Of sustainability within O&G

THE Covid-19 pandemic has shifted investors’ focus towards environmental, social and corporate governance (ESG) in a heightened bid to enhance visibility, transparency and accountability for Corporate Malaysia.

The country has made great strides in this respect. Bursa Malaysia was one of the earliest bourses in the region to introduce an ethical investment stock market index in the FTSE4Good Bursa Malaysia Index back in 2014.

The index supports investors in making sustainable investments in local public-listed companies, and currently has 75 constituents as of end-2020, compared to 24 in 2014.

Meanwhile, in December 2019, the Securities Commission Malaysia released its Sustainable and Responsible Investment (SRI) Roadmap for the Malaysian capital markets, aimed at creating an SRI ecosystem and charting the
role of the capital markets in driving sustainable development.

Corporate Malaysia is not one to be left behind. In fact, Malaysia ranks among the top leading countries when it comes to sustainability reporting.

KPMG in a December 2020 survey revealed that 99 of the top 100 companies in Malaysia publish sustainability reports, just behind Japan (100) and ahead of other regional peers such as India (98), Taiwan (93), and Australia (92).

The survey, titled International Survey of Sustainability Reporting 2020, also found that 97 of the top 100 companies in Malaysia included sustainability information in their annual reports.

“While Malaysia’s high inclusion rate of sustainability data in annual reporting is driven by Bursa Malaysia, we see this active participation from Malaysian top companies to be an encouraging sign, which sets the tone and example for other jurisdictions to follow,” said KPMG Malaysia’s head of governance and sustainability Kasturi Nathan, in a statement accompanying the survey findings.

“In fact, we’ve observed a growing understanding amongst Malaysian boards and companies on the importance of operating in a responsible manner and the impact of ESG issues on society and economic sustainability which directly correlates to long-term financial performance and corporate value.”

But we’re not stopping there. The Securities Commission continuously updates its Malaysian Code on Corporate Governance (MCCG), the latest being the issue of long-serving independent directors in Malaysian public listed companies (PLCs) as a concern.

As at March 31 this year, 434 independent directors have served their respective boards for more than 12 years; of these, 49 have served on the same board for over 20 years.

“To encourage periodic refresh of board composition, the MCCG recommends that the two-tier voting process be implemented for re-appointment of independent directors with tenures of more than nine years,” the commission said in a statement.

“The two-tier voting process which was first introduced in 2017, acts as a speed bump for boards and shareholders to carefully evaluate the decision to retain independent directors with tenures of more than 12 years and provide minority shareholders the opportunity to vote against such retention in the second-tier voting process.”

The latest additions to MCCG 2021 took effect immediately upon its announcement on April 28 this year, and the first batch of companies to begin reporting on their adoption of these practices will be those with financial years ending December 31, 2021.

The two-tier voting process will be applicable for resolutions tabled at general meetings held on or after Jan 2, 2022, it said in a statement.

The 2021 update focused on, among others, board policies and practices on the selection and nomination criteria for directors, and further guidance for practices with low levels of adoption as reported in the SC’s annual Corporate Governance Monitor reports.

The MCCG 2021 also focuses on the role of the board and senior management in addressing sustainability risks and opportunities of the company.

The last update of the MCCG was in 2017 and the SC has observed encouraging adoption of the Code by listed companies since then, with the majority of the best practices recording adoption levels of over 70 per cent.

 

Excerpts from Petronas Activity Outlook 2021 to 2023

Drilling rigs: Total drilling demand is expected to be at 22 rigs for 2021 (from 14 in 2H20). The rise in demand mainly comes from hydraulic workover units (HWU) to 5 rigs in 2021 (from only 1 rig in 2H20). Meanwhile, jack-up rig demand is largely expected to remain weak at 10 rigs, up only 1 rig from 9 in 2H20.

Offshore fabrication: The number of new offshore structures are expected to be even lower moving forward, at seven structures in 2021, and only 1 in 2022 (based on Petronas’ base case scenario) – versus 8 structures in 2020 (planned was at 11). This may translate to lower job opportunities for fabricators.

Hook-up and commissioning (HUC): 2021 is expected to be lower at 3.5m man-hours, versus 4.4 million in 2020.

Supply of line pipes: Huge drop-off to 41km in 2021, from 79km in 2020.

