For over a decade from the early 1990s, Petroliam Nasional Bhd (Petronas) was the champion of national oil companies (NOCs) challenging the established order in the global petroleum industry.
Then, it was relatively unheard of for state oil firms to venture outside their national borders to prospect for oil and gas (O&G), strictly the domain of international oil companies (IOCs).
Established players like Exxon Mobil Corp, Royal Dutch Shell plc and BP plc became the giants that they are today by making the highly risky business of finding and extracting O&G resources from the ground their specialty.
But the industry was fast changing as the race to find new oil reserves heightened on the promise of ever rising global demand amid growing fears that the world was running out of this precious resource.
Competition among the oil companies grew more intense, and stepping into this heady mix was a new and a different kind of competitor — the NOCs that between them controlled 90% of the world’s O&G reserves.
Two decades on, the state oil firms today make up the top four of the world’s largest oil companies in terms of revenue, with Exxon, the granddaddy of the IOCs, only coming in at fifth place.
In terms of market value, the estimated US$1 trillion (RM4.04 trillion) valuation for Saudi Aramco’s much-anticipated initial public offering dwarfs that of Exxon’s by roughly two-and-a-half times.
Petronas too had made great strides in that time to build an international business portfolio spanning from North America to Australia.
Since its founding over four decades ago, it had successfully parlayed RM10 million in start-up capital from the government to build a business empire with a book value exceeding RM400 billion and sitting on a RM120 billion cash pile.
Its success, however, has spawned an imitator at home where Malaysia’s largest corporation is facing what could be its greatest test.
At stake is its sole control over the nation’s petroleum reserves granted by the Petroleum Development Act 1974 and potentially, a share of the profits flowing from each producing O&G well worth billions of ringgits annually.
Sarawak O&G Fields
Sarawak, which has been clamouring for higher O&G royalties, fired the first salvo to escalate its challenge to reclaim control over the state’s petroleum resources.
Last year, it had set up Petroleum Sarawak Bhd as the state oil company with regulatory functions very much like Petronas’.
And this month it began to enforce legislation which would require oil companies operating in the state, including Petronas, to apply for a licence to continue with their activities.
This introduction of new fiscal terms more favourable to the state would likely follow.
Sarawak’s 60 O&G fields currently pump a combined 850,000 barrels of oil equivalent (boe) a day.
Malaysia produces about two million boe daily under a production sharing contract (PSC) arrangement between Petronas and the oil companies.
The PSC was introduced in 1976 to replace the concession system and promised greater control over domestic exploration and production (E&P) activities.
Oil Profits
For Petronas — one of the few NOCs set up as a private company and modelled after Norway’s — control also meant getting to keep a bigger share of the oil revenues and profits.
In a typical PSC, an oil company which has been awarded the rights to a particular exploration block will pay for the upfront costs to look for O&G reserves, and bear the risk entirely should its efforts come up dry.
These exploration costs can run into several hundred millions of dollars if it involved drilling wells in deep waters. If it makes a commercial discovery, the oil company would be allowed to recover all costs already incurred to find, develop and operate the field from the production revenue.
After deducting royalty payments, any surplus, referred to as oil profit, will be split with the NOC according to an agreed formula.
The NOCs’ share of the oil profit under this arrangement usually range between 20% and 80% — the higher share once the IOCs had recovered their initial investment. Each party would also have to pay tax on their respective profits and export income.
The PSC arrangement has been highly rewarding to Petronas which has been collecting its entitlement barrels in Malaysia without having to invest a single sen in domestic E&P activities.
It gets a second helping of the cake by requiring the IOCs to take on wholly owned E&P subsidiary, Petronas Carigali Sdn Bhd, as a minority partner in developing discovered O&G fields.
Since 1990, Malaysia’s oil production has hovered around 700,000 boe a day, while gas output has increased almost fourfold from just under two billion standard cu ft a day (bscfd) to 7.6 bscfd last year, according to BP’s Statistical Review of World Energy.
It is thus unsurprising that although its overseas operations accounted for over 40% of its revenues, more than 80% of Petronas’ profits were generated in Malaysia, suggesting that the oil profit it earns annually is a significant contributor to its cashflows.
Since the early 2000s, its cash balance has roughly quadrupled.
It could be argued that if not for its cash reserves, Petronas may have been more restrained in taking out huge bets on risky projects overseas.
LNG from Canada
The company’s spectacular decision last year to scrap a proposed C$30 billion (RM92.6 billion) project to export shale gas in the form of liquefied natural gas (LNG) from Canada, after a C$5.5 billion acquisition spree, resulted in a hefty RM2 billion write off by its local unit.
This was its second project involving unconventional gas resources, the first being a US$32 billion LNG export plant in Australia using coal seam gas in which Petronas took a 27.5% interest.
Santos Ltd, the project’s main partner, had taken over US$2 billion in write downs on its 30% stake up to last year due to the impact of low global oil and LNG prices.
The LNG business is a major contributor to the group, ranked the world’s third-largest in terms of sales volume.
Domestically, Petronas’ main focus is completing a giant refinery and petrochemical complex in Johor.
Upstream, where it has been hit hard by the collapse in oil prices in recent years, the company has to overcome the challenge of attracting new players to the country’s maturing O&G acreages which offer riskier prospects.
There has been no significant discoveries recently to increase Malaysia’s O&G reserves although every year, Petronas and its contracted oil companies have managed to find just enough to replace the annual volumes that is pumped out, reporting a marginal 2% decline in the reserves replacement ratio in 2017.
Against the backdrop of depleting petroleum reserves and the possibility of other oil producing states pushing for a wider say on O&G activities within their territories, it may be time for a relook on how the benefits from this depleting resource actually accrue to Malaysia and its people.
Norwegian Special Fund
Again, we may want to revisit Norway for lessons on sustainable oil wealth management.
In 1990, recognising that they were becoming too dependent on their oil revenue, the government set up a special fund to channel their petroleum- related revenue with a strict cap on withdrawals and limited to certain types of spending.
Today, it is worth over US$1 trillion, or US$195,000 for each Norwegian man, woman and child.
Following this in 2001 was the privatisation of its NOC, Statoil ASA, which now operates like a regular IOC.
A similar privatisation was recently mooted for Petronas to raise funds for the government, but for the reasons discussed earlier could be more difficult to pull off.
Petronas has played an important role in the national agenda and its continued achievements on the global stage are the pride of Malaysians.
But the bottom line is that it is not a fund manager, nor set up to be one like the Employees Provident Fund, Permodalan Nasional Bhd or Lembaga Tabung Haji which invest for the benefit of their depositors.
Petronas certainly acknowledged as much when it agreed to contribute to the National Trust Fund, a fund set up in 1988 to safeguard the country’s environmental heritage.
Managed by Bank Negara Malaysia, the fund, with an initial RM100 million from Petronas, has generated average annual returns of 6.5% and is now worth over RM15 billion.
Petronas is the only contributor to the fund to date. Perhaps, the idea of having our own US$1 trillion oil wealth fund in 30 years, where every Malaysian has a claim, is not farfetched after all.
