Winners and losers in the O&G space

KUCHING (Feb 9): The oil and gas sector, touted as the backbone of the world’s energy industry, epitomises complexity in all nature of the word.

The industry is a labyrinth of intricate processes: from the initial exploration and extraction of crude oil and natural gas, to refining, distribution and use to end-consumers like you and me.

One of the many reasons for the sector’s complexity lies in the sheer scale and diversity of operations, including in Malaysia. The journey from oil wells offshore to gas stations near your neighbourhood involves sophisticated technology, extensive infrastructure, and a highly skilled workforce.

Advanced seismic imaging, offshore drilling, and hydraulic fracturing are just a few examples of the technological marvels employed to unlock hydrocarbon resources.

Each step demands precision engineering, rigorous safety standards, and substantial financial investment.

Additionally, the O&G sector operates within a web of regulatory frameworks and compliance requirements that vary across different regions and countries.

Within the Malaysian context, the ongoing tussle between Petroliam National Bhd (Petronas) and Petroleum Sarawak Bhd (Petros) is one to watch.

Petronas could face a 30 per cent revenue loss once its agreed formula for natural gas distribution with Petroleum Sarawak Bhd (Petros) is implemented.

For context, Petronas and Petros have been in talks since July last year to resolve disputes over gas distribution rights in the state.

Petros aims to become the sole gas aggregator responsible for carrying out all activities involving the procurement, supply, distribution and sale of natural gas in Sarawak, as well as the planning, development, operation and maintenance of the natural gas distribution network system in Sarawak, among other things.

Industry analysts said the move could adversely impact Petronas earnings and the rating of its debt paper, and result in its forking out more in terms of finance costs.

Sarawak holds 60 per cent of the country s gas resources and generates a chunk of its liquefied natural gas (LNG) exports, which are tied to long-term contracts.

In October 2024, Premier Datuk Patinggi Tan Sri Abang Johari Tun Openg said negotiations were nearly concluded and that Petros was to be the sole aggregator for gas in the state.

Petronas, however, came out with a statement to clarify that it is still in discussions with Petros on the proposed implementation of the Distribution of Gas Ordinance.

In January, Prime Minister Datuk Seri Anwar Ibrahim reaffirmed that while Petros would control gas distribution in Sarawak under the Distribution of Gas Ordinance (DGO) 2016, Petronas would retain its national authority over oil and gas operations under the Petroleum Development Act 1974.

He also assured that no further disputes would arise, as negotiations for other projects remain commercial in nature.

During Parliament sitting earlier this month, Minister in the Prime Minister s Department (Law and Institutional Reform) Datuk Seri Azalina Othman Said noted the agreement would exclude liquefied natural gas (LNG) and Petronas and its subsidiaries are not required to obtain a licence or comply with any additional procedures to conduct petroleum operations in Sarawak.

Beyond this dispute, all eyes are on the recently releases Petronas Activity Outlook for 2025-2027 (PAO 2025-2027) for guidance on the future outlook in Malaysia, breaking down either into optimism or negativity within each O&G subsegment.

The latest edition of the PAO 2025-2027 signals a strategic shift towards maintenance, sustainability, and selective growth as the national oil company adapts to shifting market conditions and operational demands.

This shift comes as the national oil giant respond to evolving market dynamics, environmental considerations, and the pressing need for operational efficiency amid fluctuating global energy demands.

The national oil and gas outfit has been reassessing its operations to streamline operations and ensure long-term resilience.

As part of this reassessment, Petronas last year launched a comprehensive internal review to streamline its ways of working, to eliminate inefficiencies and focus on undertakings that can deliver measurable value.

Petronas vice president of group procurement, Rashidah Alias, noted that agility was crucial for Petronas’ sustainability and growth.

“We must adapt swiftly to changing market demands, harnessing digital transformation to optimise performance, enhance safety and reduce our environmental footprint,” she said in her PAO 2025-2027 foreword.

“We need to evolve rapidly to meet the increasing energy demand while prioritising the security of our supply.

“This can be achieved through streamlined operations, improved operational efficiency and informed decision-making.”

Rahidah underscored Petronas’ commitment to continue supporting the industry in navigating challenges by producing and delivering energy solutions that power society s progress.

“As Petronas celebrates 50 years, our industry s growth has been driven by the collaboration with our industry partners.

“Together, we have embraced opportunities, tackled challenges, and propelled our industry forward. We deeply appreciate your continued support and partnership, which have been instrumental in our industry s success.

“As we look ahead, it is imperative that we continue this collaborative spirit for the next 50 years, ensuring sustained innovation and progress.”

Analysts dissecting the PAO 2025-2027 highlighted a notable slowdown in upstream capital expenditure, particularly in drilling activities.

This comes as Petronas is set to scale down exploration and development efforts significantly this year, aligning with global shifts towards a more measured approach to fossil fuel investments.