Offshore maintenance, construction and modification (MCM): 2021 is expected to be slightly lower at 10.1 million man-hours, versus 11.2 million in 2020.

Plant turnaround: 2021 is expected to see higher number of turnarounds at 11, versus 7 in 2020.

Offshore support vessels: Demand for vessels is expected to be slightly higher in 2021 at 303 vessels, versus 279 in 2020. The rise in demand is mainly coinciding with the increased demand for drilling rigs.

Centering around the energy sector

THOSE in the energy sector, specifically in oil and gas (O&G), are given the extra scrutiny when it comes to ESG practice.

Despite the current downturn and uncertainty brought on by Covid-19, oil and gas companies continue to make progress toward a lower-carbon future, in line with the broader energy transition taking place across the entire energy, resources, and industrials sector.

As revenues and returns plunged, oil and gas companies are under increasing pressure from governments, regulatory authorities, activist shareholders and the general public to shift towards a decarbonised future.

And national O&G firm Petroliam Nasional Bhd (Petronas) is doing just that. In its annual Petronas Activity Outlook (PAO) for 2021-2023, Petronas has maintained a prudent view despite the collapse in oil prices and will continue to accelerate the transition towards a low-carbon economy, spurring policy intervention and global collaborations across industries.

Although gas remains a crucial and cleaner source of fuel, diversification into renewable energy was imperative, commented Petronas president and group chief executive officer Tengku Muhammad Taufik.

“Petronas has measured steps that demonstrate its stronger commitment to sustainability as it was taking cognisance of the acceleration of the global energy transition, heightened by stakeholder expectations and its vast opportunities.

“Built on Petronas desire to drive a fundamental shift in the way energy is produced, we announced our aspiration to achieve net zero carbon emissions by 2050 as part of our holistic approach to sustainability that balances environment, social and governance considerations across our value chain,” he added.

While fossil fuel remains core to the global energy mix, Petronas is redefining its energy offerings by pushing for the increased use of natural gas as a cleaner source of fuel in the energy transition while building capabilities in renewable energy for the security and sustainability of its supply.

Petronas’ acquisition of Amplus Energy Solutions Pte Ltd (Amplus), a leading distributed solar energy solutions provider and developer across India is to provide the capabilities and expertise for wider offerings in solar energy.

It is also a vehicle to explore opportunities in onshore and offshore wind energy generation for other Southeast Asian countries, with an aspiration to generate 3 GW of renewable energy capacity by 2024.

 

Progress with floating LNG vessels

Committed to establishing a deep-water LNG hub – LNG being part of their transition towards cleaner energy – Petronas expended its focus within floating LNG. In fact, Petronas became the first global energy company to produce liquefied natural gas (LNG) from two floating facilities following the first cargo delivery by Petronas Floating LNG DUA (PFLNG DUA) on March 24, 2021.

The cargo was loaded onto the Seri Camar LNG Carrier operated by MISC Bhd for shipment to a Petronas LNG buyer in Thailand, it said in a statement.

Petronas said PFLNG DUA, currently located at Block H Rotan gas field situated 140 kilometres offshore Sabah, has a production capacity of 1.5 million tonnes of LNG per year and operating at a water depth of 1,300 metres.

It said this milestone confirmed the viability of Petronas’ push in unlocking stranded and deep-water gas fields with floating LNG (FLNG) solutions that are more sustainable and economical compared with conventional solutions.

“Petronas is proud of this significant milestone from our second floating LNG facility. PFLNG DUA’s first cargo demonstrates our commitment to continue our pioneering efforts in providing more sustainable solutions to harness further value from LNG production through technological advancements.

“Similar to our flagship floating facility, PFLNG DUA’s mobility will allow us to unlock even more marginal and stranded gas fields in the future, providing Petronas with new and sustainable sources of LNG to meet the growing demand for cleaner energy,” Petronas’ Muhammad Taufik said.

With PFLNG DUA’s first cargo delivery, the national oil company will continue to extend its leadership in FLNG technologies, having introduced PFLNG SATU, the world’s first operational FLNG, in 2016.

PFLNG SATU also completed the world’s first FLNG relocation when it was deployed to Sabah’s Kebabangan gas field from the Kanowit gas field in Sarawak in March 2019.

Going forward, Petronas has guided that it will be spending RM40 billion to RM45 billion in annual capital expenditure (capex) for the next five years, with the focus still on domestic investments.

