THOUGHTS
03/06/2020 03:45 PM
Opinions on topical issues from thought leaders, columnists and editors.
By :
Zulkifli Abd Rani

Introduction: The Current Oil Crisis and the Next Opportunities

The world and business leaders are scrambling and fighting to deal with the major crisis today. Indeed, we are going through a very tough and rough journey today dealing with the coronavirus pandemic, low crude oil prices and economic recession at the same time. The current situation is a real ‘perfect storm’ not only for the energy sector, in particular the O&G industry (with which I am involved directly), but also for the whole world especially in the key major industries like aviation and land transportation (which depend so much on oil utilisation), to name a few.

This scenario in reality will present a great opportunity for all key stakeholders, especially the government policy makers and the respective responsible GLCs, to revisit the key strategy, policy and roadmap on:

1) Energy Enhancement on existing O&G business (both upstream and downstream sectors) especially on its strategy and action; and

2) Energy Transition from the ‘dirty’ fossil fuel O&G to the ‘clean’ Renewable Energy especially on policy and priority.

It is possible to believe that this global crisis that we are in today would somehow RESET and SPEED UP the strategic thinking of the government and major O&G companies with respect to the above issues, provided that we must tackle the following pertinent issues diligently and smartly as soon as possible on:

i) market madness,

ii) power plays,

iii) the rise and ruin of the new oil landscape,

iv) national energy security,

v) major spin off from the new landscape,

vi) which O&G sector (upstream & downstream) to prioritise?

vii) which renewable energy to prioritise with respect to energy generated and GHG compliance?

viii) total economics of renewable energy from a complete value chain,

ix) R&D of renewable energy with respect to new technology innovation and deployment, i.e. our universities and research centres’ capability and capacity,

x) ‘one focal point’ for government on leading and managing strategic framework or policy on how to chart a clear path for the renewable energy transition as. previously, we have seen the grey area such as MEA responsible for the Oil & Gas and MESTECC responsible for the Energy (read as Electricity).

The Malaysia Energy (Oil & Gas) Landscape

The current crude oil price collapse is just a passing phenomenon and when the economy picks up, the price will recover too but the exact question is when the economy will recover?

The O&G industry will remain the biggest primary energy source for the future still, even after this deadly coronavirus pandemic, though electricity generated by fossil fuels contributed about 25 per cent of harmful emissions in the world, but serious efforts are being taken by the O&G industry to curtail this. Noted that the world is in transition today towards the low-carbon Renewable Energy aka RE. As I had said it repeatedly before, most of us are only focusing on and are interested in adding the Electricity MegaWatt (MW) capacity from RE especially via massive on land Solar PV projects but not interested in solving the real issue on RE on Solar PV and Biomass which is reducing or eliminating the dirty Green House Gases (GHG) released to the atmosphere which have polluted our environment all along with GHG number of 8.2 TPC exceeding the allowable limit of 4.8 TPC and caused severe health and safety problems to the people at the same time. Pollution affects us all.

But, the turbulence that we are facing today will potentially spell the difference between our survival and disappearance in this harsh and hostile environment that we are in today. That's why the Energy industry today (specifically O&G industry) needs great far-sighted view and strategic leaders who possess the shrewd risk-taking, firm decision-making and broad big-picture thinking leadership skills and must sound an optimistic note against a chorus of pessimists and be able to weather the storm during this tough and rough journey of the low oil price situation hammered with the ongoing coronavirus pandemic.

Decoding the Economics of Coronavirus aka COVID-19

With coronavirus cases, both infected and deaths, growing worldwide, it is noted that the coronavirus has had a very severe significant impact on the global economy. It ranges from plummeted stocks to loss of jobs, slumping business sales to stalling supply chains and the collapse of business productivities and markets.

The coronavirus pandemic has battered demand for the crude oil or fuel, with every major economy into lockdown as people are being quarantined to stay at home and economic activities remain subdued. The economic effects are real and it will definitely change the world and its population with respect to business, education, health and behaviours.

