Uptick in upstream activity likely in 2027

PETALING JAYA: Petroliam Nasional Bhd’s (PETRONAS) capital expenditure (capex) activities are less likely to be determined by factors like the re-escalation in the Iran war than by long-term commercial factors.

The national oil company spent RM41.4bil in capex in the first half of financial year 2026 (1H26) with about RM9bil or 21% of that in upstream spending and near its recent years average annual capex spend of RM50bil to RM60bil.

Strong energy prices and energy security issues are positive to spending trends and with global energy supply disruptions potentially extending into 2027, analysts believe the heightened focus on energy security issues could accelerate PETRONAS’ upstream capex spend in financial year 2027 (FY27), including into energy transition projects.

SPI Asset Management managing director Stephen Innes said he did not expect oil companies to sharply increase exploration and production (E&P) capex solely due to the Iran conflict, given that such investments are typically long-cycle decisions.

“However, sustained geopolitical risk and higher oil prices can accelerate projects already in the pipeline, particularly where companies want to improve supply security and bring additional production onstream more quickly,” he told StarBiz.

Crude oil has held up at about US$80 to US$90 a barrel, the incentive to spend is higher for oil companies and Innes thinks prices could hold at that level on buying support.

“Brent can remain broadly in the US$80 to US$90 range while Middle East risk remains elevated, and prices could stay higher for longer than the market expects as countries rebuild depleted petroleum reserves. Temporary moves above US$90 are also possible if tensions worsen,” he forecast.

Local brokerages like TA Research and Hong Leong Investment Bank Research generally agree that the heightened global focus on energy security will accelerate PETRONAS’ upstream capex recovery in FY27.

After having prioritised downstream acquisitions in FY26, they believe PETRONAS will rebalance its capital toward upstream development to counter declining domestic production and secure long-term reserves.

PETRONAS posted a 15% year-on-year (y-o-y) rise in revenue in 1H26 to RM152.4bil helped by higher domestic production, stronger liquefied natural gas (LNG) and processed gas sales volumes and favourable average realised prices.

Core profit amounted to RM23.2bil in 1H26 underpinned by a stronger performance from its upstream division which enjoyed higher average realised prices.

Its gas and maritime division also saw higher topline underpinned by stronger realised prices and higher sales of LNG and processed gas volumes to domestic and foreign buyers.

Much of the RM41bil capex spent in 1H26 by the national oil company was skewed towards the downstream segment (63%), followed by the upstream segment (21%), gas segment (13%), and renewable business led by Gentari (2%).

This spending was largely covered by RM47.5bil operating cash flows generated in 1H26 by the group.

TA Research noted the stronger downstream allocation was supportive of PETRONAS’ efforts to unlock value from the Pengerang Integrated Complex project, particularly following its move to reacquire the 50% stake in Pengerang Refining Company Sdn Bhd and Pengerang Petrochemical Sdn Bhd, collectively PRefChem, from Saudi Aramco for an undisclosed sum.

With energy demand set to rise in the country led by demand from the data centre investments and industry in the coming years, capex spending to raise local hydrocarbon production levels will anchor domestic capex.

Latest news reports said PETRONAS has taken the final investment decision on the long-delayed Limbayong deepwater greenfield field development offshore Sabah.

The project has remained under consideration for years, with various development concepts examined before reaching a commercially viable solution.

PETRONAS also has an international portfolio which requires investments, including the possibility of expansion of capacity at the LNG Canada project.

Fluor-JGC JV had announced it has received a Limited Notice to Proceed or LNTP for the proposed Phase 2 expansion of the LNG Canada export facility in Kitimat, British Columbia.

The JV delivered Phase 1 of the project, consisting of two LNG processing trains with a combined capacity of 14 million tonnes a year in 2025.

Funding the various projects planned will not be too much of an issue, analysts believe.

“Despite lower cash reserves of RM193.6bil (2H25: RM204.4bil), PETRONAS remains in a net cash position (net cash: 0.14 times), suggesting that the elevated investment cycle remains manageable from a balance-sheet perspective,” TA Research noted in a recent report.

Kenanga Research believes the seeds of an uptick in upstream activity domestically in 2027 have been sown.

“We are seeing early signs of a turnaround in upstream spending in FY27 onwards as PETRONAS has restructured its upstream asset portfolio by bringing in more foreign ownership. We believe these exercises will be short-term negative upstream activities (due to operational transitions), but from FY27 onwards it could be positive for activities as these upstream assets could receive more funding from its owners for more development while not being bogged down by the PETRONAS group’s ongoing legal case with Petroleum Sarawak Bhd or Petros,” it stated in a report.

PETRONAS’ current upstream capex strategy suggests striking a balance of growth through PETRONAS Carigali Sdn Bhd’s large projects, with efficiency (Vestigo Petroleum Sdn Bhd’s marginal fields management) and regional diversification in the region through joint ventures such as Searah Ltd.