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In April 2020, the Malaysian government reported that throughout the lockdown period that was implemented to nipthe spread of COVID-19 in the bud, the economy was losing approximately RM2.4 billion a day. There have been four phases of the Movement Control Order (MCO): March 18-31, April 1-14, April 15-28, and April 29-May 12. This adds up to almost two months, with an estimated total loss of RM63 billion as of May 1.

To arrest the loss of revenue, while taking into consideration the improvement in the number of COVID-19 cases in the country, the government made the decision to partially reopen the economy on May 4, 2020, with a Conditional MCO (CMCO) implemented until June 9. This eased into the Recovery MCO (RMCO) phase until August 31 with more freedom of movement and almost all sectors being opened.

As the economy gets moving again, the effects of the pandemic and the MCO are slowly being felt around the country. With businesses having to tighten their belts to stay afloat or shutting down altogether and jobs being lost – some estimates say more than two million Malaysians can end up unemployed – economists expect the country to face a rough recession in 2020.

Some analysts say the recession is already here. Others, however, believe that it is not quite here yet but will arrive soon. By definition, a recession is a period of negative growth over two consecutive quarters, i.e. six months. One can argue, therefore, that it is just a matter of time.

While some paint a doom-and-gloom picture of the worst recession in history with a very long recovery period ahead of us, others take a more optimistic perspective that recovery will be faster than expected because they view the recession as an artificial event that is the result of a forced shutdown of the economy. Backed by macro policies and fiscal stimulus, they believe the economy will pick up speed in the second half of 2020 (2H20) and return to business as usual by 2021.

Perhaps the first quarter GDP numbers released for 2020 (1Q20) are a harbinger of things to come. The economy recorded a growth of 0.7%. Granted, it is a huge drop from the 4.5% growth in the same quarter in 2019 (1Q19). It is a big drop even when compared to 2019’s already poor fourth quarter (4Q19) performance of 3.6%, which until 1Q20 was the lowest since a decade ago in 3Q09. A slump in tourism, a drop in demand for palm oil, crude oil and natural gas, and weak economic activity due to the MCO have all served as a wrecking ball to 1Q20’s GDP, but this 0.7% is still better than the -1% contraction that many economists and analysts had predicted. Some even anticipated a contraction as low as -4.0%. Bank Negara Malaysia (BNM), which in April 2020 had estimated a GDP contraction of -2.0% to 0.5% for the year, said the second quarter (2Q20) GDP is expected to see a sharper drop compared to 1Q20, but it is predicted to recover in the second half of the year (2H20) with the lifting of the MCO and the resumption of economic activities.

BNM governor Datuk Nor Shamsiah Mohd Yunus pointed out that several key catalysts have been set in motion to support the country’s economic growth, such as the Prihatin Rakyat Economic Stimulus Package, BNM’s reduction of its Overnight Policy Rate, the continuation of public projects, as well as higher public-sector expenditure.

“The sizeable fiscal, monetary and financial measures and progress in transport-related public infrastructure projects will provide further support to growth in 2H20. In line with the projected improvement in global growth, the Malaysian economy is expected to register a positive recovery in 2021,” she said.

Meanwhile, Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz emphasized the importance of managing the pandemic quickly.

“I am not sure when we can come up with the vaccine for COVID-19, but with the help of the people, the government and everyone involved, we can help manage the situation and help the economy recover,” he said.

He also highlighted the impact that the stimulus packages are projected to have on the economy. “If there was no Prihatin Rakyat Economic Stimulus Package, the decline in the GDP would be more pronounced. It can generate up to 2.8% for the GDP. Therefore, it is important to help the economy recover in the short and medium term.”

The Prihatin Rakyat Package is the second stimulus package unveiled by the government. Announced on March 27, 2020, it is worth RM250 billion and includes the RM20 billion announced a month earlier in the first Economic Stimulus Package. Said to be the equivalent to 17% of the country’s GDP, Prihatin is expected to ease the burden of businesses and individuals facing income loss as a result of the MCO. As the engines of the economy that employ two-thirds of the country’s workforce and contribute about 40% to the GDP, Small and Medium-sized Enterprises (SMEs) have been given special attention with an additional stimulus package worth RM10 billion.

More recently, just before the announcement of the RMCO on June 7, 2020, another aid package was unveiled by the government to assist the recovery phase. Worth RM35 billion, the National Economic Recovery Plan, or Penjana, is packed with 40 initiatives that address immediate issues such as unemployment and domestic spending.