 

Capex for the years ahead

New energy initiatives will see Petronas an almost doubling its allocation of capex – from five to nine per cent – as the group gradually embrace its transition into renewable energy.

While these capex spending will still be lower as compared to pre-Covid levels, analyst Steven Chan from Kenanga Investment Bank Bhd (Kenanga Research) was still slightly encouraged by this, as the increased capex spending could mean the gradual resumption of activities over the coming years.

“Increased capex could mean gradual recovery of activities. While the latest Petronas Activity Outlook did guide a sluggish activity outlook in 2021, bear in mind that the report was drafted when Brent crude oil prices were in the US$40 per per barrel level,” he highlighted in a sector review.

“While we believe there are still some downside risks to oil prices, the increased capex spending from Petronas could be the catalyst to spark a recovery in activities, at least versus 2020 levels.

“Nonetheless, we do not realistically expect activity levels to resume back to pre-Covid levels any time soon.”

In another thematic report, analyst Alex Goh from AmInvestment Bank Bhd (AmInvestment Bank) outlined that O&G players have met the sustainability challenge head-on with substantial long-term commitments and strategic measures, including Petronas becoming the first Asian oil & gas operator to commit to a net-zero emission target by 2050.

“This follows the footsteps of major multinational operators such as Shell, BP, Total, Repsol and Equinor, while Exxon Mobil’s CEO has said that the bellwether company is “supportive” of such policies,” he added.

“The shift towards renewable energy (RE) in Malaysia is already in progress over the past three years with Petronas’ investment in AmPlus, which operates over 600MW of solar capacity in India and Southeast Asia.

“In its “great reset’, the national oil company is looking into the possibility of deploying more low-carbon solutions in the long term, with a project on carbon capture & storage, bio-based products and hydrogen on the horizon.”

Amongst local service providers, Goh saw that only Yinson Holdings Bhd (Yinson) has an operational renewable energy division from its US$30 million investment for a 95 per cent equity stake in Rising Son Energy, which has a 140MW solar farm in Bhadla Solar Park Phase II, Rajasthan, India. Yinson also recently signed an agreement with listed NTPC to develop a 190MW plant in nearby Nokh Solar Park.

“As Uzma Bhd has just secured a 50MW solar project which will only be operational by end-2023, we expect the momentum to gather steam for renewable projects by local O&G providers as gearing concerns are being alleviated by an improving oil price environment.”

Rise of renewable energies in Asia Pacific

Physical climate risks such as rising sea levels, droughts, floods and wildfires are credit negative for most rated sovereigns, particularly emerging markets in Sub-Saharan Africa, Asia Pacific and the Caribbean, according to Moody’s Investors Service.

From a sovereign credit perspective, weaker economic activity due to increasingly frequent climate related events will weigh on fiscal revenue and may lead to an increase in transfer payments and welfare expenditures, particularly in the event of climate shocks.

Many countries are exposed to at least one climate hazard, with emerging markets generally more likely to face multiple challenges than advanced economies, it said in it May 7 report.

“Sovereigns in Asia Pacific stand out for their exposure to flood risk – highest for Cambodia, the Philippines and Thailand. Exposure to heat stress is widespread among emerging markets. Advanced economies tend to be more exposed to rising sea levels, with Hong Kong, Singapore, Denmark and the Netherlands most at risk.

“Over time, repeated climate-related natural disasters can weigh on investment, productivity growth and economic strength, which can weaken a sovereign’s credit profile,” said Steffen Dyck, Moody’s vice president and senior credit officer.

“There is also a large gap between financing needs for climate-adaptation measures and low-cost funding sources. This threatens the credit profiles of sovereigns which are highly exposed to physical climate risk, especially those with already low fiscal strength.”

Thus, parallel with ESG’s growing interest is renewable energy (RE) which is also fast gaining traction, as it is expected to make up 69 per cent of the global capacity mix by 2050 from more than 30 per cent currently, according to BloombergNEF and International Energy Agency (IEA).

Researchers with Kenanga Investment Bank Bhd (Kenanga Research) believed the new reform will be led by wind and solar energy which would make up 56 per cent by 2050 (from circa 10 per cent) currently, while traditional gas and coal appear to have already peaked in 2020.

