INTRODUCTION TO OIL AND GAS INDUSTRY

AND SUSTAINABLE DEVELOPMENT

JANUARY SEMESTER
9 & 13 MARCH 2015

OIL ECONOMY AND ITS IMPACT

INTRODUCTION TO OIL AND GAS INDUSTRY AND

SUSTAINABLE DEVELOPMENT
LECTURE OUTLINE

The World is Still in Economic Turmoil.

The Importance of Oil.
How Does Oil Impact the Economy
Oil Prices: Trends, Key Drivers and Outlooks
Petrodollars Curse or Windfall?
Global Economic Crisis: Impact and Implications
Challenges to Oil and Gas Industry Riding Out the Current
Economic Crisis

INTRODUCTION TO OIL AND GAS INDUSTRY AND

SUSTAINABLE DEVELOPMENT

WHAT IS ECONOMICS?

The branch of knowledge concerned with the

production, consumption, and transfer of wealth.

The condition of a region or group as regards material

prosperity.

INTRODUCTION TO OIL AND GAS INDUSTRY AND

SUSTAINABLE DEVELOPMENT
THE WORLD DESCENT INTO ECONOMIC TURMOIL..

2007 The sub-prime crisis led to a credit crunch causing the

housing bubble to burst in the US.
2008 Financial turmoil was further aggravated by surging
food, commodity and oil price hike
2011
The Arab Spring
Government debt crisis in Italy and Greece
2013 Leadership transition in US and China and reforms in
Euro Area.

The world is descending into deep economic turmoil as

leading economies are tipping into recession
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US Tech
Bubble Burst

Deepening financial
turmoil on the back of
surging food &
commodity prices &
oil price rally
from 2003 to mid 2008

2000
Sept 11

2001

US War
On Iraq

2003

US sub-prime
crisis

Credit crunch
Rising unemployment
Elevated inflation
Plunging commodity & oil price
Wealth & demand destruction
Declining corporate earnings
Rising bankruptcies & insolvencies
>US$600 bil banking losses & write downs
> US$25 trillion wiped off from market cap
US$50 billion lost from commodity markets
Mass exodus of funds from commodities &
equities market into treasuries/bonds
Contraction in GDP growth

2007
The Perfect Storm

2007-2008
US-led ultra-low interest
rates policy & massive
liquidity injection globally
Synchronized & huge
liquidity injection to revive
the economy and bolster
sentiment

US house
prices
collapsed/
housing
bubble burst
led to
financial
turmoil

Rising costs of
doing business
Declining business
sentiment
Lower purchasing
power
Declining consumer
confidence

$$$

Financial Meltdown

Current Situation
Leading economies on
the verge of recession
Synchronised global
slowdown impacting
emerging & developing
economies

$$$

Global
Recession

INTRODUCTION TO OIL AND GAS INDUSTRY AND

SUSTAINABLE DEVELOPMENT
THE 2014 ECONOMIC OUTLOOK ..

Crisis in Iran, Syria and Ukraine.

The World Bank on 10 June 2014, cut outlook for 2014 global growth
to 2.8% from 3.2% in January 2014.
The price of crude is still $100 per barrel and at that price sustained
recovery seems unlikely. The rule of thumbs indicate in every $10
increase in the price of a barrel of oil ends up reducing global growth
by 20% of a percentage point.
THE GLOBAL ECONOMY CURRENTLT FACES A NEW THREAT FROM AN
OLD ENEMY

OIL

INTRODUCTION TO OIL AND GAS INDUSTRY AND

SUSTAINABLE DEVELOPMENT
THE IMPORTANCE OF OIL

Oil is the raw material that makes possible the functioning of

nearly every components of the worlds economy; directly or
indirectly.
The world has staked the entire way of life on this NONRENEWABLE resources that is DEPLETING.
Oil is a poisonous economic mix a rising oil price is both
deflationary and inflationary.
Oil remains the lifeblood of most gainful economic activity.
There is no chance of that changing in the foreseable future.

INTRODUCTION TO OIL AND GAS INDUSTRY AND

SUSTAINABLE DEVELOPMENT
THE IMPORTANCE OF OIL IN THE MALAYSIAN ECONOMY
Malaysia is overly dependent on oil revenue (57%)
With the depleting hydrocarbon resources, other form of revenue
generating alternatives need to be developed and quickly.
The Malaysian Government policy on subsidy distort the economy and
this inhibits the building of resilience and competitive industry.
The potential downside
Rising inflation particularly increase in food prices
Falling commodity prices
Declining industrial productions
Declining exports
Plunging consumer confidence
Capital investment flight

Malaysian economy How vulnerable are we?

