Structural barriers in O&G sector’s path to sustainability

Ilham Suhanji

The once-in-a-century heavy rainfall in December and ensuing floods that hit Malaysia should make us wonder about the floods that have occurred in the last few decades. With more extreme weather swings being predicted, how much worse will the floods be in the future?

The prognosis is not good. Based on the assessment of the United Nations Intergovernmental Panel on Climate Change (IPCC), a 1°C temperature rise can cause an increase of 7% rainfall in Malaysia in the coming decades. The World Bank’s climate risk country profile also foresees more frequent floods in Malaysia, owing to climate change attributed to global warming. Climate change is at our doorstep.

While reversing climate change is not possible, mitigation, via management of our carbon emissions, can and must be in place. The government of Malaysia has pledged to become carbon neutral as early as 2050 and stop building coal-fired power plants. At the recent climate change talks (COP26), Malaysia strengthened its commitment, with a pledge to reduce greenhouse gas emissions, including CO2 and methane, by 45%, an increase from a previous target of 35%. Malaysia’s oil and gas (O&G) industry, particularly the sector serving the oil majors, known as oil and gas services and equipment (OGSE), is key to this.

Some of the measures announced by the O&G industry are Petroliam Nasional Bhd’s (Petronas) 2050 net zero carbon commitment via goals such as carbon capture, a cap on greenhouse gas (GHG) emissions and carbon offsets. Furthermore, as the economy becomes greener, the OGSE sector will follow the energy transition pathway, with gas serving as the transition fuel.

To make significant progress in this area, Malaysia needs a strong, resilient and internationally competitive OGSE sector that will contribute to sustainable national development as pointed out in the National OGSE Industry Blueprint 2021-2030. We will require OGSE firms that can leverage their technical prowess to develop low-carbon technical solutions while also innovating to maximise efficiency. However, there are structural issues impeding the sector’s ability to contribute meaningfully to Malaysia’s decarbonisation aspirations.

For one, we lack homegrown OGSE champions capable of competing globally. At the same time, issues like industry fragmentation persist. Malaysia’s OGSE industry is made up of 4,000 OGSE firms — a fragmented group of players offering varied services to the O&G supply chain. In contrast, an advanced oil-producing country like Norway has just over 1,000 OGSE companies, according to Ernst & Young’s 2020 annual industry review. While the Blueprint has identified initiatives to drive competition, resilience, development and sustainability, OGSE players still need to balance between energy transition and committing to a social contract to operate, as well as managing stringent investor demands for profitability and the need to comply with sustainability standards.

While a majority of public-listed OGSE entities have adopted sustainability reporting, the non-PLCs (public-listed companies) — mid-tier OGSE players and cash-strapped OGSE SMEs (small and medium enterprises) — are still fighting tooth and nail for financial survival. Hence, we are seeing uneven progress in sustainability reporting and the adoption of sustainable practices within the industry.

This is the reality on the ground. Due to higher costs associated with Covid-19, OGSE owners are concerned about maintaining adequate cash flow to pay personnel and keep the lights on. Operators have rescheduled payments as some projects are put on hold. Compounding this is the recent widespread flooding that could mean higher costs of doing business with logistical delays, office closures and lack of manpower.

The path to OGSE sustainability lies in collaboration and relevance

The fact of the matter is this: Non-listed companies lack the awareness and resources such as financing and talent to comply with sustainability reporting requirements. There are also no sustainability guidelines in place for non-listed firms as well as SMEs, even as investors and funders are demanding that these firms report their sustainability progress as one of the many conditions in getting access to financing. Expecting all OGSE sector players to instantly adopt sustainable activities across the board may not be the best route.

Embracing sustainability needs to be on everyone’s agenda. There is a need for collaborative partners to achieve the targets set by the government. For sustainability to be adopted, policymakers need to use a systemic lens and enable the right levers to support sustainability. The sector needs a policy that is focused on industry development — and that addresses fundamental and structural issues — before further strengthening the industry with a comprehensive sustainability policy measure. Depending on company size and where they are in the supply chain, each segment will need customised, pragmatic and relevant sustainability plans.

One of the major levers that can be easily put in place is the access to finance for OGSE firms that must be complemented with sustainability financing. The government’s effort in linking the national budget to Sustainable Development Goals and allocation of sustainability funding are steps in the right direction. Another notable development is Bank Negara Malaysia’s Joint Committee on Climate Change moving ahead to establish a Climate Change and Principle-based taxonomy, a RM1 billion financing facility to assist SMEs in implementing sustainability practices, and an O&G Value-based Intermediation Financing and Investment Impact Assessment Framework (VBIAF) for financial institutions and industry players.

Notwithstanding the above, a sectoral plan and road map with clear timeframes for adopting sustainable measures will need to be devised. But the sustainability journey is long, and it is easy to get discouraged. Hence, some of the features could include minimum criteria and quick wins in the form of health and safety standards, and gender diversity at the board level, both of which are already embedded or in stages of implementation in most OGSE firms.

For minimum criteria, this is where policymakers, regulators, financial and investment bodies, together with the OGSE sector, need to be in alignment and identify achievable milestones or ratings. As most OGSE companies are Petronas-licensed suppliers, including these criteria into Petronas project requirements in the tender process could also help alleviate costs. Grants, incentives and funds should also be made available to facilitate and accelerate sustainability adoption.

Floods and increasingly inclement weather owing to climate change are here to stay. Any form of mitigation requires all of us — government, industry and society — to do our part. The OGSE sector can be a part of the net zero carbon aspiration but let us first resolve structural issues to ensure the firms thrive and contribute to both the sustainability aspirations and economic prosperity of the nation.


Ilham Sunhaji is head of corporate strategy and research at Malaysia Petroleum Resources Corporation, an industry development agency under the Economic Planning Unit