Oil & Gas
The oil and gas sector in Malaysia is still managing the ramifications of the 2014 oil price collapse and the subsequent squeeze on market players. Accordingly, industry leaders are acutely aware of the need to foster a sustainable future, not only for actors across the value chain, but also for the sector as a whole.
In this context, International Investor brought together a number of thought leaders from PETRONAS, national and international oil companies, service providers, trade associations and consultancies to discuss the major issues affecting the industry. The debate was conducted under Strategic Review conditions with focus on pressing topics including service procurement and the pursuit of industry consolidation. Discussion among the CEOs and senior executives addressed multiple issues, from the steps being taken by PETRONAS in response to the low oil-price environment, to ideas related to enhancing creativity, efficiency and cost reductions across the board.
A central proposition of the Strategic Review conversation was the need to address the challenge posed by the excess capacity of specialised assets in the local market and how to counter the impact this is having on the wider sector. To that end, participants evaluated the role of the State and the influence of market forces; the extent to which the existing upstream governance framework is conducive to the development of local capabilities, innovation and sustainability; and how traditional notions of consolidation can be adapted to best fit the current scenario.
Upon conclusion, distinct action points had been devised with regard to specific areas, including modifying regulatory aspects and working practices, while consensus was reached on a number of additional key takeaways.
“Following the 2014 fall in oil prices, there is now a significant excess capacity of newly purchased assets and many service providers are struggling to meet their financial obligations. This situation represents a sizeable challenge to the services sector”.
“Players in the fabrication sector are ready and willing to collaborate by means of working performance consolidation… [which is] one way to increase the utilisation of the excess capacity in this particular segment”.
“Genuine consolidation requires the consideration of several crucial aspects such as competence, capabilities and employment. In order to safeguard these aspects, I suggest the adoption of a managed approach to the levels of capacity required by each player”.
“A salient issue is the structure of the upstream procurement process. Liberalising this procedure by enabling the service provider and operator to finalise the service contract directly, with only guidance being provided by PETRONAS, would increase efficiency”.
- Broad agreement that the low oil-price environment will likely be prolonged.
- Cuts are required in discretionary areas first to maximise efficiency.
- Each market segment should be evaluated separately with regard to efficiency measures, rather than via the application of a one-size-fits-all approach.
- Low oil prices have resulted in the underutilisation of specialised assets, creating significant excess capacity across the market.
- Excess capacity is particularly acute in specific segments, including fabrication, drilling and supply vessels. This warrants a targeted response.
- Steps should be taken to avoid over-reliance on market forces that have created excess capacity and resulted in job losses and wasted competencies.
- Stakeholders can reflect on their contributions to excess capacity by analysing returns from certain segments and devising alternative approaches in response.
- From the service sector perspective, excess capacity is best addressed via working performance consolidation, rather than equity consolidation.
- A managed, dialogue-based approach will help to gauge required levels of capacity, while ensuring Malaysia is not priced out of the international market.
- Upstream procurement could be liberalised, following the downstream model, to expedite service contract arrangements between the service provider and operator.
- To enhance capabilities, efficiency and safety standards, a restructured procurement framework could include collective guidance provision to local companies.
“There is consensus that the industry can improve efficiency without compromising the national agenda. So what particular feature could be enhanced or changed in the current setup to improve efficiency?”
“The regimented way in which procurement is governed must be modified. For example, one possibility is for players to agree on a percentage of local content involvement and for a list of qualified suppliers to be drawn up”.
“To bring about an efficient and sustainable sector [the key] is for all players to work together towards the joint design of a simplified governance framework for the upstream segment that is conducive to creativity”.
“Local agents add minimal value to the industry and instead provide more of a market entry function. One suggestion for adding more value is to shift this relationship to a partnership arrangement with contractors who are able to complement or build local capabilities”.
- Introducing local content requirements for Malaysian players will streamline the procurement process and enhance PSCs’ ability to engage in self-governance.
- Providing companies with the freedom to operate according to their own corporate culture will help to maximise their expertise.
- State support offered to local companies should be restricted to the initial start-up phase to strengthen efforts at reducing excess capacity.
- Joint steps by industry players to ensure the regulatory framework is better at assimilating expertise, creativity and knowledge will enhance market efficiency.