With all this financial cushioning, can Malaysia look forward to avoiding a bad recession? This is not an easy question to answer. While analysts agree a recession is unavoidable, the severity of it is not quite clear. Despite BNM’s optimism about growth in the second half of the year, it has not been able to provide a definitive forecast range for the economy, as uncertainties posed by COVID-19 and domestic commodity challenges continue to persist.

BNM has already cut its OPR three times so far this year to ease the impact of the lockdown, but economists predict more cuts may be likely this year. At the time of writing, BNM still maintains a GDP of between -2.0% and 0.5% for 2020, but it will announce a revised forecast in the second half of the year. With the situation still fluid, estimating the country’s growth rate for 2020 continuous to be a challenge because unlike a normal recession, this one has been triggered by a health crisis. Whatever the outcome, it is a safe bet that while everyone hopes for the best, they will be preparing for the worst.

To say that the oil and gas industry has been going through some troubled times is an understatement.

The oil price war between Saudi Arabia and Russia essentially began when COVID-19 broke out in China, the world’s largest importer of oil. With the number of cases increasing, China made the decision to extend the Lunar New Year holiday at the end of January 2020 to keep people at home and shops and offices closed. The shutdown of the economy inevitably led to a decrease in oil demand and oil price.

As the COVID-19 outbreak spread around the world, the ensuing shutdown of economies suppressed demand further and added to the oil glut. In response, the Organisation of the Petroleum Exporting Countries (OPEC), led by the world’s top oil exporter Saudi Arabia, proposed a deal with its non-OPEC allies to cut production by 1.5 million barrels a day – on top of the already agreed 1.7 million barrels – to stabilise prices.

Russia, however, refused to cut its output. Analysts suggest that doing so would mean giving more room for US shale oil output to grow. The US is already the number one oil producer in the world, thanks to its shale sector.

As a sign of retaliation against Russia, Saudi Arabia raised production and dropped its crude oil prices, thus triggering the price war. Analysts see this as a move to capture market share and cement Saudi Arabia’s position as the world’s leading oil exporter.

When prices kept falling, OPEC and its non-OPEC allies (known collectively as OPEC +) together with the Group of 20 nations, made an unprecedented agreement to cut production by about 10% or 10 million barrels a day – the largest ever cut in oil production – to halt prices from slumping further. It kicked off with a reduction of 10 million barrels per day in May and June 2020 (later extended until the end of July at the time of writing). This is to ease up to 8 million barrels per day until December 2020, and then reduce further to 6 million barrels until April 2022.

But despite this massive cut in output, oil prices continued to fall, reportedly due to fears of decreasing storage space for the world’s surplus oil. In the US, prices dropped to historic levels. On April 20, 2020, the West Texas Intermediate (WTI) crude – the benchmark for US oil – went negative by tumbling to -US$37 per barrel. Two days later, Brent crude – the global benchmark – sunk to a 20-year low of US$15 per barrel earlier in the session before settling at US$20 per barrel.

Both benchmarks rebounded days later and have been on an upward trend as economic activities slowly restarted around the world. At the time of writing, WTI was at about US$39 per barrel, while Bent crude stood at about US$42 per barrel. This, however, may not mean that the worst is over. With the easing of lockdowns around the world and the reopening up of economies, demand for oil has been recovering. But many countries are still struggling to bring the number of COVID-19 cases under control while facing the after-effects of lockdowns such as job losses, company shutdowns and social distancing (which has affected travel and working conditions). There is also the risk of reinfections and a resurgence of the coronavirus.

Additional new headaches in the oil and gas industry have also cropped up. The pandemic has disrupted repair and maintenance schedules in projects and refineries around the world. Regular repair work that is needed to keep wells pumping, and pipelines and refineries functioning and ships moving could not be carried out due to movement restrictions and lack of parts. This loss of optimal repair time means a higher risk of glitches and unplanned outages that can cost more time and money down the line once lockdowns are eased and maintenance works are rushed through in order to catch up to schedule. In the northern hemisphere, missing out on weather windows could mean pushing maintenance works to next year. Lack of work and rising unemployment in the companies that service the oil industry are also going to have an impact on the industry.

There is still much uncertainty in the months ahead. But analysts expect to see signs of recovery by the end of 2020. In its June 2020 Oil Market Report, the International Energy Agency (IEA) said: “So far, initiatives in the form of the OPEC+ agreement and the meeting of G20 energy ministers have made a major contribution to restoring stability to the market. If recent trends in production are maintained and demand does recover, the market will be on a more stable footing by the end of the second half.”

