Highlights

• State assumes full authority. Sarawak Chief Minister (CM) Datuk Patinggi Abang Johari Openg recently announced that Sarawak will assume full regulatory authority over the upstream and downstream aspects of the oil & gas (O&G) industry in the state by July 2018. As a result, all persons and companies involved in Sarawak’s O&G industry must have the necessary licences, permits, leases and approvals required under either the Oil Mining Ordinance or the Gas Distribution Ordinance.

• Launching of Petros. The announcement was made together with the launching of Petroleum Sarawak Bhd (Petros). Petros will be granted rights to mine oil and natural gas in Sarawak and will also be the delegated regulatory and supervisory authority. To recap, Petros was formed last year as a wholly-state owned O&G company in order to enable Sarawak to actively participate in the extraction of O&G in Sarawak.

• Relevancy of PDA. One of the major unresolved and critical issues is that Sarawak’s O&G resources are still governed under the Petroleum Development Act (PDA) that was passed in 1974. Under PDA, Petronas is the custodian and manager of all O&G resources in Malaysia. If PDA does not apply to O&G resources in Sarawak, the impact on local O&G industry could be huge given the significant share of O&G reserves possessed by Sarawak. According to The Edge, data from the Energy Commission shows that as at end-2015, Sarawak possessed 28.7% of known national oil reserves and accounted for 29.4% of national production. As for gas, Sarawak accounted for 52.7% of the country’s known reserves.

• Territorial waters controversy. Another critical issue is Sarawak’s claim to its territorial waters. The major controversy surrounding this issue according to Sarawak CM is change of Sarawak boundary from 12 nautical miles to 3 nautical miles without the consent of the state. This issue is significant as hydrocarbon deposits in Malaysian waters mostly occur beyond the three-nautical-mile line.

• Local “Sarawakians” to be championed. We feel that this recent development on Petros reflects Sarawak’s growing autonomy over its resources. In our view, once Petros takes charge of the state’s O&G industry, it is likely to champion home grown “Sarawakian” service providers. With this in mind, the key beneficiaries would include

Dayang (BUY, TP: RM0.91) and KKB Engineering (not rated) via its 51% stake in Oceanmight.

Risks

• A sharp decline in crude oil prices.

Rating

Maintain NEUTRAL

• We opine that upstream activities are recovering albeit at a slower rate due to recovery of oil prices.

• Top picks: Dayang and UMWOG ( BUY ; TP: RM0.44 ).

Source: Hong Leong Investment Bank Research - 9 Mar 2018