and I believe there could be a relief rebound,” he said, based on improving US economic growth and ample liquidity from China and Japan.

Eng said according to reports, Bank of America believed Malaysia’s budget deficit could balloon to 3.8% from a planned 3% while Citi thought the 3% deficit could still be maintained.

“The outlook for investing in 2015 remains challenging but it also depends on what level the local bourse ends the year,” he said.

By JOSEPH CHIN The Star/Asia News Network

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Oil Enters New Era as OPEC Faces Off Against Shale; Who Blinks as Price Slides Toward $70?

How Oil's Price Plunge Impacts Wall Street: Video Bloomberg News

OPEC’s decision to cede no ground to rival producers underscored the price war in the crude market and the challenge to U.S. shale drillers.

The 12-nation Organization of Petroleum Exporting Countries kept its output target unchanged even after the steepest slump in oil prices since the global recession, prompting speculation it has abandoned its role as a swing producer. Yesterday’s decision in Vienna propelled futures to the lowest since 2010, a level that means some shale projects may lose money.

“We are entering a new era for oil prices, where the market itself will manage supply, no longer Saudi Arabia and OPEC,” said Mike Wittner, the head of oil research at Societe Generale SA in New York. “It’s huge. This is a signal that they’re throwing in the towel. The markets have changed for many years to come.”

The fracking boom has driven U.S. output to the highest in three decades, contributing to a global surplus that Venezuela yesterday estimated at 2 million barrels a day, more than the production of five OPEC members.

Demand for the group’s crude will fall every year until 2017 as U.S. supply expands, eroding its share of the global market to the lowest in more than a quarter century, according to the group’s own estimates.

Photographer: Eddie Seal/Bloomberg

Floor hands on the Orion Perseus drilling rig near Encinal in Webb County, Texas.

Benchmark Brent crude fell the most in more than three years after OPEC’s decision, sliding 6.7 percent to close at $72.58 a barrel. Futures for January settlement sank to $70.15 today, the lowest close since May 2010. Prices peaked this year at $115.71 in June.

Market Signals

“We will produce 30 million barrels a day for the next 6 months, and we will watch to see how the market behaves,” OPEC Secretary-General Abdalla El-Badri told reporters in Vienna after the meeting. “We are not sending any signals to anybody, we just try to have a fair price.”

OPEC pumped 30.56 million barrels a day in November and has exceeded its current output ceiling in all but four of the 34 months since it was implemented, according to data compiled by Bloomberg. OPEC’s own analysts estimate production was 30.25 million last month, according to a report Nov. 12. Members will abide by the 30 million barrel-a-day target, El-Badri said yesterday.

“OPEC has chosen to abdicate its role as a swing producer, leaving it to the market to decide what the oil price should be,” Harry Tchilinguirian, head of commodity markets at BNP Paribas SA in London, said yesterday by phone. “It wouldn’t be surprising if Brent starts testing $70.”

Conventional Producers

Conventional oil producers in OPEC can no longer dictate prices, United Arab Emirates Energy Minister Suhail Al-Mazrouei said in an interview in Vienna on Nov. 26. Newcomers to the market who have the highest costs and created the glut should be the ones to determine the price, he said.

“That is what OPEC is hoping for,” Carsten Fritsch, a commodity analyst at Commerzbank AG in Frankfurt, said in an e-mail. “It’s the question of who will blink first.”

OPEC may now be prepared to let prices fall to force some drillers with higher production costs to stop pumping, said Julian Lee, an oil strategist who writes for Bloomberg First Word and has worked in the industry for 25 years. That scenario would mark the start of a fourth oil-market era since the end of the 1970s, he said.

Fourth Era

Since the early 2000s, surging demand growth drove up prices allowing companies to apply new extraction techniques and develop deep-water and other costly oil. That ended an era that pervaded since the mid 1980s, which was characterized by low prices and OPEC regaining the market share that it had previously sacrificed in an attempt to preserve high prices, Lee said.