As all of this is transpiring, calls for renewable energy have ramped up, with environmentalists urging governments and industries around the world to wean themselves off petroleum. According to them, this is the best time to establish new norms by adopting safer and sustainable green energy alternatives to oil, such as wind, solar and hydrogen.

In a report by investment bank and financial services company Goldman Sachs, global investment in renewable energy is set to surpass oil and gas for the first time ever in 2021. The report, entitled Carbonomics, said: “Clean tech has the potential to drive between USD1 trillion and USD2 trillion of green infrastructure investments a year and create 15-20 million jobs in the energy industry worldwide by 2030, mostly through public-private partnership.”

Despite the oil and gas industry incorporating more green technologies and approaches over the years, it has been under constant pressure to keep reducing greenhouse gas emissions. This is expected to continue, even more so post-COVID-19 after the beating the industry took with the global lockdowns. The most popular green investment option for traditional oil and gas companies is offshore wind energy. Analysts at research and consultancy group Wood Mackenzie say offshore wind is expected to attract more than US$211 billion between 2020 and 2025. This technology is nothing new. In fact, it has been around since 1991.

The reason why offshore wind is the green investment of choice is clear. It is clean, renewable and abundant. It is also more stable than solar and onshore wind, and could produce up to twice as much energy as onshore wind. Europe currently leads in offshore wind energy due to a combination of factors – its scarce land, its strong winds and its population that is located near shallow waters. However, global quality assurance and risk management company DNV GL in its Offshore Wind: The Power to Progress report said that huge offshore wind potential exists around the world. It further predicts that wind, both onshore and offshore, is set to power 30% of global electricity production by 2050.

Perhaps no other industry is as volatile as the oil and gas industry. For the investors who are reeling from the pandemic-induced oil crash, offshore wind may be the answer. The return on investment may be low, but so is the risk. Despite being complex and costly affairs, offshore wind could be well worth its price.

Malaysia produces about 700,000 barrels of crude oil per day and is ranked about 26th in the world. The country is also the fourth-largest exporter of Liquefied Natural Gas (LNG) in the world. To compare, the US, currently the world’s top oil producer, puts out about 17 million barrels per day. Our production is small in comparison, but it is a highly valuable commodity, as the country is heavily reliant on the oil and gas industry to power its economy.

As an oil producer and exporter, Malaysia’s revenue is vulnerable to market forces. Ratings agency Malaysian Rating Corporation Bhd (MARC) reported that in 2019, the country’s oil-related products accounted for about 9% of total exports. The sector also generated about 21% of the country’s revenue annually.

The extraordinary jolt that the oil market has undergone due to the COVID-19 outbreak is expected to cause a serious dent to the country’s revenue. At the peak of the outbreak, oil prices had lost more than half its value since only December 2019. In Budget 2020, the revenue from oil and gas was projected to be RM50.5 billion, which is 20.7% of the country’s total expected revenue of RM244.5 billion.

This was premised on an oil price of US$62 per barrel. At the time of writing, Brent crude is at US$42 per barrel. This slump in crude oil price not only means billions lost in revenue but also less money available for domestic needs and development plans that have been laid out in Budget 2020. CGS-CIMB Research estimated that if crude oil stabilises at US$48 per barrel, Malaysia would still fall short of its projected oil revenue by RM4.5 billion.

Following the decision made by the OPEC+ countries to reduce production and stabilise oil price, Malaysia also pledged to cut output by about 136,000 barrels per day in May and June 2020, which is bigger than expected and almost seven- to nine-fold the country’s previous cuts. How fast things get back on track depends on how quickly oil prices recover and how effectively the outbreak is contained. While some analysts remain optimistic and believe the situation is temporary, others say
oil prices will not get back up for another year or longer because of uncertainties such as continued oversupply of oil and the return of COVID-19 in the near future.

Over at Petroliam Nasional Bhd (Petronas), its first quarter numbers for 2020 show a slump in net profit by 68% to RM4.5 billion from RM14.2 billion a year ago, primarily due to net impairment on assets and lower revenue recorded. The company’s first quarter revenue decreased by 4% to RM59.6 billion from RM62 billion last year, mainly due to the impact of lower average realised prices recorded for liquefied natural gas, petroleum products and crude oil and condensates. The national oil company – which controls all oil and gas resources in the country and is responsible for their development – anticipates a very challenging outlook for the rest of 2020, with economic activities expected to only gradually recover in the second half of the year. “Against this challenging backdrop, our focus is to preserve cash and maintain our liquidity, continue our cost compression efforts and respond to changing market conditions with pace,” it said in a statement.

