gas industry amidst the worst global economic crisis in more than 70 years.

Size: px

Start display at page:

Download "gas industry amidst the worst global economic crisis in more than 70 years."

Marylou Newman
6 years ago
Views:

1 1

2 2

3 The year in review was a difficult and highly challenging one for the oil and gas industry amidst the worst global economic crisis in more than 70 years. After posting years of successive robust growth, global oil demand fell by 1.2 million barrels per day to average 85.0 million the largest annual decline since the 1980s. Efforts by OPEC to stabilise the situation through successive cuts in production proved insufficient to prevent the emergence of a significant supply overhang a reversal from the tight supply conditions in the previous year. These developments, compounded by speculative activities, created significant volatility in prices the weighted average price of Tapis rose during the first half of the year by 45.5% to USD127.38, but subsequently declined by 57.5% to USD54.11 during the second half. Despite the sharp fall in oil prices, industry costs have not declined in tandem consequently, the industry moved from a high-price, high-cost to a low-price, high-cost environment that will test the resilience of all players. 3

4 The difficult industry environment was reflected in the performance of all oil and gas players both oil majors and NOCs recorded respectable increases in revenue and profit during the first half of the year, but saw sharp reversals in performance during the second half on the back of lower prices, weaker demand and squeezed margins. Industry players have responded d by scaling back both investments t and laying off manpower in a bid to defend their eroding margins e.g., according to a survey by Barclays Capital, global E&P investment is expected to decline by more than 12% in 2009, while layoffs of some 24,000 staff have been reported as of April Cutbacks of such a scale risk repeating the entire boom-bust cycle of the industry were they to persist. Note Results of oil majors and national oil companies (NOCs) were normalised to be on a consistent basis with PETRONAS financial period, based on publicly available information. The Oil Majors consist of Shell, Chevron, ExxonMobil, BP and Total, while NOCs consist of PetroChina, PetroBras, StatoilHydro and Rosneft 4

5 Notwithstanding adverse industry conditions in the near-term, the long-term outlook remains favourable. Energy use over the long-term is expected to continue increasing steadily as a result of rising living standards and growing populations, particularly in developing countries by 2030, global oil demand is expected to increase by nearly 30% to 110 million barrels per day, Against the backdrop of growing demand, production from existing fields is nevertheless expected to decline, resulting in an output gap that could reach 45 million barrels of oil equivalent (boe) per day by 2015 and 100 million boe per day by To continue meeting demand in a sustainable fashion, the industry will need to invest in substantial new production capacity some USD3.2 trillion by 2015, and a further USD8.1 trillion through 2030, based on estimates made by the International Energy Agency (IEA) in the World Energy Outlook The scale and nature of growing energy demand over the long-term shapes PETRONAS approach to the business, grounded in a strategy of integration, adding value and globalisation. Per Capita Energy Consumption (boe per person) OECD Non- OECD US Japan Europe China Brazil India M/East CAGR ( 05-30) 0.2% 2.2% -0.7% 0.6% 0.4% 5.1% 2.8% 2.7% 0.6% Source of data: International Energy Outlook 2009, US EIA 5

6 6

7 Despite the difficult and challenging year for the industry, the PETRONAS Group recorded another year of satisfactory performance revenue for the year stood at an all-time high of RM264.2 billion, representing an increase of 18.4% on the year. Profit before tax and net profit, however, was lower at RM89.1 billion and RM52.5 billion respectively amounting to a decline of 6.7% and 13.9% on the year, respectively reflecting the adverse low-price, high-cost h industry environment that persisted during the second half of the year. Notwithstanding lower profit, however, the Group declared higher dividends of RM30 billion 25% higher than the previous year. The Group s Groups performance for the year compares favourably against the oil majors. those of Note Results of oil majors and national oil companies (NOCs) were normalised to be on a consistent basis with PETRONAS financial period, based on publicly available information. The Oil Majors consist of Shell, Chevron, ExxonMobil, BP and Total, while NOCs consist of PetroChina, PetroBras, StatoilHydro and Rosneft 7

8 8

9 9

10 Stronger Group revenues were driven by both higher sales volume as well as prices, in particular: a) higher sales volume of RM10.5 billion, accounting for 25.5% of the increase, and b) higher LNG prices, resulting in higher revenues of RM14 billion, or 34.1% of the increase. The positive effects of higher volume and prices overall were further reinforced by the strengthening of the US dollar against the Ringgit. Lower crude oil and condensate prices dragged down revenue by RM2.3 billion. 10