Recently there was a hot topic discussed in public with respect to the future of the O&G industry post-pandemic and whether the O&G industry/business will remain either the potential 'winners' or 'losers', or both, during the short- & long-term impact of the coronavirus aka COVID-19 pandemic? How would the current 'crisis' shape up and speed up on the Energy Enhancement on O&G business as well as the Energy Transition policy from 'dirty energy' of fossil fuel O&G to 'clean energy' of Renewable Energy?

1) Energy Enhancement in Oil & Gas Business

The coronavirus is a global pandemic and most nations in the world implemented quarantine/lockdown in an effort to fight the spreading/transmission of the deadly disease. The current situation is a real 'perfect storm' not only for Energy, in particular the O&G industry, but also for the whole world especially in the key major industries like aviation and land transportation (which depend so much on oil utilisation), to name a few. The impacts have significantly reduced travel and transport, causing an unprecedented decline in demand for oil, while weaker economic growth will likely further reduce commodity demand especially for energy and this could be the beginning of the rise of serious virtual business landscape and technology especially when almost 90 per cent of the people around the world are having a lockdown and currently operating ‘work from home’. Hence, the remote working culture will become more strategic and important post-pandemic.

First of all, before we touch upon the subject of Energy Transition, let us dwell with this whole scenario today on the Energy Enhancement in the O&G industry which can be best explained/described from the perspective of the impact of low and high crude oil prices on the world's economy negatively (i.e. reduced revenues/incomes to government, etc.) and positively (i.e. higher incomes to government & lower cost of feedstock to refineries, etc.).

To be quite honest, I would place the 'scale' more towards 'winners' than that of 'losers' to reflect the above questions and here are the reasons why in my humble view.

The O&G industry, especially the Upstream, Exploration & Production (E&P) arm, is the strongest sector of any O&G major company in the world. Since the very beginning, most E&P companies have been focusing too much on 'growth' rather than 'value'. All of a sudden, since the double trouble crisis of coronavirus pandemic since November 2019 and crude oil prices crashing since Mac/April 2020, the O&G companies especially E&P have shifted their focus now away from 'growth' in favour of 'value'. To date, the O&G industry has experienced four crises of crude oil price collapse since the formation of the OPEC cartel, i.e.:

i) Mid 1980s,

ii) Asian financial crisis in 1997 / 1998,

iii) Great economic recession in 2008 / 2009,

iv) Supply vs Demand not in equilibrium in mid-2014 through end-2017,

v) The recent one coupled with the deadly coronavirus pandemic effect which could be the worst ever in our O&G history starting from March 2020.

Yes, the threat of both the coronavirus pandemic and the crude oil price collapse is real and very damaging and devastating indeed, not only to our Education, Economy and Eco-systems but the worst on Energy as it:

i) threatens the viability of many large-scale O&G projects today, especially in the upstream sector,

ii) jeopardises the survival of many key energy services companies and employees,

iii) creates a sizeable gap in the budget of governments that really rely heavily on O&G revenues, like Malaysia, etc.,

iv) leads to an economic downturn / recession,

v) leads to potential major unemployment in this key sector as more people will lose their jobs.

So in simple logic and philosophy, the crude oil price collapse is a big headache for the upstream (E&P) business though, however, it is indeed good for the downstream business (in term of revenues & profit growth) as feedstock cost is lower and, assuming the demand for products is higher (though it may be slowing down now as almost all major businesses stop), we must caution everybody, however, that the effects vary by segments of business in downstream, i.e. refineries & petrochemicals.

Yes, we are fully aware that the downstream sector of the O&G business, like the refineries and petrochemicals business, may be making huge profits during this time as feedstock is now very cheap. However, we still see the need for critical action for the downstream sector during this trial and testing time, especially on:

i) increasing operational flexibility with an abundance of oil supply relative to demand; they can save feedstock costs by capitalising on the abundance of distressed cargoes in the market,

ii) trading opportunities in a crisis time like this and companies with spare storage capacity on land,

iii) new business of offshore storage oil products at sea using tankers / vessels,

iv) accelerating transformation programmes with top priority on quick win on this environment and look for margin optimisation & storage debottlenecking over energy efficient initiatives while re-assessing inventory targets,

v) pushing for Merger & Acquisition (M&A) potential opportunity where the challenges of low crude oil prices pose to upstream could spur increased industry consolidation and collaboration. Indeed the current low-oil-price environment presents a unique opportunity for downstream sector if we really know how to take advantage of it.