The company, which initially planned to maintain its overall capital expenditure (capex) of RM50 billion for 2020, will now reduce it by 21%. It will also cut its operating expenses by 12%. As for its domestic capex of RM26 billion-RM28 billion, Petronas said it will strive “as far as practically possible” to minimise the impact of the cuts. It also plans to maintain its dividend of RM24 billion to the government.

For the long term, however, Petronas will stay committed to its three-pronged growth strategy, which is to maximize cash generators, expand its core business, and step out to future-proof the organisation and ensure the company’s long-term sustainability.

Part of this “future-proofing” include focusing on renewable energy, for which the company had planned to allocate 5% of its capex. This percentage is expected to go up to 7% to 8% in the next five years. While Petronas believes that all forms of energy need to be developed to meet growing demand, oil and gas are expected to remain the company’s core business. In the Petronas Activity Outlook report for 2020-2022, Group Procurement Vice President Liza Mustapha advised industry partners and players that despite a challenging outlook, they need to “embrace innovation, technology and digitalisation, which can bring bigger benefits over a longer horizon to enhance competitiveness, speed, accuracy, agility and ultimately resiliency. The industry also needs to forge stronger partnerships that would ultimately enrich lives for a sustainable future.”

An example of this partnership was put into practice when three associations that represent the interests of the Malaysian oil and gas industry announced that they have engaged with Petronas to mitigate and address the dismal situation affecting the industry. The Malaysian Oil and Gas Services Council (MOGSC), the Malaysia Offshore Support Vessels Owners’ Association (MOSVA), and the Malaysian Offshore Contractors Association (MOCA) observed social distancing requirements and held a video conference meeting with Petronas.

Representing over 500 companies and a workforce of 60,000, the three organizations brought up the challenges they have been facing and sought guidance and assurance from the national oil company. Issues discussed include maintaining sustainability and stability in order to survive this difficult time, attaining clarity for the industry to move forward and establishing the guiding principles of the “new normal”. Among the recommendations made are the need for joint government and industry cost optimisation exercises at a more holistic level across the ecosystem, and the need for the industry to be less reliant on the global supply chain so that it can become more competitive in the long run. It was also agreed that to manage future challenges, such dialogues must be continued so that the right information can reach industry players and the market.

The importance of partnerships and information sharing was highlighted in the Petronas Activity Outlook when the company announced that it is sharing contracts that cover a broader spectrum of jobs with substantial values for large players as well as Small and Medium-sized Enterprises (SMEs). Many of these contracts are up for re-tendering during 2020-2022. This presents an opportune time for industry players to strategize on resources, new technology and tactical partnerships.

Economies have opened up around the world and oil prices have been moving up, but industry experts in Malaysia believe this recovery is still fragile with many unknown elements still at play. The one thing that Petronas, its partners and other oil and gas companies would agree on, however, is that the sooner both the price and the pandemic can be brought under control, the faster their goals and objectives can be realised.

Many outside the industry may not be aware of Malaysia’s Shipbuilding and Ship Repair (SBSR) industry. Part of the marine industry, there are over 100 shipyards that employ over 15,000 people. In 2018, the industry brought in a total revenue of RM7 billion. Of the five contributing groups under SBSR – shipyard, classification, manufacturer, design, and Maintenance, Repair and Overhaul (MRO) – shipyard recorded the highest revenue at RM4.93 billion.

Exports, however, have not been growing steadily. In 2018, it increased to RM1.29 billion from RM1.08 billion in 2017, mostly in light vessels, dredgers, floating docks and cargo ships to countries such as Australia, Indonesia, Thailand and the US. But in 2019, exports dipped to RM952.2 million.

According to figures from the Malaysian Industry-Government Group for High Technology (MIGHT), Malaysia ranked 18th in shipbuilding in 2015. This dropped to 24th in 2017. The country still only captures a very small portion of the global shipbuilding market at about 0.05%.

Although actively involved in shipbuilding since the 1900s – Sarawak’s Brooke Dockyard was established in 1912 – the country has not been able to tap into its full potential and compete globally. In fact, it has fallen behind other countries in the region such as Vietnam, Myanmar and the Philippines. Leading the pack are China, South Korea and Japan, representing about 85% of the industry. South Korea’s shipbuilding industry began at around the same time as Malaysia’s, but it has since pulled way ahead.