- Enabling operators to work directly with service providers on a design-to-cost basis will enhance in-house capabilities and knowledge.
- PETRONAS’ efforts since 2016 to enhance governance efficiency by combining upstream and downstream procurement into a single area are a positive step.
- Contractors are benefitting from greater freedom following PETRONAS’ steps to raise the threshold value of companies with which it enters into PSCs.
- PETRONAS is willing to adopt local content requirements upstream to optimise the balance between international expertise and local industry development.
- Defining content requirements on a segment-by-segment basis will improve working practices under the governance framework.
- Simplifying procurement governance, including rationalising SWEC codes, will streamline time to market, facilitate implementation procedures and unleash innovation.
- Ongoing moves to harmonise upstream standards, particularly among operators, will foster increased creativity and efficiency.
- Consensus that the role of local agents needs to be reassessed to increase the value they add to the industry.
“The 3,700 vendors licenced under PETRONAS cannot be sustained given the current environment. The acute excess capacity is serious and that is why PETRONAS is taking the steps to raise entry level requirements, aligning the SWECs, and removing superfluous agents”.
“Margins are incredibly thin and so many service providers would benefit from oil companies indicating their support for some kind of sharing mechanism or model. [This] would help to ensure that service providers are not left behind with a low-cost scenario when prices rise and operators’ top lines start to increase”.
“General sentiment at the roundtable has been to allow the response to excess capacity in the market to be market driven but with an element of management from PETRONAS to ensure local industry is still nurtured to some extent”.
- Enhancing the visibility of up-coming projects in the market will combat the creation of additional excess capacity.
- PETRONAS’ market info flow mechanism will help to achieve visibility, enhancing the ability of market participants to plan projects based on hard data.
- To simplify the procurement process and expedite cost reductions, PETRONAS is consolidating SWEC codes and standardising CORAL 2.0 specifications.
- Additional industry-wide clarification on price and contract terms will ensure service providers receive mutually beneficial payment on the oil-price upside.
- Excess capacity is increasing service sector competition and, thus, lowering prices. Players that fail to adapt should be allowed to drop out of the market.
- The traditional bidding process, which is perceived to be lengthy and inefficient, should be rationalised to embed positive change and innovation.
- To boost innovation, service providers could implement small pilot schemes, similar to the Proof of Concept method prevalent in the IT industry.
- Together, PETRONAS and PSCs can create a base load of work in rejuvenation, decommissioning and near-field expansion to tackle excess capacity.
“I would like to request additional time with PETRONAS and service providers to devise the kind of step changes or proposals required to modify the governance structure of the upstream segment”.
“Our goal is to ensure that as many local players as possible are able to survive the downturn and that this survival process is sustainable. When the metaphorical party cake is back on the table, we want everyone to enjoy their slice!”
“The most important aspect is to find a balance between industry competitiveness and capabilities. In many ways, these two aspects constitute a virtuous cycle because competition is needed to hone capability, while capability is required to achieve true competitiveness”.
- PETRONAS’ collaboration with industry players is central to shaping the governance structure according to its needs in the low oil-price environment.
- Open channels of communication between PETRONAS, IOCs and contractors will foster innovation and cost-cutting measures, creating a win-win-win situation.
- IOCs could invite local players to participate in their international projects abroad in order to enhance cross-fertilisation and knowledge exchange.
- Consensus that more frequent dialogue between PETRONAS and industry stakeholders is the best way to overcome ongoing challenges in the sector.
- A common industry voice is required on the international stage to outline sector-wide initiatives and thought processes to ensure efficient production.
- For the sake of sustainability, all parties should work towards striking a balance between industry competitiveness and capabilities.
- The industry must progress from a reactive to a proactive state by facilitating the dissemination of ideas from the top down.
- To instil proactivity, all players must understand the importance of change engagement, change ownership, accountability and the sharing of information.
Zamri has a mechanical engineering degree from the former Polytechnic School of Engineering at New York University. He joined PETRONAS in 1991 as a petroleum engineer and has since held multiple managerial and leadership roles in project development. Zamri has been active in the Society of Petroleum Engineers at the regional level and sits on the board of various PETRONAS subsidiaries as well as the Malaysia-Thailand Joint Authority and the Malaysia Petroleum Resources Corporation.