OPEC will face pressure too, with prices now below the level needed by nine member states to balance their budgets, according to data compiled by Bloomberg.

“They haven’t taken collective action,” Richard Mallinson, an oil analyst at London-based Energy Aspects Ltd., said by phone. “That doesn’t mean they won’t do it in the next few months if prices stay low.”

U.S. Production

U.S. oil production has risen to 9.077 million barrels a day, the highest level in weekly data from the Energy Information Administration going back to 1983. Output will climb to 9.4 million next year, the most since 1972, it forecasts.

Middle Eastern exporters including Saudi Arabia, Iran and Iraq can break even on a cost basis at about $30 a barrel, Sanford C. Bernstein & Co. They need more to balance their budgets. Some U.S. producers need more than $80, the consulting firm said in a report last month.

OPEC’s policy will spur a crash in the U.S. shale industry, Leonid Fedun, a vice president and board member at OAO Lukoil, Russia’s second-largest oil producer, said in an interview in London before the group’s decision.

“In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,” said Fedun. “The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”

The share prices of U.S. oil producers including Exxon Mobil Corp. and Chevron Corp. fell by at least 4 percent in New York trading today.

No Cut

Igor Sechin, the chief executive officer of OAO Rosneft, Russia’s largest oil producer, said after a meeting with Venezuela, Saudi Arabia and Mexico that his nation wouldn’t need to cut output even if prices fell below $60.

“The question is, what price level will be low enough to slow U.S. production growth?” Torbjoern Kjus, an analyst at DNB ASA, Norway’s biggest bank, said by phone. “What price will get U.S. growth to slow to 500,000 barrels a day from this year’s rate of 1.4 million barrels?”

Only about 4 percent of U.S. shale production needs $80 or more to be profitable, according to the Paris-based International Energy Agency. Most production in the Bakken formation, one of the main drivers of shale oil output, remains profitable at or below $42 a barrel, the IEA estimates. The agency expects U.S. supply to rise by almost 1 million barrels a day next year, with increasing flows to international markets.

OPEC has gone “cold turkey” on balancing the oil market, Goldman Sachs Group Inc. said in a report yesterday. Prices may have further to fall until there is evidence of U.S. production slowing, according to the bank. It said last month that oil markets were entering a “new oil order,” with OPEC retreating from its role as a swing producer.

“OPEC’s decision means it is over to you America,” Miswin Mahesh, a London-based commodities analyst at Barclays Plc, said in an e-mail. “This opens the window for the U.S. to be the new swing producer.”

Source: Bloomberg


The perils of cheaper oil

COME Dec 1, Malaysia will enter a new era long desired by the advocates of free market.

The pump price of petrol and diesel at the kiosk will be based on a managed float system depending on global oil prices. This will replace the current system where the Government fixes the price at the pump, a process that involves a huge amount of subsidy.

For years, the Government adopted the fixed price mechanism because it brought about an element of stability.

Unlike most other countries where the price at the pump varies from day to day, Malaysians are used to planning their expenditure based on a fixed price.

Right from a typical consumer to large companies, they all depend on oil or some form of energy to carry out their daily lives or operations. The fixed price has helped in their planning.

But the biggest disadvantage of having a fixed price for oil is that it involves a huge amount of subsidy, especially in an environment where oil prices go beyond what is anticipated by the Government.

Malaysia’s tale of subsidy woes is a subject matter that is often spoken about.

The subsidy bill is estimated at about 14% of the Government’s total operating expenditure of RM271.94bil for next year. The bulk of the RM38bil that has been set aside for next year is to ensure that the fuel cost remains stable.

There is a sales tax of 58 sen per litre on petrol sold at the pump. But the mechanism to collect the tax has not kicked in because the subsidy per litre is much higher than the sales tax.

Beginning July this year, the oil and gas dynamics changed with the United States becoming a large producer, thanks to the shale oil and gas.

The implications of the shale oil and gas on the global economy are huge. It has gone beyond the oil and gas industry. Oil-dependent nations such as Iran, Iraq and Venezuela are in trouble because a low oil price means less revenue and less money to fund their development programmes and, more importantly, to pay off their debts.

