September 15, 2008

Dilemma of a National Oil Company

By Johannes Ridu

TAN SRI MOHD HASSAN Marican, president and chief executive of Petroliam Nasional Bhd (Petronas), seemed a bit agitated when he met the Press recently to announce the national oil company's 2008 financial results.

And who can blame him? For one, everyone, from the man-in-the street to politicians, is berating him for what he terms as `unfair' criticisms following June's sharp hike in fuel pump prices. There were also calls for Petronas to be more `transparent'.

Are these criticisms against the nation's top technocrat justified? Some question the sudden nature of the criticisms, especially those relating to transparency, given that all these years everyone was happy with the information contained in the oil company's annual reports.

Leading the call for greater transparency was Umno Youth deputy chief Khairy Jamaluddin. The Rembau Member of Parliament, who is also son-in-law to the Prime Minister, said Petronas `should reveal in detail its accounts'.

`I believe the people have a right to know, as petrol found in the country belongs to the people. Petronas is one of the best-run companies and I am sure there is nothing that can't be defended in its accounts,' he was reported as saying.

Khairy is right, at least about Petronas being one of the best- run companies. Hassan, 57, has been running a tight ship since taking over Petronas in 1995. In fact, when he assumed control, he ordered that all departments reduce their expenditure by 30% under a cost-cutting exercise.

Lavish spender?

Still, there are detractors like Penang Chief Minister Lim Guan Eng, who accuses Petronas officials of lavishness. He was quoted as saying: `When people are suffering you must share the burden. As long as Petronas does not share its profits, it is working against national interests.

`We have seen the financial statements but there must be a detailed report of the expenditures, resources and revenues. How do we know how many barrels of oil are pumped in the middle of the sea? There must be full accounting of all these, including activities meant for charitable purposes.'

Petronas has come under scrutiny for its support of, among others, the Malaysian Philharmonic Orchestra, Formula 1 racing, and more recently, the multi-billion-ringgit East Coast Economic Region (ECER) project.

Hassan, understandably, is disappointed that Petronas and its employees have been made the scapegoat for the fuel price increase, which is in fact a global problem. `They (employees) worked very hard for this company but still they were not appreciated,' he tells Malaysian Business. It is learnt that one employee was even berated by a cab driver for the fuel price hike.

Giving back

Let us take a look at Petronas' financial figures and see how it has used its revenues over the years. From its inception in 1974, Petronas has recorded a cumulative profit of RM677.1 billion. In the same period, it made a cumulative payment of RM403.3 billion to the Government, RM78.9 billion to minority interests and foreign tax, and reinvested RM194.9 billion.

For its financial year (FY) 2008 alone, Petronas paid out RM67.6 billion to the Government - RM62.8 billion to the Federal Government and RM4.7 billion to Terengganu, Sabah and Sarawak.

Of the amount to the Federal Government, RM30 billion was for dividends including a RM6 billion special dividend, RM20.6 billion for petroleum income tax, RM5.4 billion corporate income tax and RM2.1 billion export duties. As for the state governments, the payment was for royalties.

Petronas' RM67.6 billion contribution represents 44% of the Federal Government's revenue this year. It is also 63.1% of Petronas' group profits for FY08.

Despite returning most of its profits to the Government, Petronas has still managed to accumulate a huge cash reserve of more than RM100 billion. Its total assets stand at RM339.3 billion and shareholders' funds RM201 billion. It is today the fifth most profitable oil company in the world and ranks second after Russian oil giant Rosneft in terms of return on revenue and return on assets.

That's an extraordinary achievement for a national oil company that started just 34 years ago, and with a paid-up capital of only RM10 million.

Not transparent enough?

Let's examine the alleged lack of transparency in Petronas' accounts. A glimpse of the company's 2007 annual report reveals that, for one, the company did not provide details of its directors' remuneration.

