No short-term threat to global supply dynamics

PETALING JAYA: While US President Donald Trump’s executive orders signal a push for greater oil and gas (O&G) output, industry experts say structural constraints could limit an immediate surge, posing no short-term threat to global supply dynamics, prices or Malaysia’s O&G sector.

On Jan 20, upon assuming office, Trump declared a national energy emergency to accelerate domestic oil and gas production.

He signed executive orders promoting fossil fuel development in Alaska, revoking the previous administration’s electric vehicle adoption targets, suspending offshore wind leases, and lifting the freeze on liquefied natural gas export permits – shifting the spotlight back to the O&G industry.

However, the United States, which is currently the world’s top crude oil and gas produce, faces constraints on further production growth.

“The United States is already producing about 13.5 million barrels per day and increasing beyond this level is difficult,” Deleum Bhd group chief executive officer Ramanrao Abdullah, who spent decades with the world’s second-largest oil service company Halliburton, told StarBiz.

“Even if new drilling sites are approved, it takes time – from identifying a project to achieving final investment decisions and production.”

Furthermore, Ramanrao explained that unconventional oil production, particularly shale oil, has a relatively high break even cost, making it vulnerable to production declines if prices fall below that threshold.

Hibiscus Petroleum Bhd founder, managing director and substantial shareholder Kenneth Gerard Pereira, also a seasoned O&G professional, echoed similar concerns, emphasising that the United States O&G industry is already in an “overdrive” situation.

“For the United States to have reached this level over the past few years, I would say the industry is already in what I would describe as an overdrive situation,” he said.

Kenneth highlighted five key drivers that shape global O&G production – investment, decline rates, geopolitics, oil company priorities and climate-related factors.

“What drives production? One, investment – how much big oil (the world’s largest O&G gas companies) is willing to invest in new drilling and infrastructure,” Kenneth explained.

“The other is the O&G sector’s rate of decline. O&G fields’ production drops between 5% to 15% annually.”

Kenneth said the industry is sprinting hard just to stay in the same place because of this production decline.

“When Trump says “drill, baby, drill,” the reality is that big oil is drilling just to stay in the same place, not to increase production significantly,” Kenneth said.

“If the entire industry stops investing for one year, production could fall to 90 to 95 million barrels per day from the current 103 million,” he said.

Beyond geological and economic challenges, Kenneth also pointed to geopolitical factors, such as sanctions on Iran and potential sanctions on Russian vessels, which affect production and distribution.

He also noted the importance of publicly traded oil companies, which are under pressure to meet shareholder obligations, such as dividends and buybacks, limiting their ability to pursue aggressive production growth.

Finally, he pointed to climate-related factors, including decarbonisation and mitigation plans.

“It comes down to supply and demand,” Kenneth said. “The market won’t overproduce beyond what there is demand for.”

BMI, a Fitch Solutions unit, stated Trump’s moves to deregulation the energy market in the United States, expedite permit processes and rollback of environmental protections, including potential tax cuts, should all help to lower costs and incentivise spending. However, it is not within the president’s power to dictate domestic production levels.

“The large companies that dominate oil and gas output in the United States have shifted their strategies over the past 10 years. Their focus is now on high grading their portfolios, strengthening their balance sheets, maximising their profit margins and increasing shareholder distributions. “As a result, they have become far more selective in their drilling, and this is unlikely to change under Trump,” BMI stated in a recent report.

Could higher production in the United States trigger a price war with The Organisation of the Petroleum Exporting Countries and its allies’ (Opec+)?

BMI thinks its unlikely as a price war with the United States would involve Opec+ producers maximising their output to undercut prices and drive shale production into decline.

Given the cartel holds over five million barrels a day in spare capacity, the impact on prices would be swift and severe, making the Brent crude contract decline below US$50 a barrel levels almost inevitable. “However, this would be fiscally painful for the cartel, putting a severe strain on the core Opec+ members that rely heavily on oil revenues to finance their government spending.

“In particular, Saudi Arabia requires significant revenues as it invests in large-scale diversification projects,” BMI noted.