Venezuela is high on the list of countries that could seek some reprieve from bondholders because it needs oil price to be more than US$160 per barrel to balance its budget.

The Russian rouble has depreciated by more than 45% against the dollar and state-owned Rosneft has seen its profit almost collapse due to the depreciating currency.

Russia’s problems have exacerbated the slowdown in Germany, the strongest economy in Europe and this has in turn affected the entire eurozone recovery.

As for Asia, the best thing that the low oil prices have brought about is an era of low inflation and allowed some governments to carry out their reforms of energy policies. It has allowed governments to dismantle the subsidy system that has for long artificially kept the cost of production low.

Indonesia removed subsidies last week, a move that was cheered by foreign investors, because the system apparently only benefited a handful of powerful businessmen.

For Malaysia, when global oil prices are less than US$80 per barrel, which is the case now, there is no more subsidy for petrol and diesel sold at the pump. What kicks in is the sales tax of 58 sen per litre.

Come April 1 next year, the sales tax will be replaced with a goods and services tax of 6%. What this means is prices at the pump will be substantially lower than what they are today – provided global oil prices remain at less than US$80 per barrel.

Theoretically, this should translate into Malaysia having a lower cost of production due to cheaper energy prices. When oil prices went up over the past years, wages and all other costs followed suit. When the reverse happens, shouldn’t the cost of production come down?

Unfortunately that is not the case. The US is benefiting from the low energy cost era, at the expense of Asia. In fact, Asia as a whole may be losing out as a result of the steep fall in global energy prices.

Since the 1980s, Asian countries have been the destination for foreign manufacturers from the Europe and the US to relocate their operations because of the cheap cost of labour.

But manufacturers increasingly are paying more attention to destinations with low energy cost. Cheaper cost of energy is seen as an adequate substitute for low wages.

European manufacturers have turned to the US, where the cost of natural gas is one-third that of South-East Asia, to relocate their operations.

BASF, the large German chemical company, is planning to build a US$1.4bil plant in the Gulf Coast, apart from increasing its annual capital expenditure of US$20bil into that country.

An Austrian steel company, Voestalpine, is building a US$500mil facility in Texas to export iron for its steel plants. It will use natural gas to blast the furnace instead of coking coal in Europe.

Previously, these companies would make Asia their destination because of its low cost of production.

The flow of new manufacturing investments to the US is also assisted by the low rise in wages there compared with Asia. According to a report, between 2006 and 2011, Asian wages rose by 5.7% compared with only 0.4% in developed countries.

For decades the big gap in the wage rate increases between Europe, the US and countries such as Malaysia determined the flow of foreign investments. But now that is no longer the case.

Malaysia has to raise productivity or it will lose out on attracting new investments. Low wages alone will not do, especially now when prices of oil and gas resources are in a tailspin.

By M.SHANMUGAM The Star/Asia News Network

Petronas cuts capex

PETROLIAM Nasional Bhd’s (Petronas) announcement of its third-quarter results comes at a delicate time, considering that it is being watched by all and sundry.

Petronas president and CEO Tan Sri Shamsul Azhar Abbas

Amidst a scenario of a free-fall of oil prices and the politically-charged Umno General Assembly, it comes as no surprise that Tan Sri Shamsul Azhar Abbas (pic), the oil major’s president and chief executive, says he has to be “politically correct” in delivering his key message.

At a press conference yesterday, Shamsul also explained that Petronas had waited for the all-important Organisation of the Petroleum Exporting Countries (Opec) meeting to conclude before addressing the media in Kuala Lumpur.

And rightly so

The 12-member Opec decided on Thursday not to lower its output target, leading to oil prices plunging by a further 8% on Friday, cumulating in an almost 40% dip since mid-June.

The Brent crude oil price is now at US$72.84 per barrel and some forecasters are predicting that oil prices could hit US$60 per barrel.