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Depleting hydrocarbon
resources

Overly dependent on oil revenues

Unable to fully diversify the
economy and move up the
value chain

About 53% of the Governments

Revenue contributed by the
petroleum sector (2008)

Subsidies distort the economy

Inhibits us from building
resilience and
competitiveness

Inefficient utilisation of energy

Possible downside risks for Malaysia as the economy continues to

brace external challenges, political uncertainty & inflationary pressure
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Rising Inflation

Declining Industrial Production

8.5%

HIGHEST
(July 08)
1.6%
Jan 2007

Falling commodity prices

Crude Palm Oil :
RM4,486/tonne
(March 2008)

Other Key Concerns :

Declining export
Plunging consumer confidence
Capital flight

RM1,515/tonne
(end Oct 2008)

INTRODUCTION TO OIL AND GAS INDUSTRY AND

SUSTAINABLE DEVELOPMENT

OIL ECONOMY
The portion of the overall economy connected to or depending on the
production, refinement, sale, or use of petroleum. Because oil is required for
production and transportation of many other goods, as well as consumer uses
such as automobile fuel and heating, events that affect the oil economy have
significant effects on other areas of the economy.

HOW DOES OIL IMPACT THE ECONOMY?

Inflation
Consumer Spending
Automotive Industry

INTRODUCTION TO OIL AND GAS INDUSTRY AND

SUSTAINABLE DEVELOPMENT
OIL PRICES: TRENDS, KEY DRIVERS AND OUTLOOKS
The price of oil has the ability to blow the world economy, and the
Middle East often provided the spark
Crisis will cause serious supply disruption either real or perception
and dearer oil price fuel inflation
The indices for crude prices are the West Texas Intermediate (WTI),
Brent Blend and OPEC Basket for a barrel of oil equivalent to 42
gallons or 106 bottles of 1.5 litres mineral water.
Oil prices are factors of contract conditions, side benefits and
commercial interest.

INTRODUCTION TO OIL AND GAS INDUSTRY AND

SUSTAINABLE DEVELOPMENT

OIL PRICES: KEY DRIVERS

Geopolitical instability and heightened security concerns including
geopolitical conflicts.
Supply and Demand OPEC is the governing body to discipline the
worlds oil players.
Environmental factors technology, political relationship, experienced
personnel and environmental protection.
Financial Economics oil has strong inverse relationship with fund
investment.
Rising cost of upstream activities including depleting resources.
Speculation - represents 40% to 60% to the total crude oil per barrel.
Political policy protect a countrys interest and agenda.

A combination of traditional drivers (Geopolitics, supply/demand, and

environment) and new market fundamentals (financial economics, rising
cost, and speculation) have led to oil prices rally from 2000 to mid 2008
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11 July 2008
Highest price : $147.27

Dollars/barrel

January 2008
Oil price broke the landmark
$100/bbl barrier

160
140

September 1980
1st major fighting in Iran-Iraq
war

120
100

40

October 1973
1st oil crisis:
Yom Kippur war
OPEC oil embargo

1980

33.43
11.3

4.31
1979

63.15

27.33

14.85
1973

64.96

August 1990
Iraq invaded Kuwait

36

20

100

1997
Asian economic crisis

80
60

August 2005
Hurricane Katrina
March 2003
US invaded Iraq

January 1979
2nd oil crisis:
Iranian revolution

147.27

1990

1997

2003

October 2008
Lowest price :
$63.15

2005 Jan-08 Jul-08 Oct-08

The precipitous decline in oil prices to below $70 per barrel in end October 2008 was
primarily due to the demand destruction as a result of the current global downturn

Source of data : Average monthly price in dollars of New York sweet light crude, AFP, Bloomberg & Financial Post

What drives oil prices Financial economics/markets

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Speculation inflates the oil price premium as

traders leverage on negative sentiment & supply
uncertainty
Precipitous decline in the US Dollar leads financial
investors to excessively switch into commodities trading,
particularly crude oil, but as commodity prices fall, the
dollar exit commodities into safe haven such as treasuries
& bonds

Before the current fall in oil & commodity prices, billions of

dollars being diverted by financial investors and traders for
speculative purposes.
The share of oil futures contracts controlled by speculators
at the New York Mercantile Exchange (NYMEX) has doubled
in the last 8 years, up from 37% in 2000 to 71% in mid 2008.

