Singapore — Malaysia, the Southeast Asian petrostate that gets around a fifth of its revenue from oil dividends, is faced with several months of low prices and demand destruction for its oil and gas exports, but analysts expect it to weather the crisis better than many of its peers.
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As far as petrostates go, Malaysia is closer to Norway, than it is to a failed petrostate like Venezuela, because of its prudent handling of its oil riches and hydrocarbon assets under its national oil company Petroliam Nasional Berhad or Petronas.
This is also why it is likely to emerge relatively unscathed from the current market turmoil, where oil prices have fallen to less than half of the roughly $65/b budgeted for this year, and spot LNG prices hit a record low of under $2.40/mmBtu last week.
The new Malaysian government's fiscal deficit is also affected by the coronavirus, which has spiraled into a financial and liquidity crisis, forcing it to resort to economic stimulus like its latest $58 billion package to prop up vulnerable sectors.
Malaysia's GDP growth outlook for 2020 is 2.4%, much lower than the 4.3% seen in 2019, according to S&P Global Ratings, which also forecast a 3.5% growth rate for Asia Pacific's emerging markets in 2020. This is the lowest growth this economic cluster has registered since the Asian Financial Crisis of 1997-98.
Still, S&P Global Ratings maintained its sovereign credit ratings for Petronas and said the national oil company is among those able to counterbalance the impact of the pandemic and benefit from substantial savings that allow them to manage oil price fluctuations.
"The Malaysian government derives slightly less than 20% of its total revenue from oil-related sources," it said in its report dated March 26.
"The single largest component of this revenue is the dividend paid to the government by state oil company Petronas, which we expect to be maintained at Malaysian ringgit (MYR) 24 billion ($5.5 billion), as allocated in the government's original 2020 budget," Ratings said.
An unenviable task
Hence, Petronas is saddled with the unenviable task of juggling stable dividend payments to the government, meeting energy security needs by boosting oil and gas production levels and cutting capex to save cash.
To fight COVID-19, Malaysia issued a movement control order that stopped all non-essential public activity, first up to March 31, and then April 14. It also imposed several restrictions on air and land travel.
Such lockdowns have caused massive demand destruction in transportation fuels, forcing product cracks for both gasoline and jet fuel into negative territory and cratering refinery margins across Asia.
Asian refiners will cut throughput by 4 million b/d in the second quarter as the demand destruction accelerates and storage capacity runs out. Asia's oil demand will fall by 3 million b/d year on year in the first half of 2020, according to Platts Analytics.
However, Petronas, which operates the $16 billion refinery complex in Pengerang called Prefchem in a joint venture with Saudi Aramco, will be able to dodge this bullet as it already went into an involuntary shutdown last month due to an industrial accident.
It is also worth noting that Prefchem was constructed after the last oil price crash of 2015, when Petronas continued to spend selectively despite large capex cuts across the industry.
Malaysia's domestic oil and gas production continues to decline, and Petronas will again have to decide where it cuts spending, ranging from shale investments in Argentina that are uneconomical at current prices, to flagship projects like LNG Canada led by oil majors that are already slashing capex.
Petronas' flagship LNG business in particular faces challenges, with Malaysia the world's fifth largest LNG exporter, and Petronas evolving into a gas company in the long run.
China is Malaysia's second-largest LNG trading partner after Japan, and since China went into lockdown Malaysia's exports to the country fell 20% this year to date.
But Malaysia's overall LNG exports remained stable as losses in China were almost entirely covered by exports to South Korea, Chinmayee Atre, LNG analyst at Platts Analytics said.
Going forward it may not be so fortunate.
Atre said Malaysian LNG exports are 100% in the Asia Pacific region, concentrated in China, Japan and Korea, which may not be able to support Malaysian exports going forward.
"Malaysia did not really face the impact of COVID-19 on its LNG exports to date but is likely to face pressure in at least the upcoming quarter," Atre said, citing weakening gas demand and souring economic activity hitting global supply chains.
Petronas exports at least 10% of its LNG on the spot market and as global suppliers flood the market, Malaysia's ability to compete will determine whether it can sustain its LNG exports this quarter, she said.