Column - More belt-tightening for Petronas and Putrajaya?

PETROLIAM Nasional Bhd (Petronas) and Putrajaya should be congratulated. Despite a 12% jump in net profit to US$23.5 billion (RM104 billion) last year, the national oil company maintained its commitment to pay RM13 billion in dividends – the smallest since 2007 and lower than the US$16 billion paid in 2015 and US$29 billion in 2014.

Putrajaya's acceptance of a smaller dividend cheque reflects its success in slashing its reliance on oil and gas revenues from an unsustainable high of 41% in 2009 to just 14% currently. This reduced dependence was facilitated by two timely decisions – to rationalise and remove subsidies, and to introduce the Goods and Services Tax on April 1, 2015.

Complacency over the national oil company's declining dividends is a luxury both Petronas and Putrajaya can ill-afford. Given continuing volatility in global oil prices, Petronas' decision to scale back dividends for the third successive year is financially prudent.

Furthermore, accelerating output of US shale oil in recent months is a major game changer and a development that suggests both Petronas and Putrajaya must be prepared for continuing slimmer dividends in the foreseeable future.

Three factors have propelled shale oil's rise from a marginal player in the global oil market to a formidable challenger to the ability of the Organisation of Petroleum Exporting Countries (Opec) to determine prices worldwide.

First, US shale producers' average breakeven price (BEP) has plummeted – hammered by falling oil prices and improved productivity in shale drilling.

BEP is the price of oil needed for shale drilling to be profitable. A lower BEP suggests shale drilling is financially attractive even if oil prices slide.

In the heyday of triple-digit oil prices, the BEP for US shale producers was a lofty US$100/barrel. "Today, almost every single shale basin is economic in the US$35 to US$50 a barrel price range," said Regina Mayor, head of energy in KPMG in Houston, Texas.

Plunging unit prices of Brent oil from a high of US$115 in June 2014 to a low of US$27 in January 2016 caused the number of shale producers to decline precipitately, leaving as survivors only the strongest.

One indicator of shale's productivity is the estimated ultimate recovery (EUR) – this is the amount of oil and equivalents pumped from one well. In 2016, US shale wells' average EUR was 736,000 barrels of oil equivalent, more than double the volume four years ago, consultancy Rystad Energy said.

Second, because shale oil is becoming an increasingly attractive investment proposition, it has attracted the attention of oil majors. In January this year, Exxon announced it will divert about one-third of its drilling budget this year to shale fields, a Bloomberg article said.

That same month, Exxon agreed to pay US$6.6 billion aimed at doubling its footprint in the Permian basin of West Texas and New Mexico, the most fertile US shale field, Bloomberg added.

Compared with conventional oil fields, investing in shale drilling offers three advantages:

>> a shale well could cost just US$5 million – and continues to decline,

>> shale drilling has a short cycle, in many cases it is less than two months; this reduces risks significantly because the shorter production cycle allows drillers to hedge shale oil prices and

>> the typical payback period is a speedy 1 1/2 years.

Third, US President Donald Trump's campaign promise to ease restrictive regulatory requirements, particularly those relating to environmental protection, could spur increased investment in potential environmentally-damaging activities like shale mining.

Newly-confirmed head of the Environment Protection Agency, Scott Pruitt is a critic of environmental regulation with close ties to the oil and gas industry. Pruitt's appointment suggests Trump's campaign promise will be fulfilled.

Shale oil's rising output poses a challenge to Opec. A short drilling cycle means shale operators can ramp up output quickly to capitalise on higher prices – thus offsetting the painful production cuts by Opec, Saudi Arabia in particular, and non-cartel allies.

Last November, Opec, Russia and other non-cartel allies pledged to cut output by 1.8 million barrels a day from January to June this year.

Earlier this month, the US Energy Information Administration (EIA) forecast output from seven major US shale producers could climb by 109,000 barrels per day (bpd) to a lofty 4.962 million bpd in April this year from the month ago figure.

If April's projected shale output is sustained, this would result in more than a million bpd production gain in just 10 months and "keep the oil bulls in the barn … and the bears from going back into hibernation," James Williams, energy economist at WTRG Economics, said.

Fitch agrees. A stressed, oversupplied market will mean an oil price of US$40/barrel through 2019, the ratings agency predicted earlier this month.

Malaysia's Finance Ministry has assumed an average oil price of US$45/barrel in the current Budget. Will rising shale output mean several years of sustained belt tightening for Petronas and Putrajaya?

Opinions expressed in this article are the personal views of the writer and should not be attributed to any organisation she is connected with. She can be contacted at