Despite all the uncertainties, Petronas and the O&G sector have been the beacon of Malaysia’s economic drive

By MARK RAO / Pic By TMR File

The nationalisation of Malaysia’s petroleum resources in the 1970s elevated the country from a tin- and rubber-dependent economy to the brink of achieving high-income status over the next two to six years.

Oil was first discovered in Malaysia as early as during the British colonial rule, but it was only some 17 years after independence that the federal government assumed ownership of the country’s oil and gas (O&G) assets.

The Malaysian economy has grown in leaps and bounds since, raking in RM220.4 billion in revenue with gross national income (GNI) per capita at US$9,660 (RM39,407.97) last year. Malaysia’s GNI is just US$2,576 short of the World Bank’s threshold for high income economies.

The country’s O&G industry was an important pivot to the economy over this period, with petroleum-related income making up 41% of government revenue in 2009.

Petroliam Nasional Bhd (Petronas) led Malaysia’s O&G nationalisation effort since its incorporation in 1974 and is today a Fortune 500 company, joining the ranks of peers Saudi Arabian Oil Co (Saudi Aramco), Royal Dutch Shell plc and Exxon Mobil Corp.

The foray into the O&G game did, however, leave Malaysia susceptible to fluctuations in the global economy as is readily attested to by the 2014 oil crisis, which is still fresh on the minds of investors.

Today, as Malaysia celebrates 61 years of independence under a new ruling coalition for the first time in its history, Petronas’ role is even more crucial.

The current administration led by Prime Minister Tun Dr Mahathir Mohamad will be looking to the national energy company to help the country’s finances — especially with the recent recovery in crude oil prices.

But the move to grant higher royalties to all oil-producing states, coupled with Sarawak assuming regulatory control over its upstream petroleum resources, could significantly dent Petronas’ profitability, while casting doubt over the industry’s future investment outlook.

Petronas and Oil Nationalisation
The incorporation of Petronas to spearhead the exploration, extraction, refining and marketing of Malaysia’s petroleum came amid a wave of oil nationalisation efforts in South-East Asia in the 1970s as the region sought to elevate its economic status.

Petronas emerged as one of the more successful national oil companies during this era. It is recognised as one of the best O&G companies in the world for profitability.

Malaysia is the 3rd-largest exporter of LNG globally

The Petroleum Development Act 1974 grants Petronas exclusive ownership and regulatory authority over the country’s onshore and offshore petroleum resources.

Oil was first found as early as 1911 in Sarawak, but technological limitation and low global oil prices kept the industry from growing.

It was only in the 1960s that advancements in technology were made and by the 1970s, backed by technological support and rising crude oil prices, Malaysia’s O&G industry started to boom. Petronas was in the perfect position to tap into this.

The national energy company had to lure investors by introducing more lucrative production sharing schemes over concession-based models, while navigating difficult geological conditions and higher tax structures.

Asia School of Business assistant professor of management Renato Lima de Oliveira said Malaysia’s oil sector has been remarkably stable in terms of regulations since the creation of Petronas, despite these challenges.

“This helped to attract investors, despite a more challenging geology and sometimes a government-take (or taxes collected) that is not so attractive in international comparisons,” he told The Malaysian Reserve.

“However, Malaysia was able to develop a pool of talented workers and have calibrated regulations over time with enough flexibility to keep the confidence of investors.”

In 2017, Malaysia was ranked 26th worldwide in terms of total production of petroleum and other liquids, and was the second-highest in South-East Asia behind Indonesia.

Malaysia produced 648,000 barrels per day in crude oil and condensates, and 6.9 billion standard cu ft per day in natural gas that year. The country is also the third-largest exporter of liquefied natural gas (LNG) globally.

Oil Crisis and Need for Diversification
The 2014 oil crisis saw crude oil prices plummet from US$100 per barrel highs to as low as US$28 per barrel in 2015, and left many Malaysian O&G players over-invested and saddled with debt that they could not work off.

High-cost and large-scale O&G projects were forced to be terminated as the future returns in these projects no longer justified the cost of investment. This included Petronas’ own multibillion LNG facility in Canada, the Pacific NorthWest LNG plant, last year. 

The PIC in Johor is slated to add substantial capacity to Petronas’ downstream capabilities

The losses and impairments recognised by Petronas resulted in the company’s revenue declining 24.7% from RM329.1 billion in 2014 to RM247.7 billion in 2015, while profit after tax more than halved from RM47.6 billion to RM20.8 billion.

It is estimated that the petroleum industry is to comprise 9%, or RM11.44 billion, of the total RM127.71 billion in direct taxes to be collected by the federal government this year — significantly lower than the 21.3% tax contribution, or RM26.96 billion, from the sector in 2014.

Petronas undertook its own cost-saving scheme, namely the Cost Reduction Alliance 2.0, and pledged to substantially reduce its capital expenditure at the expense of service and equipment players who are dependent on the national energy company for work.

If anything, the 2014 oil crisis serves as a healthy reminder of the volatility of oil prices and the global economy, and the need for a diversified revenue base.

Caught Between a Rock and a Hard Place
The euphoria that followed Pakatan Harapan’s historic win in the 14th General Election was quickly tapered by the discovery of the nation’s RM1 trillion debt hole that the current administration is working towards plugging.

Alongside the cancellation of several mega projects, renegotiation of previous agreements and reduction of redundancies and expenditure across key government agencies, the current administration will likely look to Petronas to partially alleviate its fiscal burden.

The move would be timely as Petronas’ upstream business will directly benefit from the recent rally in crude oil prices, while the US$27 billion Pengerang Integrated Complex (PIC) in Johor is slated to add substantial capacity to its downstream capabilities.

Petronas further committed to pay RM19 billion in dividends to the government this year — up from the RM16 billion declared in 2017. But questions remain as to how the 20% royalty from the net profit of a given O&G project will impact the national energy company.

This would be a significant change in the current arrangement, which sees Petronas paying only a 10% royalty which is divided equally between the federal and state governments (Sabah and Sarawak), while Kelantan and Terengganu are granted compassionate funds.

The move could dent Petronas’ profitability and deter investors from the country’s O&G industry as high-cost projects such as marginal fields and complex reservoirs become less attractive.

De Oliveira said while O&G activities have picked up recently owing to the higher oil price environment, investments in deep offshore assets remain depressed worldwide.

“The latter takes up to 10 years from the start of exploration to the eventual discovery and production of oil, with investors more exposed to political and market risks,” he said.

“Malaysia needs to increase its exploratory activities in deep offshore to find and develop new reserves. Higher taxes and regulatory uncertainty do not help.”

Despite all the uncertainties, Petronas and the O&G sector have been the beacon of Malaysia’s economic drive and will continue to power the country well into the future.