The Rippling Effect of the Oil Crisis

The current oil crisis affects every corner of the world in more ways than one. While Saudi Arabia and Russia may be pursuing their own respective agendas in the ongoing price war, the shockwaves that the crisis has created are certainly felt across the entire oil and gas industry, chief amongst them being the American shale gas industry which has been struggling to stay afloat at current crude oil prices which are well below the required levels for sustainable shale gas production. Other nations are also feeling the pressure, particularly oil-producing nations that rely heavily on petroleum-derived revenue to fund its national budget – case in point: Malaysia.

 

The Malaysian federal government has long relied on petroleum revenue to fund its national budget annually. Despite efforts by the government to reduce its reliance on petroleum-derived revenue over the years, in 2019, Petronas’ total dividend contribution to the nation’s coffers alone amounted to RM54 billion, representing 20.3% of Malaysia’s federal government revenue for 2019. While the total share of petroleum-derived revenue has reduced substantially from 41.3% seen in 2009, the 30.7% share 10 years later still represents quite a significant portion, putting the nation’s coffers at risk particularly during a slump in oil prices.

 

On 11 October 2019, the Pakatan Harapan government unveiled a national budget amounting to RM297 billion. At that time, the national budget was formulated based on a base projection of $62 per barrel for crude oil prices, a far cry from the $28 average price traded over the past month. It is estimated that for every $1 per barrel drop in crude oil prices, Malaysia’s petroleum revenue will reduce by RM300 million. To add further pressure to the strain, the Malaysian federal government has announced a string of economic stimulus packages worth more than RM260 billion over the past month in light of the recent nationwide shutdown. This certainly begs an important question – does Malaysia have enough funds to fulfil its latest fiscal measures?

 

Prior to the slump in oil prices, Petronas had in February announced that it would distribute a regular dividend amounting to RM24 billion to the Malaysian federal government this year. With the amount of economic stimulus packages announced by the federal government ballooning by the day with no clear end in sight on the recovery from the current COVID-19 pandemic, calls for Petronas to declare another special dividend on top of its initial RM24 billion commitment are greater than before. A glance at Petronas’ financial statements will reveal that as at the end of last year, the national oil and gas company had a healthy cash pile amounting to RM141.6 billion. However, Petronas, in its latest statement on 3 April 2020 stated that it will now reassess its ability to fund its ongoing operations, service debts and other obligations in considering its declaration of any special dividend over and above its initial commitment, acknowledging the pressure it is facing and effectively depriving the government of a funding channel for its additional stimulus measures.

 

The effect of the current oil crisis is felt beyond just Petronas and the Malaysian federal government. It is estimated that Malaysia is home to over 2,000 Petronas-licensed oil and gas services and equipment (OGSE) companies, of which more than 40 of them are public listed companies on Bursa Malaysia. If crude oil prices continue to remain suppressed below the threshold required for sustainable oil production in the region, there is a strong likelihood of Petronas slashing its capital expenditure for the year. With the nation’s top 10 OGSE companies’ gearing averaging over 1.09x, the effects of a sudden cut in capital expenditure by the national oil company will certainly send strong ripples across the entire oil and gas sector, putting more than 36,000 jobs and estimated RM17.4 billion of petroleum income tax revenue for the Malaysian federal government for the year at risk. Moreover, the collapse of certain corners of the oil and gas sector will undoubtedly cause spill-over disruptions to the entire supply chain and other related industries in the country.

 

In the wake of WTI prices treading into negative territory recently and Brent dipping below $20, alarms have been raised louder than ever within the federal government – the Finance Minister in a recent statement conceded that the government will resort to adjust its spending if oil prices remain suppressed. The downturn in oil prices have already dealt a significant blow to the government’s coffers, which will only get worse unless the oil crisis recovers. As this is contingent on quelling the pandemic, the harsh reality we face is that 4 months into the outbreak, we are still dealing with virus that we do not fully understand, and the world is still not equipped with a reliable vaccine or treatment to defeat this virus. At this rate, the federal government will continue to bleed petroleum revenue beyond a level that it is able to sustain its national budget and stimulus measures. The pandemic certainly compels the government to look beyond its usual stash within Petronas and instead towards other state-owned enterprises. Who knew that the pandemic will be the event that ultimately breaks the government’s reliance on petroleum revenue, just as the pandemic is forcing every other industry to reshape and redefine its business during times of crisis?