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Oil And Gas Sector Industry

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  • 1. .'1 33 29 September 2010 | Industry Update Oil and Gas Sector Maintain OVERWEIGHT The making of a Premier Hub for Oil Services Oil and gas initiatives. PEMANDU has identified 8 entry point projects (EPPs) under the oil and gas sector that may potentially raise the nation’s gross national income (GNI) by RM26.8 billion by the year 2020. The specifics of the EPPs will only be released on 26 October but the headlines plus our commentaries are as follows: GROWTH IN UPSTREAM Rejuvenating existing fields through Enhanced oil recovery (EOR). Petronas, together with its exploration arm Pertonas Carigali, and Exxon Mobil entered into a USD 2.1 billion EOR joint venture (JV) project in 2009. The maiden domestic EOR project is located at Tapis as well as 6 other local oil and gas fields, namely Seligi, Guntong, Semangkok, Irong Barat, Tabu and Palas. Under the terms of the Production Sharing Contract (PSC), the JV partners will undertake major EOR projects, rejuvenation of facilities as well as development and drilling activities in the fields. Previously, technological hurdles and costly implementation have often kept the oil industry from using EOR. However, EOR is becoming more feasible due to new technologies and relatively high crude oil prices. We expect more of such domestic EOR JV to be concluded going forward involving other oil fields and JV partners. The EOR project is hoped to help raised the recovery rates of local matured fields from the prevailing 20+% to levels comparable with North Sea fields of circa 40+%. APPROXIMATE LOCATION (IN CIRCLE) OF TAPIS AND SIX OTHER FIELDS, NAMELY SELIGI, GUNTONG, SEMANGKOK, IRONG BARAT, TABU AND PALAS Source: Petronas, MIDFR Develop small fields through innovative solutions. The oil industry is turning towards the development of smaller oil fields due to the decrease in large discoveries. The development of small fields may however present many challenges particularly the need to work in locations where conventional oil field facilities (i.e. pipeline and storage) may not be readily available or deployable. Nonetheless the development and economic success of small oil field with the use of innovative solutions such as the utilization of the Floating Production Storage Offloading (FPSO) system demonstrated the feasibility of turning these oil fields into viable business options. Intensifying exploration activities. Malaysia’s Reserve Replenishment Ratio (RRR) currently stands at 1.1x which is well below its historical average of 1.4x hence the need to intensify domestic exploration efforts. Petronas has recently announced its intention to allocate more resources on local exploration and production (E&P) activities. KINDLY REFER TO THE LAST PAGE OF THIS PUBLICATION FOR IMPORTANT DISCLOSURES
  • 2. 0,') (48,7< %($7 :HGQHVGD 6HSWHPEHU Reserve Replenishment Ratios (RRR) Year (FYE March) RRR 2006 1.80x 2007 1.40x 2008 0.90x 2009 1.80x 2010 1.10x Source: Petronas GROWTH IN DOWNSTREAM Unlocking gas demand in Peninsular Malaysia. The domestic gas demand-supply equation will be driven mainly by the depleting supply especially from Peninsular Malaysia fields. Sources indicate that the present offshore Terengganu gas supply is estimated to suffice demand only until 2021, with first indication of reductions expected by 2017. Nevertheless, replenishment of new gas supply will be delivered from Petronas’ East Malaysia fields as well as its Australian LNG development (Gladstone, Western Australia) comprising of bed-methene and coal seam gas. First investment decision on the Australian LNG project is expected to be announced by 2011-12. The proposed re- gasification plant located in Melaka will also act as an entry point to the external gas sources, hence addressing the impending Peninsular Malaysia gas supply shortage. This will also unlock values from Petronas’ (via Petronas Gas) present gas pipelines, emphasizing on the gas transmission business apart from its traditional processing business. We view this beneficiary towards Petronas Gas, given it being the owner of Peninsula’s only gas pipeline system. Building a regional oil storage and trading hub. A huge oil storage facility will be built next to neighboring Singapore to form a regional oil products trading hub. While the exact location of the facility was undisclosed however we believe it to be in Tanjung Bin, southwest of Johor (other location is in Tanjung Pengerang, southeast of Johor). Vitol Tank Terminal International (VTTI), which is 50%-owned by MISC Berhad, is building a major new