Anas Alam Faizli
In early June Petronas hinted publicly at the World Gas Conference that it is tired of being the Malaysian government’s cash cow. It said no to fuel subsidy and last year it said it wanted to pay less dividends!
Is Petronas ungrateful? The money belongs to the rakyat anyway and hence the government.
While many have attempted to comment on the sustainability of Petronas’ payouts, this article aims to give some insights into the realities of the local oil and gas industry, and why returning all oil harvests back to Malaysians may not be to the benefit of Malaysians themselves in the longer run.
In 1974, Petronas, fully owned by the government of Malaysia, was established and given full ownership and control of our petroleum reserves. Today, it has evolved into a fully integrated oil and gas multinational corporation, ranked among Fortune 500’s largest and most profitable oil and gas corporations with a total workforce of more than 30,000.
Many will credit Tun Abdul Razak and Tengku Razaleigh Hamzah as the founding fathers of Petronas. They established solid foundations and values with which, the successive leadership and management such as Tan Sri Azizan, Tan Sri Hassan Marican, and, now, CEO Datuk Shamsul Azhar, were able to continue to uphold and flourish the corporation to its current stature. These foundations have also made Petronas’ presence visible in more than 30 countries worldwide, that it is now dubbed the new “seven sisters”, a term originally coined by Italian businessmen Enrico Mattei to refer to the likes of Exxon Mobil, Chevron, BP and Royal Dutch Shell.
Question 1 — Is Malaysia too dependent on Petronas and its petroleum reserves for its economic survival?
Naturally, Petronas’ disbursements contribute a lion’s share to the growth and development of Malaysia. Let’s see the numbers. Since Petronas’ inception in 1974, it has paid the Malaysian government a total of RM529 billion in dividends, taxes, petroleum proceeds and export duties. On top of that it has also been paying subsidies to TNB, IPPs and non-power parties a total of RM136.5 billion since 1997. (Source: Petronas Annual Report 2011)
For the past five years since its Financial Year (FY) 2007, Petronas has been paying the Malaysian government about RM61 billion each year, on average. Dividends alone averaged 53 per cent of Petronas’ annual profits, and are higher than the average of 38 per cent paid by national oil companies around the world to their respective governments. Total monies disbursed to the government constitute an average of 41 per cent of the Malaysian government’s total revenues.
This doesn’t end here, the Malaysian government has also utilised Petronas for various bailouts; such was the case for Bank Bumiputra, RM2.5 billion in 1985 and another billion in 1991. Through MISC in 1997, Petronas also bailed out Konsortium Perkapalan Berhad (KPB), which was facing losses to the tune of RM2 billion at the time.
Not surprisingly, Petronas footed a few infrastructure bills too including the RM6 billion to construct the Petronas Twin Towers and RM22 billion to complete the majestic Putrajaya.
Question 2 — Is Malaysia drying up?
We all know fossil fuel is non-renewable and finite. Malaysian oil production registered the highest output at about 650,000 barrels per day (bpd) in 1994, persistently declining thereafter.
The year 2002 saw a slight uptick but production trends have been back in the decline for the past three years, currently registering only about 600,000 barrels per day. For gas, based on projects already online, Malaysia’s domestic current gas production stands at 6.1 billion scfd. This is forecasted to decline to 1.5 billion scfd by 2025.
This is consistent with the world oil production growth trend, which was flat from 2005 to 2009. The Journal of Energy Security (2008) has frighteningly concluded that there is limited potential to increase production of both gas and especially oil. Saudi Aramco, the biggest oil and gas operator in Saudi, admitted that its mature fields are now declining at a distressing rate of 8 per cent per year. According to an International Energy Agency (IEA) report (2007), based on 800 oilfields surveyed, global supply sees production decline to 6.7 per cent a year.
Remaining untapped Malaysian oil and gas reserves are also not as abundant as before. What previously were just parcels of marginal oil fields are now “opportunities” we scurry to put our foot onto. If I haven’t painted a gloomy enough picture, production from the existing oilfields in Malaysia is either near its peak, or is already declining. The oil and gas reserves left available for development are more difficult to be developed as the reserves are either marginal (typically less attractive economically) or are located deepwater, representing more technological challenges.
Studies have also shown that in Malaysia, not even vastly increased investment in exploration and production can ensure increased output, especially in mature petroleum regions. Between 1974 and 1978, a total of 40 exploration wells were drilled, resulting in the discovery of 1,580 million barrels of oil equivalent (mmboe), adding to our oil and gas reserves. However, between 2004 and 2008, a total of 140 wells were drilled (that is 3.5 times more wells), but this only resulted in the discovery of 1,050 mmboe! The current average recovery factor from producing fields in Malaysia is at 33 per cent. This number can be improved, and we can get more from the ground, but it will require expensive technology.
What does this mean? Well, for one thing, more complex and expensive technology will be required to increase production of oil and gas from marginal fields and deepwater offshore areas, i.e. Petronas needs to have deeper pockets.
