• Petros has started to play its role as the sole gas aggregator in Sarawak in order to achieve its 10-year Sarawak Gas Roadmap (SGR) that aims to increase its domestic gas consumption to 30% by 2030.

• As Sarawak is prioritizing the gas allocation towards domestic industry over LNG export, we view this to affect Petronas’ Gas/LNG segment income. On the other hand, the impact to Petronas’ upstream segment is minimal.

• We think the realization of SGR would still depend on gas supply security in the long run, regardless of who is the gas aggregator. Thus, this requires large investment in upstream project. Hence, the possibility of Petronas cutting its upstream capex is low, in our view.

• Overall, we maintain an OVERWEIGHT recommendation on Oil and Gas sector. Against the backdrop of the upcycle in upstream capex spending, we remain in favor of upstream services companies particularly those that has exposure to greenfield projects. Our top picks are MMHE (TP: RM0.94), Velesto (TP: RM0.34), MISC (TP: RM10.30), and Hibiscus (TP: RM3.40).

Petros taking over from Petronas as the sole gas aggregator in Sarawak. Media recently reported that Petroleum Sarawak Berhad (Petros) has signed maiden gas sales agreements (GSA) with Sarawak Petchem Sdn Bhd and Sarawak Energy that would require it for the operation of new methanol plant and power plant respectively. The GSAs reflect the exercise of regulatory role that Petros has gained following its appointment as the sole gas aggregator in Sarawak, a role that was under the purview of Petronas previously. Among others, the role gives power to Petros to (i) purchase all gas produced from Sarawak waters from all upstream gas producers, and (ii) sell and distribute the gas to end-buyer as well as to decide the commercial terms including fixing the price and volume of the gas distribution.

Part of the larger scheme of thing. We understand that the changes that had taken place in Sarawak was a direct result of the Commercial Settlement Agreement (CSA) between the Sarawak state government and Petronas that was executed on 7th Dec 2020. Besides the gas aggregator role, the CSA also provides the state the power to regulate and manage Sarawak’s onshore oil and gas resources as well as to allow the state’s participation in the upstream ventures in offshore areas.

Realising Sarawak Gas Roadmap. The appointment of Petros as the sole gas aggregator is vital for Sarawak government to realise its 10-year Sarawak Gas Roadmap which aims to allocate 30% of gas production for domestic needs by 2030. Currently, it is estimated that only 0.3bn scf/day or 7% of Sarawak total gas production of 4.5bn scf/day is used domestically across power generation, petrochemical and industrial sectors. To recap, Sarawak has signed an MoU with Petronas back in Dec 2021 to increase the gas supply for domestic purpose to 1.2bn scf/day of gas (from 450mn scf/day) by 2030. Assuming Sarawak is able to maintain its gas production level at 4.5bn scf/day, this implies Sarawak’s domestic gas consumption of 27%. Notwithstanding, we think the abovementioned MoU may have been void as the changes in gas aggregator role take effect.

Implication. Given that Sarawak may redirect of its gas production towards its domestic consumption, we think this may affect the country’s LNG gas export volume. As such, this will negatively affect Petronas’ income from its Gas/LNG segment. Besides that, Petronas Chemicals may also be affected should there be any changes towards its favourable gas feedstock price arrangement with Petronas.

Should we have a concern on potential disruption to Upstream investment? We do not think so, as Sarawak government will require a sustainable investment in Upstream segment (particularly in greenfield project) in order to ensure gas supply security in the long term. From capital allocation point of view, we think that it is a bad decision for Petronas to cut its greenfield upstream capex merely due to lower income from other segment. This is even more peculiar given that the economics of greenfield project remain viable amidst higher oil and gas price environment. Hence, we view that idea (i.e. Petronas will cut its Upstream capex amidst lower revenue) as a gross oversimplification.

As such, we reiterate our view that the outlook for offshore projects should remain constructive so long as oil price remain above USD60-70/bbl. Hence, this will benefit MMHE as the largest fabricator for offshore structures in Malaysia. Besides that, drilling projects will continue and this will benefit Velesto as the sole jack-up rig provider.

Maintain OVERWEIGHT. All in, we maintain an OVERWEIGHT stance on the Oil and Gas particularly on upstream players premised on the uptick in oil and gas offshore capex spending. Our top pick remains as the following: MMHE (TP: RM0.94), Velesto (TP: RM0.34), MISC (TP: RM10.30), and Hibiscus (TP: RM3.40).

Source: BIMB Securities Research - 9 Aug 2024