Likewise for the upstream E&P sector too, we see the need for us to really reflect and re-assess seriously and sincerely our key areas on:

i) cost control & cost efficiency as we are not good at it in this area, especially during a high oil price environment as we place too much premium on growth and accelerated production, sometimes sacrificing on our risk management and Health, Safety and Environment (HSE) rules and requirements. Good example, we have many positions in the O&G companies that don't create values today to meet peak growth and scale like higher head counts despite low production & oil prices;

ii) reservoir management strategy with respect to depletion of early oil and gas, especially contributions from profitable easy oil from shallow water fields;

iii) revisit of our organisation with respect to ‘critical skills & talents’ and do the organisational right-sizing by optimising head count & upgrading / upskilling talents, especially to manage the Energy Enhancement and Energy Transition and inculcate back the high spirit of nationalism, patriotism and entrepreneurship as data has shown that most O&G companies, especially the upstream E&P sector, has relied upon ‘Competitors / Contractors’ to fill the gaps in organisation (estimated around 30 per cent);

iv) maintenance optimisation (that's why we need our ‘regional integrated O&G services hub’ now as more O&G companies will turn into the ‘maintenance, repair & overhaul MRO mode’ during this period of time);

v) technology & technical standardisation, move from 'best in class' to 'good enough solution' etc as it will lead to massive cost-reduction initiative;

vi) great opportunity for Merger & Acquisition (M&A) especially to acquire the local production assets from the existing international O&G operators at home for resource nationalism strategy as an effort to maximise and optimise local national production;

vii) great opportunity for any country involved and depending heavily on its revenues from O&G to start thinking about switching to the alternative reliable new energy for new source of revenues in the form of Renewable Energy seriously and sincerely with solid new framework, policy and strategy;

viii) re-position our O&G upstream entrance into strategic locations / ventures in perhaps the East Africa continent, the new ‘Jewel of the Nile’ in the O&G business.

2) Energy Transition from Fossil Fuel to Renewable Energy

That's the first debate on the Energy Enhancement that could be seriously considered to safeguard the O&G industry / business post coronavirus pandemic on both the upstream and downstream business sectors.

What about the Energy Transition from the so called 'dirty energy' of fossil fuel to 'clean energy' of renewable energy that everybody right from the world leaders, politicians, policy makers, industry technocrats, technologists, university academicians & researchers, vivid environmentalists are talking about even long before the attack of this deadly coronavirus aka COVID-19 pandemic takes place. Would it shape up and speed up the Energy transition policy per say now post-coronavirus pandemic?

The Roadmap of Total Energy Industry in Malaysia

(Extracted from ‘EMOG Intel Report’ Version 1 dated December 2019)

The current global crisis of low crude oil prices coupled with the coronavirus pandemic, with very unlikely hope of early recovery to settle at the most desired price of crude oil at the range between US$40 and US$45 per barrel by end-2020, has now shaped up the Energy industry landscape and roadmap moving forward.

What choice do we have as a country, company and citizen at this stage? We have to face it bravely with confidence, fortify our internal strategy decisively and fight it like a bull to push through the ‘new norm’ in the Energy industry. There is something that we will learn best in calm and some in storm as leaders in the industry.

A great leader must be tested to the fullest and must know how to weather the storm during turbulent times as turbulent times will always build a great leader.

I want to be very realistic here. The full swing transition from Conventional Energy fossil fuel to Renewable Energy will happen one day at the right time once everyone is ready, and now will probably be the best time. Though the transition may sound so simple but it isn’t actually. There are a few policy, technical and operational challenges that need to be addressed seriously as best described in the following diagram.

