• IPI declined further by -0.5% YoY in September dragged by weak mining output

• Malaysia has long been a dependent on the O&G sector for a range of purposes

• Higher oil and gas prices have been a welcome change for oil companies

• Primary focus will continue to be towards allocation of greater capital towards maintaining oil and gas production

• The oil and gas sector being an important growth driver of the national economy

The industrial production index (IPI) measures the change in output in Malaysian manufacturing, mining, and electricity. Output refers to the physical quantity of goods produced, unlike sales value, which combines quantity and price. The index covers the production of goods and power for domestic sales in Malaysia and for export.

The latest data showed the IPI continued to decline in September 2023 or by 0.5% YoY after registering a negative 0.3% recorded in the previous month. The decrease was mainly influenced by the 5.2% YoY downturn in the mining sector. On the other hand, the manufacturing sector returned to a marginal growth of 0.4% YoY (Aug: - 0.6%), after experiencing a declining trend for three consecutive months. Meanwhile, the electricity sector ascended by 2.5% YoY as against 1.9% registered in August. Nevertheless, on a monthly basis, the IPI showed continuous expansion with 1.1% growth, after registering 2.8% in August.

The output in the mining sector edged downward by 5.2% YoY in September as against a positive 0.1% recorded in August. The downward trend was influenced by Natural Gas production which returned to negative territory, with a decline of 7.8% as opposed to the 2.6% increase in August. Additionally, Crude Oil & Condensate output continued its declining trend, registering a negative 1.4% in September (Aug: -3.3%). In comparison with the preceding month, the mining index decreased by 1.6% as compared to the negative 5.4% recorded in August.

The IPI registered a marginal decline of 0.04% YoY in 3Q23, slight improvement from -0.3% YoY in 2Q23. By sector, the improvement was supported by sustained growth in electricity generation (3Q23: +2.0%; 2Q23: +2.8%) and slower decline in mining output (3Q23: -0.4%; 2Q23: -2.8%), attributable to rebound in crude petroleum output and slower fall in natural gas output. Manufacturing output fell marginally by -0.1% in 3Q23 (2Q23: +0.1%yoy), the first quarterly contraction since 3QY21.

Overview of oil production in Malaysia

Focusing on the mining component of the IPI, it is better that we understand the oil production in Malaysia.

The Mining sector covers the production of crude oil and natural gas which together accounted for 83.1% of the value of gross output. According to DOSM, Mining is part of the Category "Mining and Quarrying". It is defined as "extraction, dressing and beneficiating of minerals occurring naturally as solids such as coal and ores, liquids such as crude oil or gases such as natural gas. Extraction of minerals is undertaken by such processes as underground or open casting (open pit) mining, dredging, quarrying, the operation of wells or evaporation pans, or by recovery from ore dumps or tailings. All supplementary activities aimed at preparing the crude materials for marketing, done generally near or at the mine site as crushing, screening, washing, clearing, grading, milling, flotation, melting, pelleting, topping are also included".

Since 1974, Malaysia has produced 9bn barrels of oil and 50tn cubic feet of gas. According to report, Malaysia produces 660,000 barrels of liquids and approximately 7.0bn cubic feet of gas per day. The country's remaining commercial reserves are estimated at over 17bn barrels of oil equivalent from more than 400 fields, with gas making up three-fourths of the mix.

The year 2022 saw the oil and gas industry rebounding strongly as oil prices reached its highest level against crude oil benchmark prices after experiencing an unprecedented blow from the global economic contraction due to the COVID-19 pandemic and the continuing energy market imbalances. The race by governments around the world to reopen their economies as well as removing travel restrictions have contributed to a surge in demand despite the challenging economic landscape.

The majority of Malaysia's oil production comes from offshore fields in the Malay Basin in the West and the Sabah and Sarawak basins in the east. About 40% of the country's oil reserves are located in the Malay basin and tend to be light and medium sweet crude oil grades from shallow waters. However, in the past decade, more exploration and discovery of reserves have taken place in deepwater areas in eastern Malaysia. Deepwater areas require high quality and different completion services to reduce the production of water from the well, which helps the growth of the Malaysia oilfield services market.

Expect subdued growth outlook for mining sector in 2023

In the Ministry of Finance 2024 Economic Outlook, it was noted that the mining sector turned around to record 0.1% growth in the first half of 2023, supported by improved performance of crude oil and condensate as well as other mining & quarrying and supporting services subsectors. Meanwhile, natural gas subsector was subdued following interruption of operations in Peninsular Malaysia and plant shutdown in Sarawak. The mining sector’s performance is anticipated to contract by 1.7% in the second half of the year, owing to lower production of crude oil and condensate as well as natural gas. The decline in production is due to plant maintenance shutdown at several oil and gas fields as well as lower external demand for liquefied natural gas (LNG) amid challenging global environment. Against this backdrop, growth in the mining sector is projected to contract by 0.8% in 2023. With regard to oil prices, the MOF said that the Brent crude oil is anticipated to average around USD80 per barrel in 2023, partly due to dampening demand following weaker-than-expected recovery in China's economy and moderate global growth. However, proactive oil market management by OPEC+, as well as continued investments in the oil sector are envisaged to provide some support to prices.

Mining sector poised for expansion in 2024

The mining sector is forecast to rebound by 2.7% in 2024 driven by remarkable performance in natural gas as well as crude oil and condensate subsectors. Anticipation of first natural gas production from new gas field development projects such as Gansar, Jerun and Kasawari as well as higher production from the existing gas fields are estimated to boost the growth of the natural gas subsector. In addition, the mining sector is also expected to benefit from higher production of crude oil and condensate, especially in Peninsular Malaysia and Sarawak. In terms of prices, the Brent crude oil is projected to average at USD85 per barrel on anticipation of higher demand given the positive global outlook for the year. However, changes in world production and consumption could significantly alter the oil prices forecast.

Source: BIMB Securities Research - 13 Nov 2023