The Malaysian Shipbuilding and Ship Repair Industry Strategic Plan 2020, known as SBSR Strategic Plan 2020, was the first national plan to chart a course for the industry. Jointly developed in 2011 by MIGHT and the Association of Maritime Industries of Malaysia (AMIM), the plan laid out a number of targets to help the industry become a major player in the small to medium-sized shipbuilding market by 2020. Some of the targets include capturing 80% of the local new build market, 2% of the global new build market, 3% of the Straits of Malacca repair market, and 80% of the South China Sea offshore repair market, while generating a gross national income of RM6.35 billion and creating 55,000 jobs.

Other government efforts that have earmarked shipbuilding as a strategic industry are the 11th Malaysia Plan (2016-2020), the Third Industrial Master Plan (2006-2020) and the Malaysia Shipping Master Plan (2017-2022).

Now that 2020 has arrived, figures show that the SBSR Strategic Plan 2020 has missed its targets, having only managed to meet 60% of what was intended. According to First Admiral Dato’ Ir Ahmad Murad Omar of AMIM, the SBSR sector is still troubled by long-standing local issues that were impacted by past global economic slumps and fluctuating oil prices. These issues include ill-equipped infrastructure and medium-level automation in shipyards, high cost of repair and maintenance, and lack of support from financial institutions. As a result, orders plunged.

A publication entitled Issues & Challenges: Asian Shipbuilding Industries reported that despite an increase in the number of shipping licenses issued by the Ministry of Transport, which indicate a rise in the number of ships operating in Malaysian waters, local shipyards are still unable to capture the repair market of foreign ships whose owners prefer to dock in Singapore or Indonesia. The authors suggest that slower turnaround is the main reason for this and recommend an upgrade of shipyard facilities to capture the international market.

The authors also discovered that the west coast of Peninsular Malaysia is equipped with a docking capacity of 300 to 10,000 Gross Registered Tonnage (GRT), which is suitable for small and medium-sized vessels, but the shipyards in the east coast and East Malaysia lack this facility. With 60 of the over 100 shipyards in the country located in Sarawak, East Malaysia can potentially become a regional SBSR hub, provided the geographical issues of shallow rivers and strong currents can be overcome.

Despite problems, the Ministry of International Trade and Industry (MITI) is confident that the long-term prospects of the industry is bright and can be sustained with: the development of new competencies, the formation of strategic partnerships with international and regional players, and the adoption of Industry 4.0 and digital technology.

The adoption of Industry 4.0 in particular has been singled out. The term refers to the Fourth Industrial Revolution related to automation and data exchange in manufacturing. It is driven by the digital revolution and the Internet of Things. With most industries being transformed by Industry 4.0, the government has indicated that all SBSR industry policies must be adjusted accordingly to remain competitive in the global arena.

MIGHT echoes these sentiments and agrees that the adoption of Industry 4.0 technologies such as Artificial Intelligence, Robotics, 3D Design and 3D Printing will create new opportunities in the SBSR industry, especially for local players, through job creation, skill strengthening, supplier enhancement and local enterprise development.

One area that the government feels would give the SBSR industry an edge over the competition is design capability. According to MITI, the lack of local capabilities in ship and marine design has led to the dependency on foreign suppliers, which translates into a loss of market opportunities. Therefore, the initiative was taken to establish the Asia Marine Design Centre (AMDeC) at Universiti Kuala Lumpur (UniKL), a joint effort with the Technology Depository Agency (TDA) under the Ministry of Finance.

The oil and gas industry is one of the major driving forces of the local SBSR industry. During peak oil seasons, local shipyards diversify into offshore engineering and fabrication. But when oil prices fall – as they did due to the Saudi Arabia and Russia price war and the COVID-19 pandemic – these shipyards, their employees and support services are the most affected.

The Malaysia Shipowners’ Association (MASA), for one, is very thankful for the assistance rendered by the government during the lockdown. “We have not seen this before. It was unprecedented and it was difficult to keep ourselves afloat,” MASA Chairman Datuk Abdul Hak Md Amin said. “But I laud the government as it has done a tremendous effort with the stimulus packages and the moratoriums.”

With the easing of the lockdowns in most countries, he looks forward to an improvement in the industry. “We hope the upward trend of the crude oil price will continue to the level before the crisis. With the higher oil price, the offshore activities will be reactivated and the demand for the support services will improve.”

There is plenty of room for the industry to grow, particularly in ship design, parts and components manufacturing, system integration and other marine equipment production. With Malaysia’s strategic location along the Straits of Malacca and the South China Sea, two of the world’s busiest sea lanes, there is much potential in the country’s SBSR industry that cannot be ignored. Its trajectory remains full speed ahead.