Question 3 — How much cash do we need to sustain the business?
It is estimated that in 2012, the global oil and gas industry will register a total capital expenditure of more than RM3 trillion. According to PEMANDU, future growth in upstream Malaysian oil and gas will come from initiatives such as Enhanced Oil Recovery (EOR) methods, “innovative” approaches to the development of marginal fields and intensification of exploration activities undertaken by oil and gas operators in Malaysia and also the exploration of deepwater discoveries. As nice and dandy as this may sound, this is extremely costly and operators like Petronas Carigali will need the cash to finance these initiatives.
Petronas has largely attempted to mitigate this by emerging on the international scene, expanding its operations into 30 other countries. This is a strategic move; a result of foresight on the part of management, and possibly the government, in addressing concerns over the “mortality” of Malaysian oil wells. At the same conference, CEO and MD Shamsul also argued that now was the time to acquire cheap overseas stakes to supplement the depleting production. This too, needs cash. In fact, Petronas needs about RM300 billion in the next five years in capital investment, as it has announced last year.
Some might argue that this cash can easily be borrowed through sukuk and bonds issuances but building a sturdy cash reserve should be priority too.
Question 4 — Is our local oil and gas services industry at its full potential?
A rough estimate would show that at least RM1 trillion has been spent for the Malaysian oil and gas industry as capital expenditure for development over the past 38 years. How much of this capital has cascaded down the value chain locally? One indicator is that there are about 25 oil and gas companies listed (based on the Industrial Classification Benchmark) on Bursa Malaysia with total revenues of RM73 billion. As a comparison, Singapore, which is not an oil- and gas-producing nation, domiciles 31 oil and gas companies with revenues of RM149 billion!
Indeed, there have been visible, local oil and gas industry players like the Malaysian Marine Heavy Engineering (RM9 billion market cap), and the recently merged SapuraKencana Petroleum (RM11 billion market cap) who have emerged as regionally competitive fabrication and marine players.
But how do these look compared to the amount of CAPEX that we have spent in developing our local oil and gas industry? Furthermore, how are they compared to other global players like Hyundai Heavy Engineering, Samsung Heavy Industries, Keppel Shipyard, Sembcorp Marine and McDermott to name a few?
To be fair, we have successfully groomed and developed local expertise in all sectors of oil and gas. This ranges from engineering, fabrication, offshore installation and commissioning, specialised equipment, skill labourers and the list goes on. Our local talent pool is also competitive globally and is working everywhere across the globe. Local engineering design houses like Ranhill Worley, RNZ Engineering and MMC O&G are also of international standards.
Another strategic parallel that deserves credit are attempts to grow our domestic oil and gas sector to transform Malaysia into an oil and gas hub. This means regionally and globally, players will come to Malaysia for their A to Z oil and gas needs. A project like RAPID is a good start to becoming that “hub”. Let us make Malaysia the Houston of the Asia Pacific!
But, there are also other sectors within the industry which we can further develop our capabilities in; namely (1) equipment manufacturing and (2) oil and gas services. Local operators have always had to depend on imports of specialised equipment like turbo machinery (heavy generators and compressors), pumps, multiphase meters, electrical and instrument control equipment, super sized valves. This is one area of opportunity for local manufacturers. From the oil and gas services perspective, we should also nurture and grow our local players to an extent that they can provide world-class and value-added services at competitive rates; at par with the Schlumbergers and the Halliburtons of the world. When these are achieved, we can depend less on actual oil, and still have an oil and gas industry, even when our motherland herself has run dry.
Food for thought
Since last year, Petronas has been mulling over the idea to lower its annual dividends paid to the government through a new proposed dividend calculation format, using a percentage of profit instead of an absolute amount. This means Petronas pays less if it makes less that year. This idea has actually been supported by former Prime Minister Tun Dr Mahathir Mohamad (one cannot help but think it is because the spending had been done in his days). And recently, discussions at the World Gas Conference have openly questioned the legitimacy of subsidising gas.
Fact remains that if we continue to depend heavily on Petronas, there is risk of stunting its full potential growth, as we reduce Petronas’ cash reserve. For the past five years, Petronas has been spending on average 28.5 per cent as CAPEX from its free cash flow (FCF). In contrast, Royal Dutch Shell, with among the highest reinvestment ratios in the world, reinvests a whopping 75 per cent of its FCF, dwarfing that of Petronas’!
We depend on oil and gas income very much and it has become an indispensable instrument of the state, so much so that we cannot begin to imagine living without it. It goes without saying that efforts to reduce this dependency on this “ungrateful” child should be made. This is to not weigh him down to much at the expense of its growth, and more importantly to ensure Malaysia does not end up without a “retirement plan.”
So is Petronas ungrateful? Or is it simply trying to be the obedient child that is politely proposing a counter offer, for the betterment of this nation that it belongs to?
* Anas Alam Faizli is currently serving an international oil and gas operator and is pursuing part-time a doctorate in business administration. His research is in capital investment evaluation practices and decision making.