Petronas itself is now predicting that oil prices could settle at US$70-US$75 next year.

This is a far cry from the US$108 per barrel that Petronas had averaged last year and the US$106 per barrel, which is the average price of the Brent crude for the first nine months of this year.

Shamsul lays out the bare truth on what the falling oil prices would mean for Petronas, the oil and gas (O&G) services industry and the federal government’s coffers:

• Capital expenditure (capex) on the O&G industry will be cut by between 15% and 20%
  
• Petronas’ contribution to Government coffers in the form of dividends, taxes and oil royalty for next year will dive by 37% to RM43bil, assuming the Brent crude settles at US$75 per barrel;
  
• Petronas will not proceed with contracts to award new marginal oil fields unless oil settles at levels above US$80 per barrel
  
• Projects in Pengerang that have yet to receive the final investment decision (FID) will be affected by the cut-backs. Projects worth US$27bil that have received FID will not be affected, but Petronas does not have 100% equity in all the projects approved.

The capex crunch is expected to send chills down the spine of the already fragile O&G sector, with the stock prices of listed players already haemorrhaging in light of the free-fall of oil prices.

Apart from the 40-odd listed O&G companies, there are close to 4,000 other smaller companies that depend on Petronas for O&G service jobs.

“Nearly all depend on Petronas for jobs,” says an official in the O&G industry.

The capex cut by the national oil company is likely to have a negative impact on these companies and runs contrary to what research houses have been projecting.

Global slide

Several research houses have been stating that the Malaysian O&G industry is sheltered from the global slide in crude because Petronas will keep up with its spending of about RM60bil per year.

Taking a jibe at the forecasters, Shamsul says he has been warning of a shake-up in the industry in all his quarterly briefings.

“But nobody wants to listen to me. The worst part is, some of them have been listening to these so-called desk-top analysts who say this cannot happen because Petronas is always there to help them out … dream on.”

Shamsul says it is also reviewing the feasibility of some of its projects and could shelve projects that are no longer viable and for which Petronas has yet to make its FID.

“For the last nine months, we have been telling you guys about the likelihood that oil prices will drop. So the declining oil price is no surprise to us,” says Shamsul.

“But like every international oil company (IOC) out there, declining oil prices will impact us, and as such, we have to review our capex plans for next year onwards, which is also what the IOCs are doing. We have to assess the feasibility of projects,” Shamsul says.

He adds that at current oil price levels, marginal oil fields are no longer feasible for Petronas to get involved in, and warns that companies seeking to get involved in this business are “dreaming”.

When asked what was his message to the service providers seeking to do more work for Petronas, Shamsul said: “I’ve been singing this song for the last nine months, to watch out because things are not going to be that rosy.

“But not many seem to want to listen to me. So, I’ve stopped singing that song. But when they (service providers) get hurt, they will know,” he said.

Clearly, Shamsul is referring to how the sluggish oil price will force it to become more cost-effective in its projects, cancelling some, shelving others and negotiating down the terms of others.

Impact to federal government coffers

Meanwhile, Shamsul also explains that based on the assumption that oil prices average US$75 per barrel for 2015, the state oil firm would be paying the Government about RM43bil in dividends, royalty and taxes.

This would be 37% less than the RM68bil it plans to pay the Government this year.

“The lower dividend and other payout contributions is to ensure Petronas has enough money to replenish the reserves. If we are to maintain the payouts, it will have a significant impact on our growth plans,” says Shamsul.

As such, he says the Government should relook and rebalance its budget planning to adjust to the new level of oil prices.

He also reiterates that Petronas still needs to keep investing in new technology, in overseas projects and increasing its oil reserves in order to maintain its growth, considering that current production levels decline by some 10% every year, naturally.

At present, Petronas produces some two million barrels of oil equivalent per day.

“In five years, if we don’t replenish our production, our production will be down to half of what we have today,” he asserts.

