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Looking Beyond The Price of Oil

Source: Moneycontrol

Oil prices have plunged more than $20 per barrel since the start of October when Brent was trading at $87 and US crude just below $77 – their highest point since 2014. Both have fallen recently by more than 30% settling at $62 and $53 respectively.

For most smaller or inefficient oil and gas companies, such a drastic plunge would mean an absolute disaster as they try to keep up with increasing costs of extracting the oil.

If you are extracting oil from Saudi Arabian soil the cost per barrel is usually below $10. In places like Sarawak (Malaysia) where most of the oil is in difficult to reach offshore fields, the cost of producing oil averages $40 – $50 per barrel.

Now, the clamoring for Sarawak to manage its own oil resources has also dissipated. In early October 2018 when the price per barrel was at its highest point in more than 3 years there was the threat of secession. By the end of October the price of oil came down to US$65 per barrel and things quietened a bit. Recently, at US$53 per barrel everyone is wondering whether things are going to get even worse.

And it may just happen that way like it did in 2015.

From a high of US$100 – US$105 in mid 2014, the price of oil plunged by 40% by early 2015 and went down to as low as US$30 by the end of that year. The sharp plunge triggered cost-cutting measures and the closure of many suppliers in the local oil & gas industry.

Fortunately, Malaysia’s prudently-managed oil and gas regulator did not take the knee-jerk action of pumping more oil, wisely planning for a ‘Low For Longer’ operating environment to achieve a sustainable revenue stream. This included becoming a fully integrated organization as well as expanding overseas where cost of extraction is cheaper.

Independent of political interference and dictates by the states, those entrusted with managing Malaysia’s oil wealth have steered Malaysia out of danger before and I look forward to them doing that again, given their track record over the past 4 years.

No doubt Malaysia’s oil & gas industry, Sarawak included, will continue to thrive with the right investments, certainty of the regulatory environment and suitable partners resulting in a much stronger, competitive and vibrant oil and gas industry– something that has been happening for more than 40 years. It certainly will not help when those with a narrow agenda and no understanding of the cyclical and investment-heavy oil and gas industry make unreasonable claims that will ultimately harm the one local industry that has been a beacon of strength for Malaysians.

Contributor: 
Sherman SS 
Consultant – Economics & Finance Research (Singapore)