Instead, Petronas had lumped together the sum it paid to its eight directors, unlike that done by its listed entities - Petronas Dagangan Bhd, Petronas Gas Bhd and KLCC Property Holdings Bhd - which detailed what each director earned. Its other subsidiary, MISC Bhd, presented the directors' remuneration in bands.

Petronas also did not explain why its total 2007 director's emoluments and fees remuneration were sharply higher at RM9.2 million, compared with RM5.3 million in 2006.

Still, in comparison with government-linked companies (GLCs) like Malayan Banking Bhd and Bumiputra-Commerce Holdings Bhd - which paid out RM14.49 million and RM15.21 million respectively to their directors last year - Petronas' payouts were much lower.

It is a fact that Petronas has gained substantially from the current high price of crude oil. Petronas produces 1.77 million barrels of oil equivalent (boe) per day from both domestic and international operations. This means that with every US$1 (RM3.36 as at the time of writing) increase in world oil price, Petronas would earn US$1.77 million (RM5.94 million) per day or US$276 million (RM927 million) a year. And world oil prices have increased many times more.

While the gains will only be fully reflected in the FYO9 results, what the public wants to know is, why was this windfall not used for fuel subsidies?

The Government says it would pay about RM28 billion in petrol subsidies this year. The world crude oil price has risen by about 30%, at one time hitting US$140 per barrel in June, from about US$85 in December 2007. That gives Petronas gains to the tune of billions of ringgit. On top of that, the Federal Government received RM62.8 billion from Petronas this year, up by RM14.7 billion from last year.

Second Finance Minister Tan Sri Nor Mohamed Yakcop has argued that the money would be needed for future use. `We can't simply spend all our revenues on the people of this generation. What will happen to our children in the next generation and beyond?' he was reported as saying.

While that might be a valid reason, the public still has a right to know how much Petronas has gained from the high oil prices. Perhaps, Petronas should present a more comprehensive breakdown of its financials in its next report.

Keeping to requirements

Is Petronas legally required to reveal more in its accounts? The company says the information published in its annual reports satisfies the requirements of the Companies Act 1965. Hassan has always maintained that Petronas has revealed all information as required by the law.

Transparency International Malaysia president Tan Sri Ramon Navaratman agrees. He says Petronas has fulfilled all the requirements of the Companies Commission of Malaysia (CCM) and that there is no justification to say that the company is not transparent with its accounts. `It has given full explanation according to the requirements,' he tells Malaysian Business.

Even if Petronas, as the national oil company, should set an example by revealing more about its accounts, the question arises as to what extent it should do so. `We have to be practical, realistic and fair-minded. Surely it would be too much to ask Petronas to disclose how much it spent on tissue paper,' says Ramon.

Some say the criticisms of Petronas could be due to unhappy politicians who failed to secure contacts and other favours from the oil company. With Petronas having a stringent tender process, this is not surprising.

This could be Hassan's dilemma. Grappling with the day-to-day running of a huge multinational, he also has to fend off political interference and criticisms.

Ramon reiterates that Petronas is a Fortune 500 company and that anyone requiring detailed information of its accounts should make a written request to Petronas. `I must say that I don't quite agree with the contention (that Petronas is not transparent with its accounts). People don't talk about corruption and inefficiency in Petronas,' he says.

Petronas on the bourse?

Would going public help make Petronas more transparent or accountable?

The Malaysian Investors' Association (MIA) has proposed that Petronas be listed on Bursa Malaysia to enable the petroleum wealth to be distributed to the people. `The listing of Petronas is a good way to share the nation's wealth ... it gives a chance for citizens to own a strong company,' says its president Datuk Dr P H S Lim.

`The listing of Petronas would boost the market. It could easily push up the market capitalisation of Bursa Malaysia to more than RM1 trillion. Petronas' shares could quite easily reach three times book value,' he adds.

Lim argues that the Government should take the cue from other countries such as China and Russia which have taken their national oil companies public.