By RISEN JAYASEELAN, NG BEI SHAN The Sunday Starbizweek Nov 29 2014  

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Crude oil prices fall: subsidy needless, ringgit weaken, fiscal health affected

Malaysia's iconic Twin Towers are seen in the background of the Malaysian oil and gas company Petronas logo at a petrol station in Kuala Lumpur

DESPITE the geopolitical uncertainties in recent months – Islamic State of Iraq terrorism, Russian-Ukraine tension,Israel-Gaza conflict – Brent crude oil price has fallen to a new four-year low on Nov 13 at US$77.9 per barrel.

This is a significant drop from the average price of US$112 per barrel in June 2014. The floor price support is still not yet in sight and the downward spiral of prices seems likely to persist into 2015.

The key factors contributing to the recent drop in prices are large crude oil supply from American shale oil production, weakening demand from a subdued global economic growth outlook and also a stronger US dollar in the recent months.

Malaysia’s economy is very much dependent on the oil and gas sector. From the federal government budget revenue to the country’s exports of crude oil and petroleum products, the issue of falling crude oil prices warrants a closer inspection.

Government estimates gone awry

The Government’s projection of its fiscal position and overall economy in Budget 2015 is based on the assumption that the average Brent crude oil price would be US$105 per barrel in 2014 and US$100 per barrel in 2015. Given the substantial differences from the current market prices, the Government’s projections may no longer be in sync with the economic reality.

Budget net loss from oil prices downtrend

One notable impact of falling crude oil prices is on the government’s budget finances. On one hand, the oil and gas sector has been contributing a third to the government’s budget revenue since 2005. At the same time, the Government spends a substantial amount of its operating expenditure on fuel subsidies – an estimated of 8.5% of budget operating expenditure in 2014. Therefore, sliding crude oil prices is a double-edge sword to the country’s fiscal health.

To put the issue in perspective, the estimated budget revenue contribution from the oil and gas sector is around 6% of gross domestic product (GDP)in recent years while fuel subsidy costs the government around 1.7% of GDP in 2014. As such, the impact of lower budget revenue will outweigh expenditure savings from lower fuel subsidy cost.

Therefore, if the current blanket fuel subsidy mechanism is left status quo in light of falling crude oil prices, the circumstances would risk our nation’s fiscal deficit targets. Keep in mind that the government has committed to reduce the current fiscal deficit to GDP estimate of 3.5% in 2014 to 3% in 2015 and ultimately achieve a balanced budget by 2020.

Timely goods and services tax

No doubt the heavy dependency on the volatile oil and gas sector for budget revenue is beginning to show signs of cracks. The issue is even more pressing now that budget revenue is squeezed from falling crude oil prices.

Therefore, the broad-based goods and services tax (GST), which will enhance tax revenue collection, is considered timely at this juncture. However, the implementation of GST is only part of the long term solution to fiscal sustainability. The government must also look into the expenditure side of the budget finance to manage its fiscal prudence.

New subsidy mechanism or market prices?

Based on the current crude oil prices, the government is only subsidising RM0.13 per litre for RON95 and RM0.12 per litre for diesel in November, compared to RM0.47 per litre subsidy for RON95 and RM0.59 per litre subsidy for diesel in September – before the October RM0.20 per litre fuel price hike.

According to the Finance Ministry, if global crude oil prices fall to a low of between US$70 and US$75 per barrel, the Government would not be providing any subsidy for fuel at the current fixed price of RM2.30 per litre for RON95 and RM2.20 per litre for diesel.

Since the market pump prices are approaching a level that would require no subsidy at all, there is an urgent concern to review the sustainability of the current blanket fuel subsidy approach.Although the government has proposed to initiate a new targeted fuel subsidy rationalisation programme based on individual income thresholds, the circumstances demand a review of subsidy provisions.

Ultimately, fuel subsidy is not sustainable in the long run. Whether the government initiates a tiered fuel subsidy provision or not, the reality is that fuel subsidy should not be entrenched indefinitely.

To plan ahead for fiscal prudence, the government’s initiative to move towards a managed float pump prices is appropriate at this juncture.

