The Petronas dilemma

LAWRENCE YONG
KiniBiz
MARCH 8, 2013

Oil is all about access, not production. And therefore only those who have access to the black gold can pump up extraordinary profits.

It is estimated that three quarters of the world’s 1,653 billion barrels of proven oil reserves are in the hands of national oil companies with no foreign participation. Many of them are in the OPEC cartel. That’s how they have managed to control supply and keep oil prices soaring.

Then you have the anomaly – the so-called century old multi-national oil companies, ExxonMobil Corp, The Royal Dutch/Shell Group, BP and Chevron Corp – who used to own the oil world. Now they offer their expertise and know-how to any country who will lend them access…and still make extraordinary profits (minus pollution payouts) because they have established markets everywhere…

But therein lies Petronas’ dilemma, a young upstart of 38 years which has neither full know-how nor international access or great oil assets. It is struggling between transforming into an international major oil company or staying as a national oil concern. Fairly speaking, Petronas is now neither here nor there.

One long-time observer of the company put it unkindly : “They are earning a reputation for biting off more than they can chew.”

And what’s worse…Petronas now carries the unfulfilled burden of replenishing drawn-down national oil reserves, which by most accounts, will not last beyond this generation. The pressure is real and its on for Petronas and they know it.

After getting an entire nation addicted to driving, building highways and promoting national cars to fuel oil demand, nobody will understand if Malaysia’s oil supply suddenly ran short. It is simply Petronas’ job to make sure it does not.

Should it have gone overseas at all?

With a small hydrocarbon base in Malaysia, Petronas has used it as a leverage to try and gain access to other people’s black gold. Whether it’s from the muslim nations in Africa and the Middle East or helping resource poor next-door Southeast Asians, Petronas has tried to gain a foothold everywhere possible.

In leaked U.S. government documents on WikiLeaks from years back, it is reported that a Petronas official once told U.S.officials that Petronas made the conscious decision in the mid 1990s, with the blessings of the government of Malaysia, to compete in countries where Western sanctions precluded the oil majors from competing. These were countries such as Iran, Sudan, Myanmar, and Mauritania.

Unfortunately, nationalistic forces ultimately prevail as they did in Sudan last year, as they may also do in Iraq – which some analysts had said was Petronas next big hope for big oil finds.

Petronas said Thursday that its net profits for the fourth quarter of 2012 fell by 45 percent to RM8.72 billion, with the loss of over 120,000 barrels per day (bpd) of production in Sudan since second quarter of 2012, and it also wrote down RM5 billion on its investment in Egyptian gas.

President and CEO Shamsul Azhar Abbas said Sudan was its “cash cow” and previously, Petronas had reported that Sudan and Egypt accounted for nearly 70 percent of its total overseas production in 2011.

With such dismal performance in 2012, it’s no wonder that Petronas is trying something new…their latest bet on Canada, even though a long way from realising any profits, is a bet on open market forces and developed countries instead of the developing and undeveloped world. Nobody can say for sure if it will work or not.

But perhaps it’s time to stop taking extraordinary risks on behalf of Malaysians, Petronas. Why should a country whose nominal per capita income is US$10,000 a year invest in a country whose per capita income is five times higher at US$50,000 a year, to help them exploit their resources. Canada is the 14th richest country in the world, according to a recent IMF survey. Malaysia ranked 58th.

Who has ever heard of the poor helping the rich to get even richer?

And yet that’s how Calgary-based Progress Energy sold the Petronas takeover deal to Canadians who at first saw no net benefit for Canadians. Progress said they needed an investor with deep pockets and Petronas’ investment in LNG plants would provide 3,000 jobs.

Many of Petronas’ moves overseas appears to shadow PetroChina Corp, their partner in Sudan and Iraq. The same week that Petronas bought Progress Energy for US$5.3 billion, PetroChina bought Encana for US$2.2 billion and then China’s state-owned CNOOC also bought Alberta-based Nexen for US$15 billion.

But PetroChina represents a nation of 1.3 billion Chinese people, hungry for its oil supply to fuel a rapidly growing economy. Petronas represents about 28 million Malaysians. China has deep pockets but Petronas must realize it does not …before it’s too late.

What should Petronas attempt to do?

Firstly, the Petroleum Development Act needs to be revised. Petronas’ focus and mandate should be sharpened towards domestic oil and gas resources and should not be made accountable to the Prime Minister but to Parliament and an independently constituted board tasked to ensure that the national oil company acts always in accord with its legal mandate. Prime ministerial discretion to allow moves away from its stated mandate can be dangerous.

There are lots to do domestically as Petronas tries to make Malaysia the regional and maybe even the world’s top deepwater oil and gas exploration services hub. Petronas doesn’t have a choice anymore. Now is the time for hard work to dig deeper.

Malaysian hydrocarbon reserves which make up over 75 percent of Petronas’ total resource holdings have stayed stagnant for the last five years at least. Consultants said Malaysia is expected to be Asia’s top spender on offshore oil and gas services at over RM50 billion to be committed for 2011-2015.

But the power to hand out production sharing contracts (PSC) and risk sharing contracts (RSC) cannot rest solely on Petronas, which may already have a vested interest in many oil services companies, some of whom are run by ex-Petronas employees.

The way businesses work in Malaysia, Petronas as a top government-linked corporation will inevitably feel pressured to favour other government or politically-linked businesses, especially now since Malaysia’s political landscape is shaping up to be a divide between supporters of two key political coalitions. Membership of the Malaysian Oil and Gas Services Council (MOGSC) suddenly jumped exponentially – 121 of its 372 members just signed up last year. Why?

Or worse, since many RSCs are going to foreign interests, a large group of small niche players, how do we ensure that no under the table money is exchanged? A government body, separate from Petronas, perhaps under Parliament’s watch, must take over this duty to check that contracts are handed out fairly.

And Petronas itself needs to be checked to ensure that it does not have monopoly power to invest the nation’s oil wealth. Malaysia, with exhaustible resources, deserves a prudent fund manager which does not show political preference for companies or countries or even favoured nations.

Because it is Malaysia’s top corporation, Petronas will do well to set the standard for accounting disclosures and transparency, marking a new era for other government-linked corporations. Every cent must count for Malaysia’s oil wealth should be fairly shared by all Malaysians, including the most needy.

Perhaps, to ensure that Petronas does not get pulled in all directions, Petronas needs to pay more into a fund. This will come in useful when Malaysia needs to import its oil in the future. Norway’s Oil Fund, established since 1990 to manage the country’s wealth from oil, is now worth up to US$650 billion and is one of the largest such funds in the world. Norway’s oil reserves in 2011 stood at about 6.9 billion barrels, not so far off from Malaysia’s 5.9 billion barrels.

The challenge is to maximise as well as sustain that wealth for now and for always through prudent exploration, production and investment while being socially responsible at all times. That’s not an easy task but once the parameters are set, it should be easier.