Petronas to cut capital, operational expenditure by up to $6.69b in 2016

MALAYSIA'S national oil company Petronas is aiming to cut an additional RM15 billion-RM20 billion (S$5 billion-S$6.7 billion) in capital and operational expenditure this year amid a prolonged slump in oil prices that whittled away its net profit by 56 per cent to RM21 billion for the year 2015, and necessitated RM18 billion in non-cash impairments.

Its Floating LNG2 project at the Rotan field north-east of Sabah will be re-phased with the commissioning date pushed back by two years while the US$16 billion Rapid, or the refinery and petrochemical integrated development in Pengerang, Johor, might be scaled down, said Petronas president and group chief executive Wan Zulkiflee Wan Ariffin at a media briefing on Monday.

"We will review if the project is viable as planned or re-phase it for future use," he said, adding the oil refinery and cracker portions would be continued. A review of Petronas's business operating model has also been completed and a new organisation structure that takes effect on April 1 would be unveiled to its 51,000 employees later this week.

Describing 2015 as "an extremely difficult year", Mr Wan Zul observed "organisational survivability required tough decisions".

As an estimated 3,700 companies in the oil and gas sector are registered with the country's only Fortune 500 company and heavily dependent on it for jobs, its belt tightening exercises are bound to have a domino effect.

Rapid, for instance, had been perceived to be the silver lining in the ever growing dark oil cloud, given the government and Petronas's previous assurances the massive project would not be put on the backburner because of its hefty economic multiplier.

To be fair, Petronas had sounded the alarm about two years ago that the gravy train was about to come to a halt as expanding supply outstripped demand.

The oil price bust has also been a rude awakening to Putrajaya which saved little if any of boom-time petroleum earnings.

As Petronas's cash flow from operations fell a third to RM70 billion last year, its chief financial officer George Ratilal said the company would have to utilise its cash reserves - "and possibly borrow more" - to meet capex and dividend payments.

Petronas paid Putrajaya RM26 billion in dividends last year, but both have agreed to reduce the amount to RM16 billion this year based on the oil price assumption of US$30 Brent (2015: US$52.46).

Its cash and fund investments stand at RM137 billion with RM58 billion of borrowings.

Mr Ratilal said the company is comfortably geared at 16 per cent at present, and could scale up to 25 per cent if required.

In the October-December quarter, Petronas posted a loss of RM3 billion after providing RM13 billion in net asset impairments. In the same quarter of 2014, its loss was wider at RM7.3 billion on the back of RM20 billion impairments. Revenue for the quarter and full-year were a fourth lower to RM60 billion and RM248 billion, respectively.

Mr Wan Zul confirmed Petronas is targeting RM50 billion in capex and opex cuts worldwide over the next four years, beginning with up to RM20 billion this year.

Of the RM65 billion in capital investments last year, 54 per cent was spent in Malaysia and the rest overseas.

Cost optimisation measures include the deferment of upstream projects such as Malaysia's Sepat and Kasawari, and the review of risk service agreements.

While it remains committed to the Canadian Pacific North West LNG project, it has to follow the drawn out regulatory process before it can make a final investment decision.

btworld@sph.com.sg

This article was first published on March 1, 2016.
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