The Strategist

Petronas Is Reducing Spending by $ 11.4 Billion

01/19/2016 - 15:09

Petronas is forced to cut spending by $ 11.4 billion. The Malaysian state oil company had to work out new savings plans when quotes for Brent crude fell below $ 30 a barrel. The Capex reduction program is designed for 4 years.

Eddie Stobart via flickr
Eddie Stobart via flickr
Petronas is the largest source of income for the country. One-third of the annual budget of Malaysia is formed from the proceeds of the company. Here we can draw quite obvious parallels with some other commodity-dependent economies.

The current budget of Malaysia was set on the basis of $ 48 per barrel of Brent, which is already nostalgic. Next week Prime Minister Najib Razak will have to submit a plan curtailment to Parliament. The government is confined to cut spending after Petronas. The company has already warned that it will have to cut dividends, on which State relies, by 40% at once.

Malaysia is the second largest exporter of oil and natural gas in the whole of Southeast Asia. And, as it happens at low valuations of hydrocarbons, mischances never come single. The national currency - the ringgit - is rapidly falling. There is political instability looming in the background of a corruption scandal in 1MDB (Malaysia's largest state investment fund).

Petronas had big plans for the future before the critical fall in prices. The company intends to build a south complex of refineries and petrochemical plants worth $ 16 billion, as well as to develop capacity to export gas together with Canada, which would cost $ 28 billion. Now, the ambitions are put on hold.

Signs of problems in Petronas were visible for a long time. Net income has been falling for four consecutive quarters. In the spring of 2015, the company had to issue bonds for $ 5 billion. This was a record for not only the Petronas, but also the largest bond issue in Asia over the past year. Apparently, even at $ 60 per barrel of Brent, Petronas understood that leverage is vital, and with further falls will make the company introduce austerity.

The state oil companies of Thailand, Indonesia and Vietnam are also reducing costs, just like all the world. According to Wood Mackenzie, during 2 years of falling global oil prices, Capex cut amounted to $ 380 billion, which at some point may lead to a shortage of hydrocarbons.


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