In my humble view, the best way forward in pushing the Energy Transition into a low carbon economy is by appreciating the combined efforts of the renewable energy with natural gas being the cleanest of fossil fuels playing an essential ‘temporary bridge’ to that low carbon nirvana. In doing so, pragmatism rather than dogmatism is necessary here and is the name of the game today and in the future in the New Energy World.

Indeed, this new scenario post-coronavirus pandemic will present the new opportunity for the New Energy World when it reopens to change, i.e. on:

i) changing consumer / citizen behaviour to have less dependency on oil utilisation in their daily life,

ii) eliminating energy subsidies in emerging market and developing economies like Malaysia,

iii) pushing major O&G companies proactively with the strong support from Government as the new and real industry leader instead of being a follower in the investment and innovation on ‘green technology & energy’ versus the old mind-set / strategy of ‘wait & see’ for others to venture first.

Conclusion

There is an urgent need to set up officially the much-needed strategic independent think tank outfit to advise government on the ‘Centre for Energy Transition & Climate Intelligence’ aka CETCI, a joint effort initially by EMOG and MIER based on an MoU signed on Oct 1, 2019, with the potential inclusion of Petronas and MiGHT with proper allocated resources and funds required with focus amongst others to address the strategic Future Energy beyond Oil & Gas in investment, research & development & innovation and development / operation of:

A) High Impact Renewable Energy Leadership

i) Biomass Strategy into higher value downstream uses such as for (Biomass-to-Energy, Biomass-to-Biojet fuel, Biomass-to-Bioproducts),

ii) Hydrogen Economy, especially on Solid State Green Hydrogen, that can be easily transported, stored and traded worldwide to demand centres;

iii) OTEC (Ocean Thermal Energy Conversion) to provide Clean Energy to be applicable offshore deepwater (of more than 700 metres water depth), fresh high quality mineral water and high value protein foods, etc.;

iv) Energy storage via Lithium-ion (Li-ion) Battery Technology, capitalising the US$1.7 billion ‘funding’ committed into batteries in 2019, with 80 per cent going into Li-ion battery technology.

B) New Strategic Niche of Oil & Gas

i) Greater value added investment in downstream projects in exploiting our feedstocks such as natural gas, ammonia, methanol, etc. at the designated industrial zones such as Sipitang Oil & Gas Park in Sabah, Tanjung Piai Petroleum Complex in Johor and Tanjung Agas Oil & Gas Hub in Pahang.

ii) Positioning Malaysia as the new ‘hub of storage and distribution’ of Oil & Gas products considering Malaysia is an ideal location as it is free from major natural disasters like typhoons, earthquakes and volcano eruptions apart from being a very strategic gateway to East Asia markets, especially China and Japan.

iii) Positioning Malaysia as the new ‘Regional Integrated Oil & Gas Services Hub’ especially on MRO, ISO Tank for LNG, Offshore Maritime Station to cater for both upstream and downstream business sectors

Those are some of the ‘critical measures’ for Energy Enhancement needed to be considered seriously in order to help the Oil & Gas industry as the Oil & Gas industry is still our largest and most important industry in Malaysia in terms of share of value added, government revenues and dividends, export values and economic contributions to the country and citizens of Malaysia in addition to the Energy Transition to the high-impact Renewable Energy strategic plan in a post-coronavirus pandemic world.

Last but not least, always remember this ‘mantra’ below:

“If you control the FUEL, then you control the NATION; if you control the FOOD, then you control the PEOPLE; if you control the FLUID (water), then you control EVERYTHING.” All the best and good luck Malaysia. Together we will build this beloved country once again under the strategic leadership.

“Empowering education and reshaping energy.”

-- BERNAMA

Zulkifli Abd Rani is Adjunct Professor at the Muslim University of Morogoro, Tanzania, and Chairman of the EMOG (Energy, Maritime and Oil & Gas) Think Tank.

(The views expressed in this article are those of the author and do not reflect the official policy or position of BERNAMA)

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