11 The Group s revenue continue to be led by petroleum products (36% of the total), crude oil (24%) and LNG (18%). Strong growth in petroleum product and LNG revenues were driven by both higher volumes and prices. Higher crude oil revenues reflected higher crude oil trading volumes, while higher natural gas revenues reflect higher prices recorded during the year. 11

12 International operations, for the second year running, were both the Group s biggest revenue earner for the Group as well as its fastestgrowing segment. In particular, 42.1% of the Group s revenue for the year was derived from international operations, 37.2% from exports and a further 20.7% from domestic operations. This growing contribution from international operations is attributed to a well-targeted and disciplined approach towards the Group s globalisation strategy. Note: As at 31 March 2009, PETRONAS was involved in various activities along the oil and gas value chain in more than 30 countries worldwide. 12

13 Manufacturing activities continue to make a significant contribution to the Group value-adding its oil and gas resources during the year, revenue from the Group s manufacturing activities increased by 18% from RM120.5 billion to RM142.0 billion. The value-add that manufacturing brings to the Group is underscored by the fact that had PETRONAS sold crude oil and gas in their raw forms, revenues for the year would have been lower by 32.6% at RM178.2 billion. In other words, through manufacturing, the Group has been able to generate an additional revenue of RM86 billion. 13

14 Despite higher revenues, the Group s profit before tax for the year declined from RM95.55 billion to RM89.1 billion, primarily as a result of higher production and operating costs. Compounding this profit erosion further were higher costs from other elements, including higher amortisation, depreciation and impairment, as well as higher petroleum proceeds and export duties. 14

15 Higher costs reduced the Group s profit margins, resulting in lower operating profit of RM91.6 billion and subsequently lower net profit of RM52.5 billion. 15

16 The Group s balance sheet continued to strengthen in particular, total assets increased by 14.4% to RM388.1 billion, and shareholder s funds by 15.1% to RM232.1 billion. The increase in the Group s total assets and shareholder s funds reflect successive years of reinvestment of its profits that have over the years built PETRONAS into what it is today from an initial capital of only RM10 million 35 years ago. 16

17 The Group continued to sustain a performance level that was either at par or exceeded those of other leading oil majors and NOCs for the fifth year running, all key financial ratios remained at or above those of peers. This consistent performance reflects PETRONAS resilience and capability to compete efficiently and effectively despite adverse industry conditions. Note Results of oil majors and national oil companies (NOCs) were normalised to be on a consistent basis with PETRONAS financial period, based on publicly available information. The Oil Majors consist of Shell, Chevron, ExxonMobil, BP and Total, while NOCs consist of PetroChina, PetroBras, StatoilHydro and Rosneft 17

18 Despite lower profits, the Group increased its payment to the Government in particular, payments to Government rose 20.1% to RM74 billion, amounting to 71.4% of the Group s profit before tax, petroleum proceeds and export duty for the year of RM103.7 billion Since FY2005, payments to Government have more than doubled. Profit reinvested amounted to RM21.9 billion for the year, or 21.1% significantly lower than those of other key players in the industry. Since its incorporation PETRONAS Group has cumulatively generated profit of RM780.8 billion, out of which amount 60.4% or RM471.3 billion was paid to the government, RM77.4 billion paid tominority shareholders and foreign tax, whilst RM232.1 billion or 29.7% was reinvested by the Group. Note Results of oil majors and national oil companies (NOCs) were normalised to be on a consistent basis with PETRONAS financial period, based on publicly available information. The Oil Majors consist of Shell, Chevron, ExxonMobil, BP and Total, while NOCs consist of PetroChina, PetroBras, StatoilHydro and Rosneft 18

19 The Group s higher contribution to the Government of RM74 billion for the year caps five successive years of increase during this period, the Group s contributions to both Federal and State Government rose at an average rate of 21% a year and totalled RM268 billion. Since its incorporation 35 years ago, the Group has paid RM471 billion to the Government, in addition to bearing a cumulative gas subsidy of RM97 billion. Payments to the Government represented 44.9% of Federal Government revenue for calendar year These returns continue to demonstrate the enduring strength of the Group s business model as a national oil company (NOC) that nevertheless operates commercially and independently. 19