“Geographically, the Asia Pacific region is poised to lead investments in new capacity over the next 30 years, with the rest of APAC (which excludes China and India) expecting US$1.9 trillion to be invested,” it said in a RE thematic report.

“Locally, Malaysia is targeting a 20 per cent RE ratio by 2025 while the Association of Southeast Asian Nations (Asean) ministers have set a target of 35 per cent RE in installed power capacity by 2025.

“Based on the Malaysian Generation Development Plan 2019, the electricity demand is expected to grow at 1.8 per cent per annum over the next 11 years with 9,321MW of new capacity required to meet demand growth.

“As such, the increase demand will be led by rising supply of RE to 23 per cent – from about two per cent in 2020 – by 2025, while thermal capacity share will reduce to 70 per cent (from 82 per cent), which would result in an estimated annual system cost of RM35.2 billion in 2020 to RM45.4 billion in 2030.”

 

Sunny days for solar, but gone with the wind

It comes as no surprise that the shift from environmentally exhaustive gas and coal energy is largely a result of declining RE cost over the years, Kenanga Research said.

Globally, unsubsidised cost of solar photovoltaic (PV) and wind has already become cheaper than conventional technologies with similar generation profiles, such as gas peakers and gas combined cycles.

“However, there are some instances where the capital cost of certain RE technologies, namely solar PV (crystalline utility scale) and solar PV “thin film utility scale) have converged with conventional technologies, which coupled with the improvements in operational efficiency, have led to the convergence of Levelised Cost of Energy (LCOE) in respective technologies,” it highlighted.

“Solar cost in particular has decreased as a result of improved technology which include higher wattage panels to 550W in 2021 (from 245W in 2016), leading to lower per watt cost whereby the Balance of Plant, EPC and the cost of project development are spread over more power generated.”

Meanwhile, AC inverters (compared to DC) have better ability to detect faults and optimise outputs.

This should seal the deal for most countries to shift to solar generation as it is one of the cheapest and most scalable ways to meet RE generation targets, while other less competitive energy sources are expected to be phased out.

An unusual observation made by Kenanga Research was wind energy being the less popular RE choice due to infrastructure and complex supply chain.

“World turbine price trends have also been on the decline due to oversupply, and competition as oil and gas companies compete for more market share,” it said. “Bigger turbines which translate to more energy and floating wind are expected to be the future for wind energy.

“However, this segment remains challenging due to grid limitations to offshore locations, while larger turbines require stronger foundations.

“If these concerns are addressed, wind would be an interesting option for Malaysian engineering companies or companies with steel making capabilities and shipping partners to improve the value chain.”

 

Bigger pockets for energy storage

A key criteria to help improve energy efficiency is declining energy storage cost. For viability, Kenanga Research saw that energy storage is particularly important for intermittent energy generations like solar which only occurs during sunlight hours, and wind which is dependent on weather conditions.

As such, effective battery storage is vital to harness the energy to be stored for future use when needed.

“In the past, without affordable and effective energy storage capacities, RE was highly dependent on weather conditions and could not produce enough power to meet peak energy demand.

“Going forward, energy storage prices are projected to trend steeply downwards by as much as 65 per cent to US$73 per kWH by 2030 (from US$208 in 2018) due to technology and design advancements, as well as better economies of scale,” it estimated.

“On this front, China is taking the mantel as the manufacturing leader and is expected to dominate the growing supply of lithium cell plants at 68 per cent of global demand by 2025, followed by Europe (17 per cent) and the US (seven per cent).”

 

Malaysia’s RE journey

Going forward, local solar players may see increased overseas contribution given limited barriers to entry to penetrate international markets and a competitive local environment.

“In order for Malaysia to meet its 20 per cent RE capacity mix target by 2025, it would have to develop 2,758MW of new RE capacities, of which the bulk will consist of solar of 2,172MW and 1,586MW of non-solar
which is a sizeable amount for growth,” the research firm gathered

“However, local bids such as the recent LSS bids have been highly competitive, going as low as RM0.177pkWH which is lower than gas-based power generation cost of RM0.23pkWH and the reference price of LSS2 of RM0.32pkWH.”

Given that Malaysia is not facing an acute shortage of electricity supply and RE demand is mostly based on local government targets, it said international markets may prove to be more profitable given the necessitated commitment for increased energy supply.