According to researchers from RHB Investment Bank Bhd (RHB Research), overall offshore support demand is expected to decline by 9 per cent year-on-year, with anticipated delays in offshore fabrication, pipeline installation, and decommissioning projects.

Despite the slowdown, analysts foresee a gradual recovery beginning in 2026, as Petronas recalibrates its focus towards offshore maintenance and operational stability.

Maintenance activities have emerged as a key priority for Petronas. The company plans to undertake an average of 367 facility improvement projects (FIPs) annually over the next three years, up from 300 FIPs in previous guidance.

These include KGA pipeline replacement, HP compressor engineering, procurement construction, installation and commissioning (EPCIC), and F6 rejuvenation project gas turbine generator (GTG) replacement.

These FIPs not only aim to enhance operational efficiency but also contribute to decarbonisation initiatives by reducing flaring at new onshore facilities.

Analysts have expressed optimism about floating production storage and offloading (FPSO) and maintenance-related oil and gas stocks, which are expected to benefit from this increased focus.

This strategic shift also reflects the company s commitment to sustaining production levels and ensuring operational cash flow generation, as Petronas has projected long-term oil prices in the range of US$70-80 per barrel.

In 2025, higher activity levels are expected in maintenance, construction, and modification (MCM), hook-up and commissioning (HUC), decommissioning, and plant turnaround segments.

MCM activities are expected to rise by 30 per cent year-on-year in 2025, reaching 13.6 million man-hours, with Sarawak and Sabah driving much of this growth.

Similarly, hook-up and commissioning (HUC) activities are projected to increase to 6.48 million man-hours in 2025, up from 6.31 million in 2024.

These trends signal a resilient and steady stream of opportunities for maintenance-focused service providers.

Mixed outlook for OSVs

The offshore support vessel (OSV) market presents a mixed outlook for 2025.

According to Kenanga Research, demand for production-related OSVs is expected to remain stable at 118 vessels, while drilling-related OSV demand is projected to decline to 220 vessels in 2025, down from 250 in 2024.

This decline, combined with an ageing OSV fleet, presents challenges for OSV operators such as Perdana Petroleum and Icon Offshore.
Petronas has stressed the need for newbuilds to modernise the fleet, creating potential opportunities for companies with younger and superior specifications.

RHB Research estimates that overall OSV demand will fall by 9 per cent to 338 vessels in 2025, primarily driven by reduced demand for drilling and project-support vessels.

In 2024, Petronas deployed 120 vessels for production operations, lower than the initial projection of 148.

The outlook for 2025-2027 suggests relatively flat demand, with about 118 vessels required per year, reflecting a 16-19 per cent downward revision from earlier estimates.

For drilling and project support, Petronas initially projected the use of 249 vessels in 2024 but ended up utilising 150. This number is expected to fall 12 per cent to 220 in 2025 before rebounding slightly to 234-222 vessels in 2026-2027, representing a 34 per cent uptick in 2026.

Notably, these projections exclude vessel requirements for HUC, MCM, and EPCC, which will be sourced separately.

With overall OSV demand set to decline, local players such as Keyfield, Perdana Petroleum, Marine & General, Alam Maritim Resources, and Icon Offshore may struggle to optimise their fleet utilisation unless they secure more term charter contracts.

Researchers with Hong Leong Investment Bank Berhad (HLIB Research) added that demand for drilling rigs is expected to ease in 2025, with 20 units required, down from 23 in 2024.

This is mainly due to a slowdown in demand for jack-up rigs, which are expected to fall to 10 fleets in 2025, compared to 14 fleets in 2024.

The fall in rig demand is in tandem with the lower anticipated exploration/appraisal activities in 2025, as Petronas has put on hold several upstream exploration works in Sarawak, in view of the ongoing Petronas-Petros saga, based on our checks, HLIB Research said.

Decommissioning: A growing market

Another critical aspect of the PAO 2025-2027 report focuses on decommissioning activities, which are set to ramp up significantly starting in 2026.

Petronas plans to address the increasing number of mothballed facilities by embarking on large-scale decommissioning projects, including well abandonment and the restoration of upstream facilities such as wellhead platforms (WHPs) and central processing platforms (CPPs).

“For the next three years, decommissioning plans include the plugging and abandonment of 153 wells and the abandonment of 37 offshore facilities and one onshore facility, namely the SSGP (Sabah-Sarawak Gas Pipeline), the report read.

Apart from that, Petronas said for the next two years, about 15 exploration wells are forecasted to be drilled each year, focusing on shallow water wells and deepwater wells.

The decommissioning market, estimated to be worth approximately RM3 billion, presents a significant opportunity for contractors specialising in this niche area.

Companies with expertise in underwater services and facility restoration are likely to see increased demand for their services.

On February 3, Petronas clarified that the decommissioning of the Sabah-Sarawak Gas Pipeline (SSGP) will only impact the section running through Lawas, Limbang, Miri, and Bintulu in Sarawak. The remaining sections of the SSGP will continue to operate as usual.

