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Plans to cut $11.4 billion in spending through next four years

KUALA LUMPUR (NewsRise) -- Malaysia's state-run oil and gas company Petroliam Nasional Bhd, or Petronas, plans to cut its capital and operating expenditure by as much as 50 billion ringgit ($11.4 billion) over the next four years, as it intensifies efforts to control costs following a slide in crude oil prices.

     Petronas, the sole Fortune 500 Company from the Southeast Asian nation and the country's most profitable enterprise, said it has circulated an internal note as "part of its on-going efforts to optimise costs to address the impact of the continuous fall in crude oil prices."

     The company's acknowledgement of an internal memo without detailing its content comes in response to a Dow Jones Newswires' report on the spending cut that cited the chief executive's mail to the Petronas staff.

     Petronas is the latest to join a clutch of energy majors who have deferred billions of dollars in spending and have cut jobs as the crude oil price tumbled by nearly 75% over the past 18 months amid a supply glut and lacklustre demand.

     Capital spending worth $380 billion, on 68 major projects, has been deferred since oil prices started crashing in late 2014, and an additional $170 billion is at risk from 2016 to 2020, particularly in deep water projects, energy consultancy Wood Mackenzie said in a recent report.

     "We are not at liberty to disclose or discuss the contents of the communication with external parties," Petronas said, referring to its internal memo on spending cut.

     The unlisted Petronas is the single largest source of government revenue, contributing through taxes and dividends. Petroleum receipts accounted for more than 40% of government revenue in 2009. That could fall to 14% in 2016, according to the federal budget that was unveiled in October. Petronas had warned in November that it would cut back dividends to the government this year to 16 billion ringgit from last year's 26 billion ringgit after profits plunged between January and September.

     The spending cut is "a painful yet sensible move by Petronas as its profit contributes substantially to the Malaysian government," said Hong Leong Investment Bank analyst Jason Tan. In the "extreme" scenario, Petronas' original annual budget of 60 billion ringgit could shrink by about 20%, he estimates.

     That means high-cost upstream activities in deep water and unconventional fields are "unlikely to be sanctioned under current conditions," said AmResearch analyst Alex Goh.

     While a $32 billion liquefied natural gas project in Canada could be postponed, Petronas is expected to focus on projects back home such as a $27 billion Refinery and Petrochemical Integrated Development spearheaded by its unit Petronas Chemicals Group, said Goh.

     Also known as the Rapid, the project in the southern state of Johor includes a deep water port and petrochemical and gas-import facilities, making it more of an integrated industrial complex. It will also house petrochemicals and polymer plants manufacturing highly-specialized products.

     As crude prices slipped, financial pressure have built on oil exporting emerging economies such as Nigeria, Venezuela and Malaysia. The wealthy oil-rich United Arab Emirates have also started feeling the pinch, with the governments cutting fuel subsidies and implementing cost-saving measures.

     Malaysia estimates with every $1 dollar drop in crude price the government loses about 300 million ringgit in revenue. Prime Minister Najib Razak is expected to announce on January 28 revisions to the annual budget estimates as a battered crude blows a hole in the government's financial plan. This year's budget had estimated crude price at $48 per barrel. The benchmark Brent crude price fell to a fresh 13-year low on Tuesday at below $28 a barrel.

     Lower capital spending by Petronas could, in turn, hurt business prospects of oil and gas service providers such as Uzma and SapuraKencana Petroleum. These "will not be spared from the storm", although the effect could be "milder," said Hong Leong's Tan.

     So far this year, shares of Petronas Chemicals have fallen nearly 5% while SapuraKencana plummeted 20% on the Malaysian stock exchange. The country's benchmark FTSE Bursa Malaysia KLCI meanwhile has slipped 4.7%.

     The Malaysian ringgit, which was the worst-performing Asian currency against the U.S. dollar last year tracking weak crude price and political uncertainty, has been under pressure this year too following the Chinese yuan's depreciation and foreign portfolio outflows. It has shed 2.4% in so far in January.

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