Some serious questions for Petronas

STORY BY

LAWRENCE YONG

lawrence@kinibiz.com

In the first article of a four-part series on national oil company, Petronas, KiniBiz looks at the pressing questions that come up when one talks about Petronas’ operations especially since the company still operates under a cloak of secrecy – after 38 years. Future articles will look at foreign and domestic operations and what it should be doing going forward.

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Petroliam Nasional Bhd or Petronas, came to being in August 1974 via the Petroleum Development Act (PDA), one of the shortest pieces of legislation, which is all but 13 pages long.

That gave Petronas control of all oil and gas resources in the country and the right to negotiate with oil majors such as Shell, Exxon and Conoco to adjust their concession agreements to production sharing contracts (PSCs) modelled on those by Indonesian oil company Pertamina. Pertamina started operations six years earlier in 1968.

In the 38 years since, Petronas has morphed – no longer is it a company which controls domestic resources, it operates around the world, in the past as many as 36 countries. In exploration and production, it operates in at least 22 countries. Along the way – because it accumulated substantial cash resources – it has been used in a number of rescue attempts some notable ones being Bank Bumiputra, Malaysia Airlines, Malaysian International Shipping Corp and Proton amongst others.

Although the legislation under which it was set up was primarily aimed at controlling domestic oil and gas resources, it was possible to use it for other purposes because the PDA required that Petronas must take all instructions from the prime minister. And it operated under a veil of secrecy.

Malaysia’s only entry into the Fortune 500 global  companies list is still a remarkably closely held affair. As closed and jealously guarded as  the view from the top of twin towers, some may say, where Petronas’ CEO and adviser have their offices, side by side.

Selected visitors  only get halfway up the 88-storey Petronas Towers or as most do, gaze at the world’s tallest twin towers (there are taller single buildings) from the ground below.

For most of its existence, there is  only ONE Petronas story – the official, glossy, often successful history. You can find this on its website.  Like its famous TV advertisements by Leo Burnett, the Petronas story thrives on the ‘feel good’ human factor, positive vibes, and never any mention about the fact that Petronas has invested in areas where regimes oppress people.

“Petronas only follows the minimum accounting standards required of authorities and the laws in Malaysia but what people want is much more details,” said Ramon Navaratnam, a prominent Malaysian economist who was former deputy secretary general of the finance ministry, now  the chairman of the Centre for Public Policy Studies at the Asian Strategy & Leadership Institute.

Navaratnam, also formerly head of Transperancy International Malaysia, said: “Petronas must aim to narrow the gaps …and unless they do that, there will always be doubts in the public’s mind.”

Apart from the ethical side of investing in some of these countries, there is also the question of whether these investments carry too much risk. How much money for instance has Petronas lost in Sudan after a civil war halted production? Why is it that Petronas is switching more to developed countries now, making some of its largest investments in countries like Canada?

The Edge last week quoted Petronas president and CEO Shamsul Azhar Abbas as saying: “Three years ago, we were in 36 countries but looking at the asset quality, there was nothing to talk about.”
That’s more than a little alarming. Shamsul himself has been employed by Petronas since 1975.

The successful conclusion of PSCs with major oil companies by the so-called young Turks who led the negotiations way back in the seventies proved a boon for Malaysia as much more of oil revenues accrued to the country, filling up national coffers. Now income from Petronas is estimated to account for some 40% of the federal government budget every year.

Malaysians appreciate Petronas because they enable subsidies by the government. The country today enjoys one of the lowest petrol and electricity prices in Asia, despite oil prices having risen to record levels in the last decade.

Some of them are thankful for the F1 motor race every year at Sepang and many other events and performances that Petronas sponsors. But they don’t know how much Petronas spends on this and why there is a need to brand Petronas all over the world when their products are sold mostly in Malaysia. And do they really engage in cutting edge research to improve their lubricants and fuel or is it just so much PR?

Petronas tells us that it has paid out about RM20 billion a year in gas subsidies alone since 1997. All in, Petronas has given RM653 billion in total direct contributions to the Malaysian government since 1974 to December 2011. In the last five years, the company contributed about RM60 billion a year. In comparison, it mostly contributed RM100 million a year to a sovereign fund for the people. Why not pay more into the sovereign fund so that future generations will benefit from the oil revenue as well?

Sure, Petronas has done a lot in terms of harnessing the oil wealth for the country  and it deserves applause for many things it has done in the past, although the various bailouts when it was called upon by the government to do so are dubious.  Yes, but unless there is more transparency, we won’t know how well they really have done.

Unless there is transparency, we won’t know how well – or badly – they have done overseas. A cutback in investments and withdrawal from some undeveloped and developing countries is an indication that there are problems but no quantification has been made.

Now, Petronas is involved in some of the largest investments it has undertaken – it has already spent over RM15 billion for a shale gas project in Canada and over RM6 billion in Australia. It will be the main spender in the country’s RM60 billion refinery and petrochemical complex which is part of the oil hub and terminal project in Pengerang, Johor. And it is investing over RM35 billion to look for eight billion barrels of oil and gas buried deep beneath Malaysian waters.

In fact over the five years from 2011, Petronas has budgeted capital expenditure of a massive RM300 billion. Who is keeping track to see all of these are spent properly? What checks and balances are there if any? Doesn’t the public – the ultimate owners of Petronas through the government – have a right to know and be comforted that all is being done well?

How well is Petronas doing in terms of finding new reserves where it matters most – in Malaysia? The finance ministry said in September last year that the anticipated lifespan of our oil reserves is 29 years – that is if new reserves are not discovered. What is Petronas doing about getting new reserves?
That Petronas is a closed door is an understatement. They have turned PSCs into risk sharing contracts (RSCs) but it is not certain whether they are sharing their risks or whether the contractors are putting the risks on Petronas. Local  companies which are experts in oil field servicing,  maintaining refineries, lending out marine vessels and such are now suddenly roped in to jointly explore for oil under RSCs. Why?

Officially, only the Petronas CEO may divulge any business information about the company’s many privately negotiated deals or investment plans. You only ever hear about it after it’s done or done with. And none of it has ever been reversed by parliament or questioned by the Prime Minister in public. Yes, there is need for secrecy, but can’t there be more disclosure post announcement?

And in Malaysia Petronas is helping to rope in expensive friends  ranging from Halliburton and Technip to Hess and mainstays, Shell and ExxonMobil, to help nurture a handful of small and medium-sized  local upstream oil service support companies in contracts worth billions.

Petronas is stretching both ways. In its overseas ventures, Petronas, which has tripled its gas reserves, still put a RM15 billion payment in Canada to buy Progress Energy, a  bet on an ‘unconventional’ gas project halfway round the world in British Columbia Canada, where not a single drop of liquefied natural gas has been shipped out yet … surely Petronas knows something we don’t and there will be much more investments before production actually happens.

When asked about Petronas’s level of investments overseas, Alan Troner an energy consultant who owns APEC Consulting, with nearly three decades of experience said: “I am uncertain whether this is a peak for investment abroad, but certainly it is high. I think it is more economic – fear of a relatively small home hydrocarbons base – and the unwillingness to ease upstream terms to allow more foreign access.”

Petronas declined to be interviewed for this series of articles.