Speculation raises a premium of between 40% and 60% to

the total crude oil price per barrel.
Excessive and uncontrolled speculation may lead to further
price-distortion in the oil markets
Source of info & data : Financial Times & Bloomberg

INTRODUCTION TO OIL AND GAS INDUSTRY AND

SUSTAINABLE DEVELOPMENT
PETRODOLLAR CURSE OR WINDFALL?
The Oil Curse is the mismanagement of oil revenue for personal gain
or lack of transparency in its utilization. This will lead to deplorable
state of economy and society, and may trigger internal strive and
conflict.
The Oil Windfall is a proper management and utilization of oil
revenue with the utmost accountability and transparency. Oil
revenues are channeled towards development projects, infrastructure
and facilities and other related socio-economic activities that will
create a better life for the people and nation.

Petrodollars - Curse or Windfall?

Food for thought
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Oil revenues can lead to a curse or windfall - depending on how it is being managed

The Oil Curse

Mismanagement of oil revenues, either
for personal gain or lack transparent in
its utilisation. This will lead to deplorable
state of economy and society, and may
trigger internal strife and social conflict

The Oil Windfall

Proper management and utilisation of oil
revenues with the utmost accountability and
transparency. Oil revenues are channeled
towards development projects,
infrastructure and facilities and other related
socio-economic activities that will create a
better life for the people and the nation.

Petrodollars - Curse or Windfall? Some Examples

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Saudi Arabia

Norway

Russia

The richest oil nation on earth is

struggling with a 25%
unemployment rate, huge gap
between wealth and assets
ownerships, a massive public debt,
and an undiversified economy
dependent on commodity exports,
particularly oil.

Prudent utilisation of its oil revenues via

the Petroleum Fund has made Norway one
of the leading examples of best practices
in economic management using oil money
as the country does not face issues such
as chronic unemployment, high inflation,
and huge national debts.

Russia has done well to avoid

"resource curse." The budget
surpluses, the reserve fund, a
three-year rolling budget for
planning purposes, the analytical
use of a non-oil budget and its
high external reserves
underscore its commitment to
maintaining a prudent stance.

Venezuela
Chavezs populist policy has been
regarded as a windfall for the
population, but it comes at a cost as
investment in its oil sector continues to
dwindle owing to the current resource
nationalism policy that gives the state
(via PDVSA) a dominant stake in the oil
and gas projects, thus creating a barrier
to entry for foreign players to access its
hydrocarbon resources.

Source of data & info : All Africa.com, BBC & Slate Magazine

What about Malaysia?

Nigeria
Oil exploitation and export revenues have
engendered conflict, corruption, environmental
degradation and deepening poverty, which leads to
the so-called "resource curse".

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THE DEEPENING GLOBAL

ECONOMIC CRISIS :
IMPACT & IMPLICATIONS

The deepening financial meltdown weighs down heavily on

the economy, business and the people
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Business & Industry

Declining business sentiment
Wealth erosion
Demand destruction
Higher risk premium
Credit & liquidity squeeze
Increasing cost of capital

Projects become uneconomic

Declining corporate earnings & lower margins
Bankruptcies & insolvencies
Mass exodus of funds from commodities &
equities market into treasuries/bonds
Mergers & acquisitions intensify

Recession &
synchronised global
slowdown
Macro-economy

Consumer at large

Contracting/declining GDP growth

Wealth & demand destruction
Lower energy, food & commodity cost
Easing inflation expectation
Rising unemployment
Credit & liquidity squeeze

Lower purchasing power

Declining consumer
confidence
Not spending but savings
conscious

The oil and gas industry will also be impacted along the value chain
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E&P

More industry consolidation via M&As

Decline in oil prices - Less protectionism, market
liberalisation & more access to resources?

Demand destruction
Inventory build-up/Tank-top/supply surplus
Sharp & precipitous decline in prices

Margin erosion/squeeze
Higher risk premium - Supply-Chain and Counter-party
risks
Projects become uneconomic (Delay & postponement)
Increasing cost of capital
Tighter lending & borrowing criteria
Plant shutdown/scale down operations
Waning interest in clean technology, RE, Biofuel &
Unconventional oil development

OIL

GAS

PETCHEM

Key Issues/Challenges
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Key issues/challenges for PETRONAS

that evolve around growth, costs &
gaps in technology & skills:
Access to resources.
Escalating costs & changing fiscal terms.

The oil & gas industry faces

myriad of issues/challenges
from many fronts :
Geopolitics - Uncertainty and heighten security
concerns.

Human capital and talent development.

Environment - Increasing concerns on climate

change and global warming.

Technology as a competitive edge - How have

we progressed?

Energy vs. food security.

Capacity constraints - oil production decline,
reserves depletion, thin spare capacity.

Enabling technology - difficult geology, harsh

operating environments; unconventional sources.

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