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FORGET about the ESG (environmental, social and governance) backlash, oil majors worldwide have hogged the limelight this year given their eye-popping record profits, generous dividends and large allocations for share buyback schemes.

From Exxon Mobil Corp to Shell plc, oil majors’ earnings leaped to multiyear highs and smashed records in 2Q2022, as Brent crude oil climbed to a nine-year high of US$111 per barrel.

For Malaysia, too, fossil fuel continues to be a blessing as an alternative source of income that provides the necessary breathing space for the government when times are tough.

Just three years after a bumper dividend payout of RM54 billion by Petroliam Nasional Bhd (Petronas) in 2019, there is expectation the national oil firm will help fill the nation’s coffers as Putrajaya stretches its finances to tame inflation and lighten the high cost of living burdening ordinary folks.

Petronas’ highly anticipated 2Q2022 results, which will be released later this month, may paint a clearer picture on whether it will be able to afford a more generous dividend payout to the federal government, whose budget deficit is surely widening.

In the West, aggressive share buyback activities continue for the likes of Shell (US$6 billion in 2H2022), BP plc (US$3.5 billion in 3Q2022), TotalEnergies SE (US$2 billion in 3Q2022) and Chevron Corp (US$15 billion for 2022 thus far).

BP also raised dividends by 10% quarter on quarter for the April to June period, alongside Murphy Oil Corp (43% q-o-q) and ConocoPhillips (up 50% or US$5 billion for 2022 from initial guidance of US$10 billion), to name a few.

At home, Petronas’ 1QFY2022 net profit was already its strongest in at least a decade, up 154% year on year (y-o-y) to RM23.44 billion from RM9.22 billion in 1QFY2021, as revenue rose nearly 50% to RM78.75 billion from RM52.55 billion.

An annualised estimate will see Petronas exceeding its record profit of RM68.67 billion for the 12 months ended Dec 31, 2011, on revenue of RM288.47 billion.

Unlike previously, this time around, oil prices have risen alongside a stronger US dollar — which rarely happens as the two commodities typically move inversely to each other because oil is priced in the US currency.

In 2011, when Brent crude averaged US$111 per barrel, the ringgit was also stronger against the US dollar, averaging at 3.0585. However, the local currency has averaged at 4.3046 year to date (Aug 9), marking a hefty difference of 40%.

The ringgit is also 6.7% weaker than the 2018 average of 4.0351. That was when then deputy finance minister Datuk Othman Aziz told the Dewan Rakyat that the government would gain RM300 million for every US$1 increase in oil price.

On July 21, Minister in the Prime Minister’s Department Datuk Seri Mustapa Mohamed told parliament that Petronas was expected to achieve a net profit of RM75 billion to RM80 billion for the financial year ending Dec 31, 2022 (FY2022), with an assumption of US$100.03 per barrel and no production hiccups.

Petronas’ payments to the government for 2022 is expected to be between RM55 billion and RM59 billion, including dividends, corporate and petroleum taxes, the one-off cukai makmur, petroleum proceeds and export duty, Mustapa said last month. This represented an increase of RM11 billion to RM15 billion from the initial petroleum-related revenue estimate of RM43.9 billion in the Federal Government Fiscal Outlook 2022 report published last year — although the latest projection may have been made assuming no change to the FY2021 dividend of RM25 billion.

From 2011 to 2014, when Brent crude averaged between US$99 and US$111 per barrel, Petronas’ contribution to federal and state governments ranged from RM65.7 billion to RM80 billion.

Note that the highest full-year contribution by Petronas of RM84.6 billion in 2019, when Brent crude averaged US$64.31 per barrel, was because of the RM30 billion special dividend — specifically to address GST refunds. Excluding that, the amount stood at RM54.6 billion.

