The company is mindful of the kind of impairment that it must recognise to meet accounting standards.
President and group chief executive officer Tengku Muhammad Taufik Aziz said the impairments were due to the oil price volatility that had affected Petronas’ balance sheet throughout 2020 and in line with Malaysia’s weaker economic growth last year.
The country’s gross domestic product (GDP) shrank by 5.6% in 2020, the biggest decline since the 7.4% contraction in 1998. The economy dipped 17.1% in the second quarter due mainly to the movement control order (MCO) to contain the Covid-19 pandemic.
According to standard accounting exercise, the oil and gas players’ investments based on the assumption of oil prices between US$70 and US$80 per barrel (RM282–RM323) now need to be reset.
“When we announce our financial results on Feb 26, we will have to announce an accounting profit and there may be a huge impairment, which is something the industry is recognising,” he said in an interview.
“This huge drop in value happens because oil futures previously climbed to US$60-US$70 per barrel, but the estimates have changed,” he added.
Oil prices are currently hovering at about US$60 (RM242) per barrel.
“The biggest hit after adjustments was in the second quarter of last year. That was probably the single largest quarterly loss. But there was already a bit of recovery in the third quarter in the revenue and gross profit lines due to a certain degree of confidence,” he said.
In Q2 2020, Petronas recorded a large net impairment of RM20.77 billion. Impairments in the first and third quarters were about RM4.67 billion and RM5.71 billion, respectively.
The national oil company incurred a net loss of RM21 billion in Q2 but narrowed its loss after tax to RM3.37 billion in the third quarter.
For the cumulative nine-month period, Petronas posted a net loss of RM19.89 billion versus a net profit of RM36.36 billion in the same period of 2019. However, excluding asset impairments, it would have chalked up a net profit for both the second and third quarters.
Tengku Muhammad Taufik said although there was some respite due to the sporadic easing of lockdowns which had led to the gradual resumption of economic activities worldwide as well as positive vaccine news, the environment remained challenging.
“Now the third wave has happened. I think most of the world has started returning to lockdowns with the emergence of new Covid-19 variants. For us, the market is challenging not only at home but also abroad,” he said.
Petronas, which has footprints in 32 countries, had to adapt to differing responses to the pandemic.
“We had to adhere to the host countries’ quarantine guidelines, with crew changes in order to fulfil the safe operation of our assets and units all over the world, Malaysia included.”
He pointed out that Petronas had to respond to refineries which had to draw back their operations and slow deliveries of liquefied natural gas (LNG) towards the third and fourth quarters.
“But then, the cargoes of LNG started picking up again in the first quarter of this year because of the cold winter in parts of Asia.
“This is something we now need to live with as a norm. We have to be a lot more responsive to immediate demands and respond to a more liquid spot market, be it for petroleum products, crude or LNG,” he added.
Tengku Muhammad Taufik hoped for a clear indication of gradual economic recovery this year, particularly in sectors such as transportation and tourism industry, in tandem with the rollout of vaccination programmes that would spur consumer confidence.
Based on the government’s forecast, Malaysia’s economy is expected to grow between 6.5% and 7.5% in 2021.
“We hope that consumption of petrochemicals will rise again in most emerging Asian countries once the vaccine is rolled out and we also hope for more usage of gas in energy transition as gas is the cleanest of the fossil fuels,” he said.
Coping with oil price uncertainty
Tengku Muhammad Taufik noted that 2020 was a historic year for the oil and gas industry following the immense supply glut, the emergence of Covid-19 pandemic and a standoff between Saudi Arabia and Russia in an oil price war that had led West Texas Intermediate (WTI) futures to plunge into negative territory.
Another oil benchmark, Brent crude, also declined to as low as US$19 (RM76) per barrel in the same week of the WTI crash.
“Oil price spiked to US$63 (RM254) per barrel recently, perhaps due to optimism on the rollout of vaccine programmes globally. My guess is the rate of vaccine rollout will affect reading going forward,” he said.
In Tengku Muhammad Taufik’s view, the industry would be governed by expectations rather than fundamentals amid the rollout of Covid-19 vaccination programmes and the behaviours of the Organisation of the Petroleum Exporting Countries (Opec) members.
“We believe that the price is very fragile and artificial, which is why we had to take a very long hard look, objectively and based on empirical data. We believe that oil prices will be lower than before in the long run.
“We do not believe that oil prices will be between US$50 and US$60 (RM201-RM242), but at least for the next few years if you look for planning purposes, our projects will (have to) achieve profitability even with oil prices at US$40 (RM161) per barrel,” said Tengku Muhammad Taufik.
He said for allocation purposes, Petronas was always assessing the viability of its projects at US$40 (RM161) per barrel and making sure that its unit production cost (UPC) was maintained at mid-teens.
“On the back of this technical challenge, maintaining a low UPC may be more challenging. That is why technology has to be part of the solution moving forward,” he said.
Despite the gradual recovery and prolonged market challenges, Petronas remained optimistic in pursuing its growth strategies, he added.