When global crude oil prices are depressed, consumers would certainly rejoice. However, when there is a reversal of crude oil prices, the government could then step in to provide targeted assistance to the low-income households. As the government would be sensitive to the impact of rising cost to the low-income group, savings from fuel subsidy expenditure could be channelled to the targeted needy households.

The Bantuan Rakyat 1Malaysia (BR1M) provisions for eligible households and single individuals amount to around RM4.9bil in 2015, benefitting around 7 million recipients. Therefore, the low-income group has already been identified through the BR1M database. The government can consider to top up on BR1M with a supplementary monetary provisions equivalent to a cost of living allowance to compensate for the upside volatility of market fuel prices.

If the government would consider providing an additional RM250 to its BR1M provision for each eligible households and single individuals as the supplementary allowance, total BR1M payment for eligible recipients in 2015 would amount to around RM6.7bil.

Therefore, from the perspective of fiscal management, doing away with fuel subsidies would greatly assist the government to meet its fiscal objectives. From Budget 2015, the Government has allocated around RM37.7bil for subsidy expenditures. Based on historical trend, around 55% of total subsidy allocated is for fuel subsidies.

If the government considers abolishing subsidies for fuel in 2015, it could save up to RM20.7bil from the operating expenditure. Given that the projected fiscal deficit is around RM35.7bil for 2015, the savings from fuel subsidy will assist the government to meet its fiscal deficit targets. Furthermore, the government can also save billions of ringgit for money not spent on upgrading petrol pumps to accommodate the proposed tiered fuel subsidy mechanism.

As long as the provision for the additional supplementary allowance to BR1M does not exceed the savings from fuel subsidy expenditure, subsidies would be channelled to the targeted group while narrowing the fiscal deficit along the way.The cost of living allowance can be claimed through the BR1M distribution channel. This will assist the government to meet its fiscal deficit to GDP targets.

One way or another, it is still monetary subsidy provisions by the government. However, a more targeted approach to distributing provisions and also doing away with the heavy dependency on subsidies are the right approach moving forward not only for the fiscal health but also to the fundamental competitiveness of the economy.

By Manokaran Mottain, chief economist at Alliance Bank Malaysia Bhd.

Ringgit Falls for Sixth Week in Longest Stretch This Year on Oil

Malaysia’s ringgit fell for a sixth week, the longest losing streak this year, as a slump in crude oil prices threatens to crimp government revenue in a nation that’s a net exporter of the fuel.

The ringgit is Southeast Asia’s worst-performing currency in the second half as Brent crude lost 29 percent since the end of June. Oil-related industries account for 30 percent of government revenue. While a weaker exchange rate helps lower export prices it makes imports more expensive. A report today showed inflation quickened to 2.8 percent in October from a year earlier, compared with 2.6 percent the previous month.

“The drop in commodity prices, especially crude oil, is to be blamed for the ringgit weakness,” said Wong Chee Seng, a foreign-exchange strategist at AmBank Group in Kuala Lumpur. “The fact that the ringgit is a high-beta currency also didn’t help,” he said, referring to a measure of volatility.

The ringgit depreciated 0.3 percent from Nov. 14 to 3.3555 per dollar in Kuala Lumpur, according to data compiled by Bloomberg. It touched 3.3681 yesterday, the weakest level since March 2010, and has lost 4.3 percent since June 30.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options and a gauge of risk, increased 16 basis points, or 0.16 percentage point, to 7.15 percent this week.

Subsidy Announcement

The ringgit led gains among Asian currencies today, rising 0.3 percent, after the government said in a statement that it will remove subsidies for fuel and diesel from Dec. 1 and as Brent rebounded.

“The ringgit strengthened today because of the increase in crude oil prices,” said Saktiandi Supaat, the Singapore-based head of foreign-exchange research at Malayan Banking Bhd. “The announcement on the subsidy removal gave further support.”

