Analysis: Softer O&G outlook as Petronas tightens spending

KUCHING (Feb 3): The research arm of Public Investment Bank Bhd (PublicInvest Research) is expecting Malaysia’s oil and gas (O&G) sector to face a more subdued operating environment following the release of the Petronas’ Activity Outlook (PAO) 2026 to 2028 that reflects a more conservative upstream investment stance amid lower oil price expectations and domestic regulatory uncertainties.

In its latest sector update, PublicInvest Research said that the PAO 2026 to 2028 shows that Petroliam Nasional Bhd (Petronas) has taken more conservative stance, underpinned by tighter upstream investment discipline and a strategic shift towards optimising brownfield assets to sustain production at lower unit costs.

“This approach is framed against a softer oil price environment, alongside domestic uncertainties following Petronas’ move to seek clarification from the apex court on the regulatory framework governing its operations in Sarawak,” said the analyst.

Additionally, with Brent crude averaging in at US$68.2 per barrel (bbl) in 2025, the O&G sector experienced a broadly lackluster year as actual activity levels fell short of earlier expectation amid project deferrals, cost pressures and a more cautious investment environment.

This underperformance was most evident in the Hook-Up and Commissioning (HUC) and Modification, Construction and Maintenance (MCM) segments, which fell short of expectations by 4.55 million and 2.17 million man-hours, respectively, in 2025.

Reflecting the softer outlook, PublicInvest Research said activity assumptions for 2026 to 2027 have been revised lower by 2.71 million man-hours for HUC and 0.47 million man-hours for MCM.

Offshore Support Vessel (OSV) demand has also been scaled back, with actual vessel requirements in 2025 fall short of forecasts by around 30 vessels, while OSV requirements for 2026 to 2027 have been revised down further by 118 vessels in line with more subdued upstream activity.

However, PublicInvest Research highlighted a meaningful improvement in the outlook for well services, with the addition of 18 development wells, 14 appraisal wells, and 43 plug and abandonment (P&A) wells scheduled for 2026 to 2027.

While the PAO 2026 to 2028 supports ecosystem stability, PublicInvest Research cautions that downside risks remain especially as the internal reorganisation undertaken by Petronas in 2025 underscores deeper structural challenges relative to previous downturns in 2016 and 2020.

That said, PublicInvest Research guides that they expect any scaling back of Petronas’ capital expenditure to be structural and gradual, rather than abrupt, in order to mitigate immediate shocks while sustaining the broader industry ecosystem.

“Our earlier sensitivity analysis indicates that at an average Brent crude price of US$70 per bbl, Petronas’ operating cash flow could compress from RM102.5 billion in 2024 to around RM81 billion in 2025.

“This would place pressure on its annual capex commitments, estimated at RM40 to RM50 billion, as well as its dividend obligation of RM20 billion in 2026,” said the analyst who estimates that Brent Crude oil will average at around US$60 per bbl in 2026.

Overall, TA Research maintains a ‘neutral’ call on the oil and gas sector, as Petronas seeks to balance cash flow preservation with capital efficiency while continuing to support the domestic oil and gas services and equipment (OGSE) ecosystem amid a more challenging operating environment.