Petronas cited worsening environmental factors over the years as a key consideration, noting that these challenges have increasingly affected the pipeline s integrity and safety.

Despite the partial decommissioning, the company reassured customers that energy supply commitments and contractual obligations will remain unaffected.

Petronas remains committed to investing in Sabah and Sarawak through the development of value-added oil, gas, and energy-related projects in both states, the statement said.

The report also supports the view that after the Petronas-Petros saga, exploration and drilling-related contracts will be impacted, but maintenance contracts should remain resilient. This has led analysts to maintain an overweight stance on the oil and gas sector.

Selective strategy: Balancing maintenance with expansion

While maintenance and decommissioning take centre stage in the PAO 2025-2027, it has also outlined selective growth opportunities in both the upstream and downstream sectors.

In the upstream segment, Petronas plans to drill over 400 wells and execute 39 upstream projects over the next three years. Notable developments include the Kasawari, Gumusut-Kakap Redevelopment, and Seligi Redevelopment projects.

However, drilling activities are projected to slow in 2025, with the number of rigs required dropping to 20 from 23 in 2024.

This decline stems from reduced demand for jack-up rigs and a more cautious approach to exploration and appraisal activities.

The slowdown in drilling may impact contractors, which could face lower utilisation rates and delayed contract awards in the near term.

On the downstream side, plant turnarounds will see a significant increase in 2025, with 13 plants scheduled for maintenance, up from just four in 2024.

Initially, Petronas had planned 14 turnarounds for 2024, but only four were completed, with most of the shortfall coming from smaller projects.

Looking ahead, the company has revised its turnaround projections for 2025 and 2026 downward to 13 and four, respectively, from earlier estimates of 18 and six.

Despite the revision, the number of turnarounds in 2025 still represents a substantial rise, creating opportunities for downstream maintenance players.

While most main mechanical packages have already been awarded, additional opportunities remain in areas such as catalyst change-outs, equipment supply, and support services.

The rise in plant turnarounds reflects Petronas commitment to ensuring the reliability and efficiency of its downstream operations, which are critical for meeting Malaysia s production target of 2 million barrels of oil equivalent per day (mboepd) by 2025.

The Activity Outlook report also sheds light on challenges in offshore fabrication and pipeline installation, which are expected to see delays in 2025.

Pipeline installation days are projected to drop significantly to 31 days in 2025, down from 270 days in 2024, due to delays in uncontracted work orders, according to analysts.

Despite this, Petronas plans to install 346.6km of pipelines in 2025 primarily in Sarawak (259km) after none were installed in 2024. This should benefit pipe coating and related services companies.

A significant rebound is expected in 2026, with a notable increase in planned projects.

Similarly, offshore fabrication activities will remain subdued in 2025, with only three lightweight platforms slated for installation, compared to none in 2024.

Workforce shortages, Trump policies pose a challenge

On a more somber tone, the PAO report underscored the shortage of skilled manpower in Malaysia s oil and gas industry as a critical challenge faced today.

As Petronas plans to execute approximately 50 turnarounds and shutdowns from 2025 to 2027, it requires peak workforce of around 25,000 skilled workers by mid-2026 and first quarter of 2027.

Given the importance of both turnarounds and shutdowns, skilled manpower is essential and will significantly impact the safety and efficiency of the plant operations, further highlighting the need to address any skill gap in the industry.

Currently, this sector is facing a significant talent shortage of skilled manpower which could impact the future of Malaysia s O&G sector, read the report.

The industry is currently facing a talent shortage due to uncompetitive salaries, limited career development opportunities, low awareness on available opportunities and training programmes and the allure of the gig economy.

To address this issue, Petronas has proposed solutions such as improving job prospects, increasing talent engagement, and launching awareness campaigns to attract younger generations to the sector.

Meanwhile, the appointment of Donald Trump as the next US President presents another hurdle, following the issuance of the Unleashing American Energy executive order, aimed at enhancing domestic energy production and reducing regulatory constraints.

The order focuses on streamlining federal land leasing and reassessing regulations that could hinder energy development.

The potential impact on US crude oil production remains uncertain, though deregulation could lead to increased output. The Trump administration is expected to expedite leasing approvals and environmental reviews, which may result in moderate production increases in the next 6 to 18 months.

As such, Kenanga Research maintains its Brent crude forecast at US$77 per barrel for 2025 and US$74 per barrel for 2026, as it expects any production increases under Trump s policies to be gradual rather than abrupt.

Analysts also anticipates Organisation of Petroleum Exporting Countries and its allies (OPEC+) to adopt a measured approach in unwinding its production cuts in 2025, as it seeks to avoid triggering a sharp decline in crude oil prices.

Overall, the O&G sector is expected to show strong earnings momentum in 2025. The POA reaffirms that upstream activities in Malaysia remain intact, though analysts have turned more cautious on EPCC and drilling prospects for 2025.

The tight market supply is also creating opportunities for new FPSO and OSV builds in the coming year.

-Agency