2020 has been a rough year for oil companies. In April, with the sudden stop in economic activity due to COVID-19 shutdowns, the price of U.S. crude fell to below zero for the first time in history. Oil companies were essentially forced to pay to store excess crude for a while, and with the global economy still reeling the rebound in demand has been sluggish. Still, the market price for crude bounced back pretty quickly, likely on hopes that this downturn will be short-lived. While it remains below its pre-pandemic price, it has recovered quite a bit since its April lows, with a barrel of West Texas Intermediate fetching $45.53 last week.
This disruption has had a big impact on the earnings of the world’s oil giants. ExxonMobil posted $1.69 billion in losses for the first half of 2020, while Saudi Arabia’s Aramco saw profits fall 50 percent in the second quarter (although the firm apparently had no problem paying out an $18.75 billion dividend). In Southeast Asia, Malaysia’s state-owned Petronas booked 16.5 billion ringgit (approximately $4 billion) in losses during the first six months of 2020, while Indonesia’s Pertamina posted a $767.92 million loss. It seems likely that next year these companies will return to the profit-machines they have historically been, but how quickly they might return to profitability is a bit less clear.
The oil and gas industry is divided into two main segments: the upstream sector and the downstream sector. Upstream activities involve exploration and drilling of oil and gas deposits at the source. The downstream sector involves refining crude inputs into products that can be sold to consumers: the gas you buy at the pump, or a can of propane for your stove. Both Pertamina and Petronas straddle the system from end to end, developing, refining, and selling oil and gas.
COVID-19 initially hit both segments of the industry hard, driving down crude prices and depressing demand for refined oil and gas products. But what does this mean going forward? First of all, Petronas is a much more internationally diversified company. In 2019, about 33 percent of its revenue came from domestic sources, the rest from international operations and exports. This means Petronas, to a large degree, must watch and wait for a recovery in global crude prices and demand in its overseas markets.
This is not great news for the Malaysian government, for which Petronas is a very significant source of revenue. Including dividends, cash payments, and taxes, Petronas contributed 84.6 billion ringgit (approximately $20.7 billion) to the public coffers in 2019. With total revenues of 264.4 billion ringgit last year, that means the oil and gas company alone contributed 32 percent of everything the government took in.
It has been announced that Petronas will still pay out a 34 billion ringgit ($8.33 billion) dividend in 2020, but given that it already posted about half that amount in losses the company’s finances are sure to be a bit tight this year. Ultimately, there isn’t much of a choice. Because of the way public finances are structured in Malaysia, without Petronas’ contribution the Malaysian government will be looking at a huge fiscal hole. And their ability to get out of it through the domestic market is somewhat limited, since they rely quite heavily on external revenue sources.
Indonesia’s state-owned oil and gas company, Pertamina, poses an interesting contrast to this state of affairs. For one, Pertamina is nowhere near as internationalized. The company drew 93 percent of its revenue from domestic sources in 2019, meaning that for better or worse its fate is closely tied to the fortunes of the local economy. But even if it takes a while for local demand to bounce back, the state is also less dependent on Pertamina to fund its activities. The company’s 2018 dividend was only 7.95 trillion rupiah (about $562 million). If you count up all transactions (including current and future tax withholdings, dividends, customs duties, and regional payments), Pertamina’s contribution to the government in 2018 was about 120 trillion rupiah, or roughly 6.23 percent of total revenue.
To some extent, this may explain why Pertamina’s losses in the first half of 2020 were less severe than Petronas’; it is not as exposed to international sources of revenue, and its downstream operations were already not terribly profitable. In any event, a reduction in profitability from Pertamina will not be a crippling blow to the Indonesian government, whereas Malaysia really cannot afford to lose the income that Petronas brings in. With a vaccine on the way, both of these companies and their shareholders will likely bounce back by next year. But at the moment one of them seems to be in a better position, and for the long-term it might be wise to rethink the logic of leaning so heavily on a single national champion in a volatile industry.