Oil & gas: All quiet on the consolidation front

PETALING JAYA: While talk of consolidation in the oil and gas (O&G) industry has been around since the plunge in global oil prices last year, analysts opine that the process, if it indeed happens, will be on a small scale, as its positive effect is limited.
An analyst who declined to be named said consolidation won't change the cost structure for O&G firms, thus it is not expected to happen "in a big way".
"If you consolidate all the assets, it won't change your cost structure much. So the synergy of doing consolidation is not much. They don't have incentives to go into M&As (mergers and acquisitions). Maybe one or two acquisitions will happen, but they won't be big and change the industry," he said.
"So far, we've seen only one consolidation, the takeover of Perdana Petroleum Bhd by Dayang Enterprise Holdings Bhd last year," he added.
When pursuing an acquisition, another analyst said, the O&G companies must manage it properly.
"Most of the asset cost is depreciation. During a market downturn, you need to do a lot of write down as the structure is not competitive," he explained.
On the potential that could be reaped through expansion into the downstream O&G segment, analysts are cautious as it is a cyclical industry as well.
"I don't think it will happen in a big way. It has ups and downs and the refining margin will go up and down," the analyst said.
He noted that the downstream industry has started to pare down its gains following a significant rise last year due to the sharp fall in oil prices.
"But the trend seems to be reversing as the refining margin has come down in the first quarter of the year, so I don't think it will attract many players to the downstream segment," he added.
Besides oil prices, he said, the refining margin is also determined by demand and supply of products such as petrol and diesel,
In the near term, at least for this year, the refining margin will come down compared with last year.
"This year we see a lot of supply from refineries, I think the refining margin will stay at the lower side in the near term," he said.
The analyst also said the upcoming Pengerang project in Johor will increase the capacity for downstream products in Malaysia.
Another analyst said the concept of switching sub-segments is not simple given that most O&G players are service providers.
"For the upstream sub-segment, there are not many jobs now and the rate is low, this is evidenced in offshore support vessel providers such as Alam Maritim Resources Bhd and Icon Offshore Bhd."
He noted that the downstream segment is capital intensive, which does not augur well for the O&G players.
Companies involved in the downstream business include Petronas Chemicals Group, Shell Refining Co (Federation of Malaya) and Petron Malaysia Refining & Marketing.
In the long run, the analyst said, the O&G industry has to upgrade itself to focus on technological development, rather than just buying assets and leasing them out.
"They have to give value to the industry and advise their clients on how to optimise their production. Switching to a more technological focus will be good and bring the industry forward," he added.