Will Petronas give Najib ‘GAS’? – Sir Wenger J Khairy

The prime minister should engage competent advisers to ensure that he does not suffer the ignominy that befell his good friend, Datuk Seri S. Samy Vellu, who was forced to step down from MIC after the realisation of GAS ("Gerakan Anti Samy Vellu") threat.

Whereas the "GAS" threat that faced Samy was the noisy and rambunctious MIC rebels who congregated at Sri Paandi, the GAS threat facing Daruk Seri Najib Razak is reflected in the financial reports prepared in the pristine and immaculately maintained offices of the Petronas Twin Towers.

This is because the key risk that could end Najib’s continued grasp of the Umno presidency and the prime ministerial chair is economic, and it does not matter whether Tun Dr Mahathir Mohamad is in Umno or if he joined DAP or PSM.

If the ringgit depreciates past RM4.80 to the US dollar, the pressure for Najib to resign will be unbearable.

If it trades below RM4.50, Najib is safe as the Umno hoi polloi lack an excuse to scuttle the prime minister.

As it stands today, the ringgit is trading at about RM4.20, or about 12.5% below the critical RM4.80 level.

While current ringgit depreciation already reflects the effects of the twin scandals of 1MDB and the RM2.6 billion "investment", does it reflect fully the country’s exposure to the GAS threat?

For Malaysia, the risk is more towards the natural gas market than the oil market. In 2015, Malaysia exported US$12.1 billion of liquefied natural gas (LNG) compared to only US$6.6 billion of crude oil.

However, a lot has changed in the oil market and even more in the LNG market since last year.

In 2015, Malaysia’s LNG export was at an average US$9.79 per MMBTU and crude oil exports averaged at about US$58.5 per barrel.

However, brent crude oil trades today at about US$36.6 per barrel or about 37.4% lower than the average levels before.

LNG is trading at far more depressed levels and according to the Chicago Mercantile Exchanges LNG Japan contract, the current spot market for LNG is US$4.85 per MMBTU or about 50.5% lower than the averages last year.

Here is where the future market sentiment looks decidedly weaker for LNG than it is for oil.

Most market observers believe that with a 10% cut in US production of crude oil, coupled by other reductions from oil majors, the crude oil market will probably get back into balance by the end of the year.

However, the same cannot be said of the LNG market.

The next five years will mark the commencement of operations for several LNG "mega projects" in Australia, the US and Cameroon, that will see the total supply of LNG increasing by 46.3%.

The long-term effect of this is “economics 101” – the price differential between LNG, which trades at US$8 to US$9 per MMBTU to that of natural gas (which is gas in gaseous form as opposed to LNG which is gas that is pressurised, cooled and liquefied), which trades at US$3-US$4, will evaporate.

So far, Petronas has been insulated by this effect due to the long-term nature of the contracts it has with buyers in Japan.

As a result of certain peculiarities of the LNG market, Petronas is able to still enjoy a higher price than the current market because the price paid by the Japanese customers uses a multiple, called a “slope” or “indexation” of the average historical oil prices over a certain period (six to nine months) as opposed to current spot prices, with “adjustments” to protect against extremely low oil prices.

Najib should note that Petronas's loss of RM3 billion in the fourth quarter of 2015 was still achieved with average LNG prices trading at US$8.30, far beyond what is being priced in the spot financial markets.

However, that will change as these old supply contracts get renegotiated.

The LNG market is a buyers’ market and buyers I have talked to are even saying that prices may go as low as US$3 per MMBTU.

Even assuming, LNG prices in 2016 to average US$5 per MMBTU and crude oil prices to average at US$35 per barrel has some serious impact to the Malaysian current account balance.

At those prices, the loss in export revenue is about US$8 billion per year. That loss is comparable to the current account surplus for the whole of 2015 of RM34 billion which would mean that should this situation persist in 2016, this could result in Malaysia registering a current account deficit.

This will put additional pressure on the ringgit and could see Malaysia experiencing a twin current and capital account outflow.

At that rate, a 10%-20% depreciation of the ringgit could be inevitable and may result in tremendous pressure on the prime minister to step down and for his deputy to take over a country facing severe economic head storms. – March 1, 2016.

* Sir Wenger J Khairy reads The Malaysian Insider.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.