IS the decision by Petroliam Nasional Bhd (Petronas), to pay a sharply higher dividend this year to the Federal Government financially prudent and sustainable in the medium term?
Buoyed by a stunning 71.5% jump in net profit to nearly RM23 billion for the first half of this year, the national oil company announced it will pay RM24 billion in dividends to the Federal Government this year – a 50% hike from the RM16 billion level last year.
Higher dividends are financially feasible this year because oil prices have increased markedly and are likely to remain elevated in the short term.
This is due to the combined impact of US sanctions against Iran – resulting in possibly 1.5 million barrels per day (bpd) withdrawn from the market effective Nov 4 this year – hiccups in Venezuela’s oil production and major producer Saudi Arabia’s inability or refusal to raise output immediately to meet this shortfall in supply.
On Monday, Brent crude oil futures closed at US$84.98 (RM351.81)/barrel. Post settlement, prices strengthened to US$85.45 – the first time that prices exceeded the US$85 level since November 2014.
Other indicators include open interest in Brent oil call options (giving the holder the right to buy a commodity) at US$90/barrel has risen to 38 million barrels in the past week, Reuters says. Hedge funds’ long positions also suggest markedly higher prices while some institutions like ANZ expect oil prices to hit US$100/barrel in the near term.
Higher oil prices will boost Federal Government coffers. In April this year, the then deputy finance minister Datuk Othman Aziz said the Federal Government will enjoy an additional RM300 million for every one US dollar rise in oil prices.
Despite buoyant oil prices, continually higher dividends are unsustainable because this could cause the federal government to slacken efforts to curb wasteful government expenditure, reduce its debt and eradicate corruption.
Furthermore, two factors suggest the need for Petronas to aggressively husband Malaysia’s oil, which has become more urgent.
First is the rapid growth of electric cars that could crimp oil demand in the long term.
About a third of global oil demand is from cars, Jim Burkhard, head of oil research at IHS Markit, told Patti Domm in CNBC.com.
A report by Carbon Tracker (CT), an independent financial think-tank, argues transportation has a bigger impact – accounting for 50% of oil demand.
Spencer Dale, group chief economist at oil major BP, concedes growth of electric vehicles (EVs) will accelerate over the next 20 years but asserts this won’t be a game changer. Global oil demand will be driven by increasing prosperity in fast-growing Asian economies, Dale predicts.
Laurence Watson, a CT data scientist, disagrees. Criticising oil majors’ myopia, he says there is a gargantuan mismatch between EV forecasts by car manufacturers and oil majors.
CT’s report says projections of EVs by oil majors – including Exxon and BP – are 75% to 250%, lower than those forecast by car manufacturers who have announced EV targets.
Writing in OilPrice.com, Nick Cunningham cites a report by Bloomberg New Energy Finance (BNEF) that suggests EVs will become cheaper than internal combustion engines in five years while electric buses will completely “dominate” this sector by the late-2020s.
BNEF forecasts EV sales will top 1.6 million this year from a few hundred thousand in 2014, an acceleration due to three factors:
> Battery costs have plummeted by 79% since 2010 – from over US$1,000 per kilowatt-hour (kWh) to US$209 kWh at end-2017;
> Governments continue to support EVs with various policy measures;
> Increasing sales of EVs in China due to the need to reduce air pollution. By 2025, China will account for roughly half of the entire global EV market.
Apart from EVs’ accelerating growth, another reason why Petronas’ needs to prioritise cash conservation is growing demand by Sabah and Sarawak for higher oil royalties from 5% to 20%.
Given these two states’ increasing importance in politics and energy, higher oil royalties are a given – the issue is the quantum and how this should be calculated.
According to the US Energy Information Administration, Malaysia has proven reserves of 3.6 billion barrels, of which the peninsula accounts for 40%. With Sabah and Sarawak contributing 60% of the country’s reserves, their bargaining power is strong.
Additionally, Sarawak’s 60 oil and gas fields pump 850 barrels of oil equivalent daily – or 42.5% of Malaysia’s total output.
Not surprisingly, compared with Sabah, Sarawak’s stance on higher oil royalties has been quicker and more determined.
Last year, Sarawak set up Petroleum Sarawak Berhad. This month, oil companies operating in Sarawak must apply for a licence to continue their operations.
Given the roughly 10-year gap between the discovery of oil to peak production, Malaysia’s only Fortune 500 company doesn’t have the luxury of adopting policies determined largely by short-term considerations.