20 To ensure the long-term sustainability and growth of its business, the Group maintained a higher capital expenditure for the year of RM44 billion, a 17% increase. Reflecting ongoing efforts to replenish a maturing domestic resource base, the exploration and production (E&P) business received the lion s share of the Group s capex, amounting to RM33.8 billion or 77% of the total. Domestic spending, which amounted to RM 26.2 billion or 60% of the total capex, have helped spur local economic activities. 20

21 21

22 Total Malaysia hydrocarbon reserves increased marginally to billion barrels of oil equivalent (boe) on the back of ongoing exploration efforts and field growth activities. Higher reserves replacement ratio (RRR) for the year stood at 1.1 times, as more reserves were added to the nation s resource base than were produced during the year. A growing proportion of Malaysia s oil and gas reserves is located in geologically complex frontier acreages 14.7% of oil reserves exist in deepwater blocks, whereas 24.7% of gas reserves have a high content of carbon dioxide (CO 2 ). Developing frontier acreages to sustain future national production will be technologically ll more demandingdi and will entail higherh costs. 22

23 Total Malaysia oil and gas production declined by 0.9% to 1.66 million barrels of oil equivalent (boe) per day, reflecting ageing fields as years of steady and continuous production took their toll. Crude oil production resumed its generally downward trend of the past 5 years, declining further on the year to 553,600 barrels per day. Peninsula Malaysia and Sarawak remain the major contributors tib t to national production, amidst a growing contribution from Sabah. A total of RM22.3 billion was spent in Malaysia s upstream sector, up 3.6% on the year, mainly on development and production projects. 23

24 PETRONAS average domestic production increased to 1.17 million barrels of oil equivalent (boe) per day on the back of higher entitlements, amounting to 70.4% of Malaysia s total production. Lower production from PETRONAS Carigali largely due to unplanned shutdowns and project delays. 24

25 The international E&P business continued to make significant contributions to the Group. International reserves increased 9.6% during the year to 6.84 billion barrels of oil equivalent (boe), following a number of significant gas discoveries in Turkmenistan and Mozambique. The acquisition of a 40% equity stake in the Gladstone LNG project in Queensland, Australia, with coal seam gas (CSG) equity reserves of 0.36 billion boe, marks PETRONAS first venture into unconventional hydrocarbons. Over the years, the Group has built a robust and geographically-balanced international upstream portfolio that enhances security of supply by ensuring we are not overly dependent on any single region. 25

26 International production increased 2.3% to 629 thousand barrels of oil equivalent (boe) lower crude oil and condensate production was offset by higher gas production from the Group s operations in the Malaysia-Thailand Joint Development Area and Egypt. Africa contributed 59.9% of the Group s international production, with the Middle East & Asia and South East Asia & Oceania regions each contributing approximately 20%. 26

27 Efforts to strengthen the Group s upstream resource base continued to yield positive results during the year the combined total domestic and international reserves increased by 2.5% in the year to billion barrels of oil equivalent (boe). The Group s total reserves replacement ratio (RRR) for the year climbed to 1.8x, one of the strongest t in the industry. Total combined domestic and international production during the year increased further to 1.80 million boe per day. 27

28 Oil Business continued to play a strategic role in adding further value to the nation s petroleum resources through its integrated activities in marketing, refining, retailing, and trading. Total marketing volume for crude oil and petroleum products decreased to million barrels lower exports of Malaysian Crude Oil (MCO) were offset by higher Foreign Equity Crude (FEC) sales of 51.8 million barrels. Improved the Group s domestic refinery operations, reflected by utilisation and reliability rates of 97.3% and 98.2% respectively, enabled higher processing of MCO. The Group s overall refinery utilisation rate, however, eased to 86.2% as a result of an unplanned shutdown of its South African refinery. The Group s crude oil marketing portfolio also expanded further during the year with the debut of Vietnam s Song Doc crude as its latest FEC. 28

29 The Group s domestic and international retail operations registered lower sales of 78.8 million and 61.3 million barrels respectively, on the back of slower economic growth and generally higher fuel prices during the year. Trading activities, an important component of integration in the Oil Business value-chain, increased significantly by 47% to million barrels during the year due to expansion of crude oil and petroleum products trading portfolio. 29