Malaysia’s 10-year government notes fell for a second week. The yield on the 4.181 percent securities maturing in July 2024 rose three basis points to 3.9 percent, data compiled by Bloomberg show. The yield dropped three basis points today. - Bloomberg

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Timing of latest fuel subsidy cut a surprise

PETALING JAYA - The latest round of fuel subsidy rationalisation came as a surprise to researchers and analysts who, nevertheless, are positive on the implications of the move, which could translate into savings of an estimated RM1 billion for the government.

Effective today, retail prices of RON95 petrol and diesel are up 20 sen each to RM2.30 per litre and RM2.20 per litre, respectively. This translates into a 9.5% increase for RON95 and 10% for diesel.

"We estimate that this fuel subsidy cut will save the government around RM1.1 billion in 2014, thus helping to achieve fiscal deficit target of 3% by 2015 and a balanced budget by 2020," AllianceDBS Research economist Manokaran Mottain said in a note today.

Currently, the market price for RON95 is RM2.58 per litre and for diesel RM2.52 a litre.

Manokaran said the move to cut the fuel subsidy further came as a surprise ahead of the tabling of Budget 2015 on Oct 10 and amid the recent decline in global crude oil prices.

"Following the recent announcement of a delay in the introduction of a multi-tiered mechanism for fuel, we had expected something like this to come on Budget Day," he said.

Manokaran said the reduction in fuel subsidy was necessary as the government had committed to bringing down the budget deficit to gross domestic product ratio from an estimated 3.5% this year to 3% in 2015, and to achieve a balanced budget by 2020.

However, in light of the latest fuel subsidy cut, Manokaran is now expecting a delay in the announcement of a multi-tiered pricing mechanism.

"We maintain our view that the current blanket subsidy mechanism has to be changed to a multi-tiered subsidy structure based on household income level.

"This is to ensure that subsidies are only channelled to the lower-income group. We hope that the government will have strong willpower to initiate the fuel subsidy reforms soon in order to ensure the economy is more competitive," he said.

Manokaran expects inflation to spike again in the last quarter of this year following the hike in fuel prices. "We maintain our view that 2014 full-year inflation will be 3.5% and inflation to hit 4% in 2015 on the back of the Goods and Services Tax implementation," he said.

Meanwhile, HongLeong Investment Bank Research said that with the 20 sen fuel price increase, it sees no rush for the government to implement the multi-tiered subsidy scheme, which has high complexity in implementation.

"In line with the latest comments by the Ministry of Domestic Trade, Cooperatives and Consumerism, we now expect the new fuel scheme to be rolled out in early 2015," its economist Sia Ket Ee said.

Coupled with the recent weakening of crude oil prices, he said, the government's fuel subsidy per litre is now as low as 28 sen to 32 sen per litre.

"As we expect crude oil prices to remain weak in the near term, the government's subsidy bill is expected to be well contained," Sia said.

He said savings from the subsidy cuts will likely be channelled to other economic services and social spending, expecting an additional RM150 in BR1M payment for 2015, or an extra RM1.2 billion.

The BR1M payout announced in Budget 2014 was RM650 for households and RM300 for singles. A BR1M payment of RM450 was also given to households with a monthly income of between RM3,000 and RM4,000.

RHB Research said the hike in fuel prices will likely hurt consumer and business spending somewhat but it will likely be manageable.

It expects inflation pressure to hold up in the fourth quarter following the fuel prices hike today, which will spill-over into other end-product and service prices gradually.

"Given that the weights for petrol and diesel account for about 7.5% and 0.2% respectively of the Consumer Price Index, the hikes in retail petrol and diesel prices are expected to add 0.7 percentage point to the inflation rate in October.

"However, the impact on inflation will likely be more muted due to the higher base effect in the 4Q of 2013," it said.

In light of the fuel price hike, RHB Research now expects inflation to come in at the higher end of its forecast of 3% to 3.4% in 2014, compared with 2.1% in 2013.

While inflation is expected to hold up in the fourth quarter due to the higher fuel prices, it opined that the country will likely experience a more moderate pace of economic growth in the second half of this year. -Sundaily

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