Global LNG prices have crashed to the worst levels in history. For example, in December of 2019, LNG prices arriving in Japan were contracted at prices of about USD $6.70 per MMBtu. Based on the latest data available, that same LNG can only fetch USD $2.60 per MMBtu. This will severely impact Petronas, which counts as LNG sales as an important revenue driver.
Malaysia exports about RM 3.5 billion per month of Liquefied Natural Gas or LNG. For the benefit for those who are unsure, LNG refers to natural gas which has been cooled sufficiently that it turns to a liquid and is a major feed stock for natural gas fired electricity generator plants and is used at home for cooking. While previously way back in 2013, Malaysia could earn RM 5.0 billion a month from LNG sales, recently it has seen its revenues reduce as major oil companies like Chevron and ExxonMobil have flooded the market, as their enormous gigantic LNG plants in Australia and the United States have recently come online.
However with the Coronavirus, this tough situation has turned into an all out bloodbath for LNG. Given this kind of price pressure, it will be difficult to see Petronas continuing to be a revenue contributor to the Government, much less even to turn a profit.
New Economy Policy (NEP 2.0)
Reader Calvin mentioned that the petroleum sector is considered to be dead and gone. I would agree because commodities oriented economies do suffer when supply increases and demand collapses. Malaysia was overly reliant on the petroleum sector but as early as 2017 it was very clear that the world was going to face a massive LNG glut as massive new LNG liquefaction facilities came online in both US and Australia in the early part of the 2020s. In 2017, Malaysia was only behind Qatar as the worlds 2nd largest exporter of LNG. Right now we are behind Australia and US, which should give you an idea of the massive explosion in supply. Prices are so bad that at $2.20 per MMBTU , the LNG plant cannot even cover the basic feedstock cost, compression and transportation. This of course will also impact the bond holders and Bankers who financed the American and Australian mega LNG projects like Gorgon LNG. Previously, LNG deals were long dated in nature, for example for 10 to 20 years as buyers in Japan, and South Korea were more concerned with securing supply than quibbling over prices, but more recently with the explosion in supply, it has become a buyers market.
The key question is how long will this last? Our view is that prices once it has collapsed so rapidly tends to stay low for longer and I don’t see a recovery until 2022 at least, because of the massive supply in the United States and this economic concept called the output gap. As we are currently witnessing the worst economic crisis since the Great Depression, it takes several years for the economy to go back to full output.
The government definitely needs to relook at the current economic model. A new policy is needed that should focus on technology skills upgrading. Interestingly , we were considered to be pioneers in developing policy , because we started the MSC in 1997 way before everyone else. We had tried to introduce Open Source technology with the Open Source Competency Centre in the early 2000s. (Nowadays even Microsoft is embracing open source and all major innovations are almost in the Open source platforms. )
In the end, things did not really take off because we never had technical people driving these initiatives. I will say this a billion times, leadership matters. Good leaders drive results. Bad leaders or incompetent destroy initiatives, businesses and policies.
We should learn to look past prejudices and focus on getting competent people to be in charge of key initiatives. If Microsoft and Google are willing to trust Asians or “brown people” as Tun Dr Mahathir would quip, perhaps it’s time for us to consider competency as a key criteria. But that is only half the battle, because competent leaders must be able to get the best out of their team. That is probably what only a very few folk can do.