30 Average Malaysia sales gas demand increased marginally by 0.1% to 2,563 million standard cubic feet per day (mmscfd) lower demand in Peninsular Malaysia was offset by higher volumes in Sabah and Sarawak. Higher gas imports into the Peninsular Gas Utilisation (PGU) system were necessary to ensure reliable gas supplies to customers amidst lower supply from fields offshore Terengganu. PETRONAS Gas Berhad (PGB), the Group s gas procession and transmission arm, continued to sustain world class operations standards for the PGU system, ensuring customers throughout the Peninsula continue to benefit from reliable and uninterrupted gas supply. Note: The Peninsular Gas Utilisation (PGU) system was developed to spearhead the use of natural gas in Malaysia. The natural gas produced from offshore Terengganu is processed in six Gas Processing Plants in Kerteh and are then fed into a 2,500-km pipeline system that delivers supplies to the power, industrial, petrochemical and other consumers throughouth t the Peninsular. 30

31 PETRONAS incurred gas subsidies to the tune of RM19.5 billion during the year, which declined only by a modest 1% on the year as increases in domestic regulated prices were lower than that of the market price for gas. Since the regulated price came into effect in May 1997, PETRONAS has incurred a total gas subsidy of RM97.4 billion. 31

32 The Group s total LNG production held steady at 24.1 million tonnes marginally lower production from the PETRONAS LNG Complex in Bintulu was balanced by higher equity production from Egyptian LNG. Exports of LNG from Bintulu an important foreign exchange revenue earner for Malaysia were shipped mainly to Japan (60% of total), South Korea (27%) and Taiwan (12%), where they made significant contributions towards the supply of gas in each of those markets. Strong plant operational performance, as reflected in consistently high reliability rates, reinforced the Group s reputation as a reliable supplier of LNG. The Group s LNG trading arm, ASEAN LNG Trading Company (ALTCO), successfully traded 14 cargoes mainly from Egypt and Trinidad & Tobago amounting to 0.9 million MT. Note: PETRONAS is currently the fourth largest equity owner of LNG production capacity in the world and the PETRONAS LNG Complex in Bintulu, Sarawak remains one of the world s largest LNG production facility in a single location with a combined capacity of about 23 million tonnes per annum. 32

33 Despite high unfavourable global market conditions, the Group s total production remained relatively stable during the year at 9.2 million tonnes. Overall plant reliability remained high at 94.9%, reflecting the Group s pursuit of operational excellence initiatives over the last five years to enhance its cost management practices. The Group successfully commissioned the Mega Methanol plant in January 2009 to strengthen its position as a major methanol supplier in Asia. The launch of Polinas DST PP628 a more energy efficient modified polyvinyl chloride (MPVC) compound for use in the manufacture of pipes marks the Group s foray into a growing market for environmentally-sustainable products. 33

34 The Logistics & Maritime business continued to deliver a solid performance during the year amidst a challenging industry environment characterised by falling trade volumes, weakening freight rates and higher operating cost. Group subsidiary MISC Berhad took delivery of 3 new LNG carriers, bringing the total LNG fleet size to 29 and its overall fleet strength to 119 vessels with a shipping capacity to over two million deadweight tonnes, reinforcing MISC s status as the single largest owner-operatoroperator of LNG carriers in the world. Overall vessel utilisation rates held steady at 97.2% compared to 98.9% in the previous year, although slot utilisation rates in the liner business suffered a decline to 67.5% on the back of falling trade volumes. The Group s total offshore facilities increased further to nine, following the delivery of one FPSO and two FSOs during the year in particular, the FPSO Espirito Santo successfully delivered to Shell Brazil, marking the company s second offshore facility in the Brazilian deepwater sector. MISC s subsidiary MMHE completed two fabrication projects and two marine conversion projects, as well as the dry-docking and repair works for 68 vessels. 34

35 35

36 36

37 37

38 38

Table of Contents PRESIDENT & CEO S MESSAGE 19 FIVE-YEAR GROUP FINANCIAL HIGHLIGHTS REVIEW OF FINANCIAL RESULTS

Table of Contents PRESIDENT & CEO S MESSAGE 19 FIVE-YEAR GROUP FINANCIAL HIGHLIGHTS REVIEW OF FINANCIAL RESULTS Rationale The cover design for this year s Annual Report depicts an architectural drawing of the foundation of the PETRONAS Twin Towers, our corporate headquarters. Based on Islamic geometric traditions,