This year, the biggest non-budgeted item is the more than twofold increase in subsidies and cash aid to RM77.7 billion from the initial projection of RM31 billion. This represents a shortfall of RM46.7 billion, which estimates show the gap could be partly filled by: (i) the crude palm oil (CPO) windfall tax (RM2 billion to RM5 billion); (ii) the one-off cukai makmur (about RM5 billion); and (iii) the federal government’s cost-saving efforts. Finance Minister Datuk Seri Tengku Zafrul Aziz reportedly said RM5 billion to RM6 billion could be squeezed from the cost-saving efforts.

Based on the above figures, there could still be a gap of RM15 billion to RM23 billion. UOB Kay Hian Research, in a July 22 note, anticipates an additional dividend payout of RM22 billion by Petronas on top of the RM25 billion committed to make up for the subsidy costs, which could exceed its official projection of RM85 billion.

Against the backdrop of strong crude oil prices at above the US$90 per barrel level, the Covid-19 pandemic and harsh economic climate, it is reasonable to expect the national oil firm to loosen its purse strings for a more generous dividend payment. Furthermore, its global peers are already doing so.

But this once again exposes the government’s tight fiscal position. Bluntly put, there has hardly been any saving for a rainy day. Also, its dependence on oil revenue does not seem to have reduced.

However, the higher dividend payout is not something that is easy for Petronas to commit to, despite the many things moving in its favour.

The company’s dividend payout ratio has exceeded 100% in four of the last six years (2016-2021), compared with 54% to 61% from 2011 to 2014, when it paid out RM27 billion to RM30 billion a year. There are also rising cash payments as well as additional tax payments to states like Sabah and Sarawak.

At end-March, Petronas had RM183.99 billion cash against short- and long-term borrowings of RM15.738 billion and RM87.9 billion respectively. By paying more than it earns, the national oil company can’t reinvest its earnings to ensure sustainable long-term returns for the country at whatever oil price levels.

There is also an urgent need for Petronas to raise its capital expenditure (capex) to capture opportunities on the back of industry underinvestment over the years and the energy transition, having reduced its capex to an average of RM42 billion in 2016-2021 from an average of RM54.5 billion in 2011-2015.

Oil is wealth. But to make money from it, Petronas first needs to spend to bring out the hydrocarbon, which is getting more expensive as easy-to-reach reserves dry up, the upstream services industry heats up and emissions management adds to costs.

The group is doubling its capex allocation to RM60 billion in 2022 from its decade-low of RM30.5 billion in 2021 to play catch-up and undertake “material steps” into non-hydrocarbon businesses, chief financial officer Liza Mustapha said in June.

And while Malaysia could take another breather due to the 2022 oil bonanza, one must recall the sub-zero price environment in 2020. But Malaysian policymakers need to bear in mind that Petronas does not dictate the oil price — the global market does.

It is worth remembering that as recently as 2019, pundits pointed out that the oil price was sustainable at US$70 per barrel and not much higher. Oil’s flash crash of 41% in the last three months of 2018 was another reminder that price volatility is a norm in the industry, even if one removes extreme events such as the pandemic and Russia-Ukraine conflict from the equation.

Prices could spiral downwards if prevailing recession fears materialise. Additionally, a return to the market for even a portion of Russia’s oil, roughly 10% of global output, would weigh on prices.

Petronas’ US$50 to US$60 per barrel expectation in its 2022-2024 Activity Outlook allows a big buffer to ensure business resilience. That does not mean Malaysia cannot be more prudent. Recall that petroleum-related revenue had reduced to just 15% of federal government revenue back in 2016 — the second year that the country implemented the Goods and Services Tax (GST). Sadly, it was also because of GST that Petronas needed to declare a record high dividend to fill the fiscal hole for GST refunds.

It is easier to adjust during good times.

Will the current price situation persist going into 2023? Analysts are already forecasting that Brent crude will drop below US$100 per barrel in 2023, and to the US$80 range in 2024. Certainly, Malaysia cannot risk adjusting only when the oil price loses favour.

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