Yinson Annual Report 2020

129 Annual Report 2020 Market outlook 2019 was a positive year for the floating production systems market. Oil prices were relatively stable and the industry saw a ramp up in project bids and awards as the industry grew in confidence and made more capital expenditure budgets available for offshore projects, particularly deep water projects which our FPSOs are well placed to serve. There were 13 FPSO contract awards in 2019, an increase from the 12 units awarded in 2013, when Brent oil prices were hovering above USD100 per barrel. This was a positive signal of the years to come for the oil and gas industry, along with the expected increase in global energy consumption. The start of 2020 saw an unprecedented turn of events that crippled the global economy. Mobility restrictions were imposed in many countries, and economic growth projections were revised downwards worldwide. The prolonged pandemic is expected to cause liquidity and growth concerns globally at a record scale with governments introducing economic stimulus programmes to mitigate their economies from sinking into recession. Challenges to the oil and gas industry were made worse in March 2020 when Brent oil prices plunged from the USD50s to low USD20s per barrel level – the lowest since 2002. The market was facing a subdued demand for oil due to the Covid-19 pandemic, which contributed further to the price reduction. Just a few weeks later in April 2020, the oil price recovered mildly to the USD30s per barrel level, after oil producers finally agreed on their biggest output cut to date. Despite the successful outcome of oil production output cuts, it is expected that oil prices will remain unpredictable for the time being as countries are still heavily invested in containing the Covid-19 situation, which may cause a further disruption to the global supply chain. This may dampen the demand for oil, which would further suppress prices in the shorter term. Given the situation, oil companies have started to revaluate their capital expenditure in view of the oil price uncertainty, with most of the capital expenditure cuts directed at the exploration side of upstream activities. Nonetheless, it is expected that many of the 2020 FPSO project awards will be delayed into 2021 as operators seek to conserve capital. That said, projects will move forward as long as production remains cash generative or viable for the oil company, as evident from the recent project tender launched by Petrobras for Project Mero 4. The reduction in capital expenditure by oil companies will naturally result in less tightness in the supply chain. This typically means the cost of operating and building assets will see a down trend. To capitalise on this, Yinson will be looking at both operations and construction cost optimisation. Coming out of the last oil downturn, we have already seen less economical oil projects shuttered, with those remaining being either economical in the new oil price environment, or strategic to a country’s economic activity. Fortunately, the long-term nature and robust contractual terms of our existing FPSO contracts provides us a solid foundation in such uncertain times and visibility on our cash flow up to 2048. Despite the expected decline in global demand in the short term, global energy consumption is still projected to grow exponentially in the long term and will continue to rely on the production of oil and gas and also the expanding platforms of renewable energy solutions to meet these demands. Gearing for growth and supporting our vision to be a sustainable global energy solutions provider, Yinson set up a renewable energy division to complement our existing FPSO and offshore marine businesses. As we navigate and wait out the current storm, the Company will continue to remain vigilant and maintain a disciplined approach to market opportunities, and only bid for contracts that create value for our shareholders. We will adhere to our promise to be a reliable partner to our clients, and to provide consistent quality work on all our projects. Management Discussion & Analysis FYE 2020 started with great promise, as new opportunities emerged in the FPSO industry and the oil and gas market performed steadily. The theme of this Annual Report, ‘Geared for Growth’, is a reflection of the investments and efforts Yinson put into building our project execution, financial and operational capacity in line with this growth. However, the global economy suffered an unprecedented setback in the Q1 2020, with the Covid-19 pandemic causing distress and disruption to world markets and the collapse of oil prices. Nevertheless, we are confident that Yinson remains resilient – attributed in part to our recent project wins, ongoing contracts with robust contractual terms and the investment that we have put into building the sustainability of our business. We will continue to stay true to our Core Values – R.O.A.D.S which strengthened our foundation throughout the period of stability post 2014, and we believe this will see us through the present period of uncertainty and into the future.