oil terminal in Tanjung Bin with initial capacity of 750,000 cubic meters. Tanjung Bin is geographically strategic due to its close proximity to Singapore tank terminals which are located mainly in Jurong, west of Singapore. This proximity may help to facilitate convenient logistics and trade activities between the two oil storage centers. We believe this initiative would be a boost for the domestic oil terminal business. Malaysian players will able to tap into Singapore’s proven oil terminal market and shall present opportunities to widen our clientele networks. MAKING MALAYSIA AS ASIA’S PREMIER HUB FOR OIL FIELD SERVICES Consolidating the domestic fabricators. There are currently six Petronas-licensed major fabricators (see Table below) in addition to other smaller companies. We reckon the proposed EPP would involve the merger or even outright acquisition of smaller fabricators by the bigger players. Moreover we expect the three largest fabricators, namely Malaysia Marine and Heavy Engineering (MMHE), Sime Darby Engineering (SDE) and Kencana Petroleum (Kencana) to become the ‘anchors’ upon the consolidation of local oil field service industry. The consolidation exercise is seen to help elevate the capacities of local oil field service companies thus increasing their likelihood of winning major contracts locally and overseas. Company Location Capacity (tpa) MMHE Pasir Gudang, Johor 69,200 SDE Pasir Gudang / Teluk Ramunia, Johor 107,700 Kencana Lumut, Perak 48,000 OilFab Pulau Indah, Port Klang 16,000 Boustead Penang Shipyard Pulau Jerejak, Penang 9,000 Brooke Dockyard Sejingkat, Sarawak 5,000 Source: Petronas, MIDFR 2
  • 3. 0,') (48,7< %($7 :HGQHVGD 6HSWHPEHU Attracting MNCs to bring their global oil field service and equipment operations to Malaysia. The world’s largest oil field service companies such as Schlumberger, Halliburton and Baker Hughes do currently have some degrees of presence in Malaysia. However it is hoped that they will increase their scope of activities by bringing their global oil field service and equipment to Malaysia. We opine that a well mapped out, orderly and robust development of the local oil and gas industry is in itself a pull factor for these major players to choose Malaysia as their regional hub and to increase their activities in the country. We view the EPPs as the catalysts for a more robust development of the domestic oil and gas industry. Developing engineering, procurement and installation capabilities and capacity through strategic partnerships and joint ventures. Upon consolidation of the domestic oil field service players, the local ‘anchors’ will be in more favourable positions of strength to enter into joint ventures as well as strategic partnerships with the world’s largest oil field service companies. These arrangements may help to expedite the development of domestic engineering, procurement and installation capabilities and capacity. CONCLUSION Most of the companies under our oil and gas sector coverage are oil field service contractors that will most likely benefit from the increased activities particularly in the upstream oil and gas sector. The oil and gas initiatives which pertain to the upstream and downstream growth of the domestic oil and gas sector are mostly ongoing but nonetheless are now given more prominence with their inclusions in the EPP. However the proposed strategic partnership and consolidation of the domestic fabricators as well as the efforts to attract global oil field service companies to Malaysia are novel EPP ideas that are seen to help elevate the level of competencies and competitiveness of the local oil field service and equipment sector and turning Malaysia into the regional hub for oil field services. Despite lacking in details, we view the EPPs positively as they are meant to provide the impetus for a more robust development of the domestic oil and gas industry. Maintain OVERWEIGHT on the sector as we await further details on the EPP initiatives. 3
  • 4. 0,') (48,7< %($7 :HGQHVGD 6HSWHPEHU MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been TRADING BUY assigned due to positive newsflow. NEUTRAL Total return is expected to be between -15% and +15% over the next 12 months. SELL Total return is expected to be <-15% over the next 12 months. Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been TRADING SELL assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE The sector is expected to outperform the overall market over the next 12 months. NEUTRAL The sector is to perform in line with the overall market over the next 12 months. NEGATIVE The sector is expected to underperform the overall market over the next 12 months. 4