`In many countries, most of the top oil companies are listed. In China, state-owned companies like Sinopec, PetroChina and CNOOC are listed. In Russia, Gazprom and Rosneft's equity stakes were well received,' he says. Then there are the well-known oil and gas companies like ExxonMobil, Shell and BP, which are all listed internationally.

Lim says he will continue to pursue the matter with the Government.

But what are the chances of the Government considering such a proposal and also making Petronas' accounts more transparent?

Minister in the Prime Minister Department, Tan Sri Amirsham Abdul Aziz, declined to comment to queries from Malaysian Business on issues related to Petronas.

Moving ahead

Petronas, meanwhile, appears eager to put the public criticisms behind it and move ahead. The company remains focused on its vision to be the leading oil and gas multinational. Its strategy is to globalise, be an integrated company, increase its value-added activities and grow its technology capabilities.

`Petronas' objective is to meet the energy and economic development needs of Malaysia and at the same time, become a world- class oil and gas player,' says an energy analyst.

In doing so, the question of its production-sharing contracts (PSCs) comes into question. Some say Petronas should squeeze more out of its partners, while the company says this would only drive away potential partners.

Currently, Malaysia's average oil production is 1.67 million barrels of oil equivalent (boe) per day, of which crude oil and condensates amount to an average of 691.6 thousand barrels per day while gas production averages 5.9 billion cubic feet per day (equivalent to 981.9 thousand boe per day). The Petronas group entitlement stands at 69.2%.

With Malaysia's total oil and gas reserves of 20.13 billion boe as at Jan 1, 2008, Petronas is aggressively pursuing international exploration and production (E&P) to augment its domestic production. Its international reserves currently stand at only 6.24 billion boe, raising the group total reserves to just 26.37 billion boe.

According to the oil company's FY08 accounts, its international business contributed 40.3% to revenue, overtaking its domestic business which contributed 20.8%, and exports, 38.9%. The group also secured 13 new international PSCs in FY08, which brought the total of the company's international E&P ventures to 63 in 23 countries.

Of this, Petronas is operator in 29, joint operator in 14 and active partner in 20. According to the company, six of the group's international upstream projects began production in FY08.

Production from international operations accounts for 34.7% of the combined production of 1.77 million boe per day. Sudan contributes more than 50% of Petronas' overseas oil production (equity basis) but Russia and Central Asia are new long-term growth regions for Petronas given its initial successful foray into Turkmenistan.

Giving priority to reinvestment

But even as Petronas is certain to become a major global player in oil and gas, should it continue to give back its profits to the Federal Government?

If Hassan has his way, he would be the first to cut Petronas' contribution to the national coffers and stop the 80% gas subsidy to the five independent power producers - Malakoff Bhd, YTL Power Bhd, Genting Sanyen Bhd, Powertek Bhd and Sime Darby Bhd.

The oil company has also been losing its senior staff to oil companies from the Middle East. To a certain extent, it is unable to stem this brain drain as, being a government-owned company (GOC), it cannot freely hike up wages to retain staff. But if not addressed, this brain drain could affect its long-term prospects.

There is a genuine need for Petronas to retain a bigger portion of its profits for reinvestment. So far, reinvestments by Petronas are lower than that of the oil majors and other national oil companies (NOCs). In FY08, Petronas reinvested 29.2% of its profits compared to 51.7% by oil majors and 77.1% by other NOCs.

More importantly, the cost of production has outpaced crude oil price hikes over the past five years. For instance, rig cost escalated by 298%and steel price by 225% in the last five years, compared to a 182% hike in the price of West Texas Intermediate. To add to this, Petronas' oil production has been declining since 2005.

Analysts say Petronas' capital expenditure is expected to rise to RM50 billion in FY09 and that the upward trend will continue. And come what may, Petronas simply has to retain more of its profits for reinvestment to ensure its survival.

Maybe the attitude is changing. For one, the gas subsidies are being reduced. So don't rush to get your NGV (natural gas for vehicles) kit yet as in a few years, the price of NGV may be comparable to that of petrol.

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