Coronavirus means cheap oil isn’t good news for energy-hungry Southeast Asia
- With demand at an all-time low, things look dire for Indonesia, Malaysia, Vietnam, Thailand and Brunei, whose state revenues rely on oil and gas projects
- Meanwhile, Singapore’s struggling offshore and marine sector will be further squeezed
The oil and gas industry is no stranger to volatility. But with the Covid-19 outbreak in tow, things are different this time, says Tan Lian Yok, a Singapore-based partner at international law firm K&L Gates Straits Law.
“What’s different is that business is not as normal. You have all that oil either in the ground or in storage but it’s stuck, because no one is consuming it,” Tan said. “That’s going to be a big problem.”
DOUBLE WHAMMY
But in a world awash with supply, and where demand has drastically evaporated because of coronavirus lockdowns, the region’s oil and gas businesses are sitting on the verge of implosion.
For countries such as Indonesia, Malaysia, Vietnam, Thailand and Brunei, much of their state revenues rely on oil and gas projects.
Malaysia is facing about 16.5 billion ringgit (US$3.8 billion) in potential losses from oil-related revenue for 2020, mainly from petroleum income tax.
“This time around, you’re having problems on both the supply and demand sides,” said TSMP Law Corporation lawyer Melvin Chan. “The oil producers don’t seem to be playing ball, while air travel is dead, shipping has gone down. It’s a double whammy.”
In 2015 and 2016, for instance, while Indonesia made use of fuel subsidies, or the removal of some of them, to bolster government spending, it is unlikely to be able to do the same today because consumption is hammered.
Still, the low oil prices have attracted some bargain hunters for now, at least.
A Bloomberg report said Indonesia’s state-owned Pertamina has hired tankers to store refined fuels at sea, while Australia’s federal government is set to spend US$94 million on a fuel reserve in the United States to add to its national stockpile.
DEEPER AND HARSHER
In an industry that is capital- and credit-intensive, it is the lack of cash flow that will drive many to their demise.
Reuters reported on Thursday that Chinese state energy company Sinopec was said to be eyeing a stake in an oil storage terminal that is partly owned by Hin Leong.
Even before Hin Leong’s collapse, another commodity trader, Agritrade International, was placed under judicial management in February, while Hontop Energy (Singapore), the trading unit of a Shandong-based refiner, went into receivership.
Singapore’s central bank has told banks not to “de-risk indiscriminately” from the bunkering and oil trading sectors. But as oil industry consultant Ong Eng Tong put it: “Which bank would dare to open a letter of credit for a company in the oil business now?”
More will follow as the financial strains deepen. “We expect bad loans (from the sector) to increase over the next three to six months. Any oil companies that are looking to roll over debt will find it more difficult this time round,” said King & Spalding lawyers Andrew Brereton and Merrick White.
A source who asked not to be named added that a number of companies in Indonesia and Thailand were looking at legal help with their liabilities.
Offshore and marine contractors that support oil and gas projects will also be squeezed, with debt-laden firms such as Falcon Energy, Swiber Holdings and Ezion Holdings looking especially vulnerable.
“Cheap oil is good for the vessel operators. But nothing can mitigate low or no demand,” said Ang Ding Li, an analyst at market intelligence firm IHS Markit.
“The way I see it, this downturn will finish what 2014 didn’t do. It will rebalance the market, and only the competitive and financially strong will survive,” he said. “If not, it’s game over.”