MISC Integrated Annual Report 2020

OUTLOOK AND OPPORTUNITIES IMPLICATIONS TO MISC Oil prices are unlikely to mount much of a recovery in 2021 and is expected to linger at USD50-USD60 per barrel in 2021 and 2022. The rebound in global oil demand will be gradual and is unlikely to return to 2019 levels before 2022. Despite the uncertainties, global oil consumption and production is forecasted to rise during 2021 and 2022. The pace of growth will be dependent on the distribution and effectiveness of the vaccines and the rate of global economic recovery. Global oil supply will be impacted by OPEC+ production cuts in the short term and its growth will lag recovery in oil demand due to lower investments in the E&P sector due to reduced capital availability. There is likely to be limited rebound in US oil shale supply and output is expected to remain flat at about 11 million barrels a day in the near term. Sources: EIA, Reuters, Worldoil.com As noted above in Economic Recession, despite the negative market conditions in 2020, MISC successfully secured major contracts, our financial performance would be underpinned by existing long-term contracts even with slower market recovery, and we will focus on project execution and delivery in the meantime. However, lower E&P investment will affect the number of opportunities available for the Offshore Business and Marine & Heavy Engineering segments. For the Petroleum & Product Shipping segment, lower oil production and demand will post some challenges for its spot tankers to secure employment in the near term. Material Matters Risks Global offshore spending is forecasted to remain subdued in 2021 but will slowly rise by the beginning of 2022 partly contributed by resumption of delayed FID. Assuming oil prices remain steady around USD50 per barrel, deferred projects in 2020 and new projects are expected to be revived and sanctioned in 2021, with potentially 35 to 70 FPSO orders will be awarded over the next five years, arising mainly from Brazil, Southeast Asia and Africa. All regions will further cut CAPEX in the offshore segment in 2021 except for Latin America —more specifically Brazil as maturing projects are seen to be moving forward in Brazil despite low oil prices due to their favourable break- even prices and long field life. South America is the largest source of newbuild FPSO demand, followed by the Asia Pacific, with operators eyeing huge fields in Brazil, Guyana and Australia. Sources: IHS Markit, EIA Despite the cutback in capital spending by major oil companies in 2020, some awards proceeded as planned, including the Mero 3 FPSO project in Brazil. This FPSO project will add substantially to the long-term secured profit of the Offshore Business segment. Importantly, the Mero 3 FPSO breakthrough award lays the path to vie for more projects in the Atlantic Basin, where most of the large-scale deepwater FPSO projects are located. Although the order intake for the Heavy Engineering segment was severely affected in 2020, fortunately it has an orderbook backlog to sustain its revenue over the next few years. In the meantime, it is pursuing business opportunities in new areas such as the offshore wind farm sector. It is also intensifying its improvement initiatives in execution and delivery of its ongoing projects and for greater competitiveness in bidding. Material Matters Risks SHORT AND MEDIUM TERM OIL MARKET DOWNTURN In March 2020, Saudi Arabia and Russia engaged in an oil price war to gain market share. As oil production spiked, a huge oil surplus started to build amidst the collapsing demand resulting from the worldwide lockdowns and curbs to battle COVID-19. With oil prices tumbling to record lows in April, the OPEC+ alliance agreed to implement deep production cuts in May, removing approximately 9.7 million barrels per day of oil production from the market and ending the oil price war. Continued oil supply cuts by OPEC+ together with gradual easing of lockdowns paved the way for oil prices to regain some lost ground, eventually reaching above USD50 per barrel by year end. Sources: EIA, Reuters Source: EIA OFFSHORE SECTOR The global upstream exploration and production (E&P) CAPEX spending is experiencing the steepest cuts since 2014 due to the collapse in oil demand. A number of project awards and final investment decisions (FID) were either cancelled or deferred. The upstream onshore sector bore the brunt of the CAPEX curtailment while the offshore sector has been less affected. The FPS market, in particular, has proved to be more resilient during this crisis. Sources: IHS Markit, EIA Source: IHS Markit OUR OPERATING ENVIRONMENT World liquid fuels production and consumption balance million barrels per day Q1 105 100 95 90 85 80 0 Q1 Q1 Q1 Q1 2016 2017 2018 2019 2020 world production world consumption 100 0 10 20 30 40 50 60 70 80 90 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Brent crude oil price USD/barrel 0 100 200 300 400 500 600 700 800 Offshore 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Global upstream E&P CAPEX USD billion Onshore Project and financial performance Risk management Project and financial performance Risk management Crude oil dynamics - supply, demand and price Asset availability and utilisation Crude oil dynamics - supply, demand and price // Key Messages / Highlights / Strategic Review / Sustainability / Financial Review ////// MISC Berhad / Integrated Annual Report 2020 4 72 MISC Berhad / Integrated Annual Report 2020 4 73 ////// Financial Review / Sustainability / Strategic Review / Highlights / Key Messages // Section Section