The fact is, Opec+ can be very effective in managing short-run shocks to the market but cannot combat structural market trends.

The advent of shale oil and gas has structurally altered the market and there is nothing the group can do to durably remove it from the supply mix.

Anyways its believes ‘Big Oil’ and Opec+ producers are following their own agendas, and both would prefer prices to roam in the higher range of US$80 to US$90 a barrel level in 2025.

Shifting the focus to the local scene, Ramanrao noted that Malaysia’s O&G sector, which has long-term contracts in place, is less likely to be impacted by the immediate push for increased US production.

“Our contracts are long-term, so our industry won’t be affected that much. All the off-take is already there. In the short run, I don’t see significant changes,” he said.

Meanwhile, Kenneth stated that Malaysia remains an attractive investment destination for O&G companies due to its stable geopolitical environment and competitive costs.

He cited France’s TotalEnergies SE acquisition of SapuraOMV Upstream Sdn Bhd as a sign of investor confidence in the country.

In January 2024, TotalEnergies agreed to purchase a 50% stake in SapuraOMV for US$903mil, which included a US$350mil loan transfer, followed by an April 2024 deal to acquire the remaining 50% from SapuraOMV for US$530mil.

“The deal was a very good show of confidence for Malaysia. I think people are interested in coming here,” Kenneth said.

He further emphasised that the real impact of Trump 2.0 on the O&G industry will likely come from tariffs rather than increased drilling in the United States.

“The tariffs will cause a reduction in consumption. That’s what’s going to impact the industry. Tariffs will cause economies to potentially taper down their plans,” he said.

“So, it’s the tariffs, more than “drill, baby, drill,” that you have to look at carefully.”

He also pointed out that investment flow into any country for the O&G business depends on factors such as the unit cost of production, taxation rates, and geopolitical risks.

“People are interested in making a profit. If the unit cost of production is attractive and geopolitical risks are low, industry capital will flow here,” Kenneth said.

“Malaysia’s geopolitical risks are very low, so it’s all about unit costs and taxation. If our costs are too high or taxes are too steep, or if climate-related policies hinder the industry, investment could slow down.”

“At the current oil price and cost of production, investment looks promising.”

Looking ahead, Kenneth forecast crude oil price to range between US$75 and US$85 per barrel which would strike a balance between industry investment and economic growth and without putting oil-dependent countries under financial strain.

“That price range allows for investment and growth without putting countries with heavy reliance on oil revenues in financial jeopardy,” he said.

Meanwhile, Ramanrao noted that Trump’s stance against green energy could drive higher demand for O&G, potentially pushing prices up.

“If fossil fuel demand increases, even with a slight increase in supply, the price will remain healthy,” Ramanrao said.

Brent crude futures are currently trading at slightly over US$76 per barrel.

Meanwhile, Petroliam Nasional Bhd (PETRONAS) remains committed to increasing Malaysia’s oil and gas production to two million barrels of oil equivalent per day (boe), up from the current 1.7 million boe, according to its 2025-2027 activity outlook report.

This target will be driven by key projects such as Kasawari, Gumusut-Kakap Redevelopment, Bekok Oil Redevelopment, Tabu Redevelopment, and Seligi Redevelopment.

Over the next two years, the national oil company plans to drill about 15 exploration wells annually, focusing on shallow water and deepwater prospects.

PETRONAS said its outlook for upstream development projects remains steady for the next three years, with 69 development wells in 2025 compared to 56 in 2024.

It forecasts more than 400 wells to be drilled, and expects 39 upstream projects to be executed over the next three years, including the construction of three offshore central processing platforms, three onshore facilities, and fabrication and installation of about 900 km of pipelines.

To enhance production efficiency, PETRONAS also outlined 367 facility improvement plans per year for the next three years.

Additionally, decommissioning activities over the same period will include the plugging and abandonment of 153 wells, as well as the retirement of 37 offshore facilities and one onshore facility, including the Sabah-Sarawak Gas Pipeline.