Faiz has a law degree from Durham University, UK and over 30 years of experience in the audit and business advisory services of financial institutions in Malaysia. He has led several projects in the areas of strategy, investigation and mergers both locally and internationally. Faiz is highly active in his field and in addition to his current post at PwC, he serves as president of the Malaysian Institute of Accountants and as fellow of the Institute of Chartered Accountants in England and Wales.
Shahril has an industrial technology degree from California Polytechnic State University and a masters in Management of Technology from Massachusetts Institute of Technology (MIT) Sloan School of Management. In addition to his role at Sapura Energy, formerly known as SapuraKencana Petroleum Berhad, Shahril is a also a member of both the MIT Sloan Asian Executive Board and the Board of Governors for the Asia School of Business, a MIT Sloan-Bank Negara collaboration.
Samsudin has a chemical engineering degree from Aston University, UK and a masters in project management from Reading University, UK. He began his career with PETRONAS in 1983 as a process engineer and has subsequently held distinct positions in the PETRONAS Group, including general manager of the Plant Division of OGP Technical Services Sdn Bhd. Prior to his current post, Samsudin served as Head of the Downstream Business Excellence Division at PETRONAS.
Sharifah has a degree in electrical and electronic engineering from the University of Nottingham, UK and an MBA from the same institution. She has over 27 years of experience across a range of activities in the field of oil and gas, from the conceptual side to fabrication and construction. This includes 8 years of involvement with MOGSC, where she was elected president for the 2016-2018 period. Sharifah is also general manager of Project Management at MMC Oil & Gas Engineering Sdn Bhd.
Ernest is a chartered accountant and member of both the Chartered Institute of Management Accountants, UK and the Malaysian Institute of Accounts. He began his career with the company in 1989 and has since held a number of senior positions within the Controller’s and Audit divisions in Houston, Texas and Port Dickson and Kuala Lumpur in Malaysia. Ernest also sits on the National Corporate Ethics Award Steering Committee chaired by the Malaysian International Chamber of Commerce and Industry.
Taufik has a degree in accounting and finance from the University of Strathclyde, UK and is a member of the Institute of Chartered Accountants in England & Wales. He joined PwC in 2015 having previously accumulated 15 years of experience in a number of different roles across the oil and gas value chain, including in finance, business development and planning at PETRONAS. Taufik was previously chief financial officer at a listed upstream oil and gas service provider.
Aravindh holds a degree in petroleum engineering from the Universiti Teknologi Malaysia. He joined Baker Hughes following graduation from university and has spent almost two decades at the company in various roles including field engineering, marketing, supply chain, sales and operations management. As a consequence, he has worked in several distinct locations during this time. *Since the Strategic Review, Aravindh has assumed the role of OFS Lead, Southeast Asia at Baker Hughes, Southeast Asia.
Azman is a registered Professional Engineer with a degree in electrical and electronic engineering from California State University. With over 30 years of experience in oil and gas, he also acts as Group Director of Oil, Gas and Energy at Boustead Group in Malaysia. Azman is a member of the Industry Advisory Panel of the Malaysian Petroleum Resources Corporation and serves as a board member of SPIE Oil & Gas Services (Malaysia), a specialist subsidiary of SPIE Oil & Gas Services.
Iain has a masters in civil engineering from the University of California, Los Angeles. He joined Sarawak Shell Berhad as a field engineer in 1990, prior to assuming a distinct range of engineering, economics and corporate roles based in Malaysia, The Netherlands and Singapore. During this time Iain has held various senior positions across Shell, both regionally and globally, including the post of Vice President for New Business Development and Ventures for Shell Chemicals in Singapore.
David has a degree in physics from the University of Cambridge and an MBA from INSEAD business school, France. He has 30 years of experience in the upstream exploration and production sector of the global oil and gas industry, in roles covering country and business unit leadership, large asset management, field development and commercial leadership. David’s career includes multinational experience from assignments in Malaysia, Norway, the U.S., UK, Abu Dhabi and France.
Stefano has a civil structural engineering degree from Tennessee Technological University and a masters in systems engineering from Virginia Polytechnic Institute and State University. He has over 25 years of experience in the industries of oil and gas and advanced materials, including in corporate and business development, strategic planning, asset management, oil and gas engineering, and project development and management. Stefano assumed his current position in 2015.
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