National oil company typically does not have to put up money for upstream investments domestically

Pic By TMR File  

Much of the debate on the RM30 billion special dividend to be paid by Petroliam Nasional Bhd (Petronas) to the government this year has centred on how the national oil company’s capital expenditure programme could be potentially affected and impact Malaysia’s future oil and gas (O&G) production.

When announcing the special dividend last year, the government had said the additional income would help it narrow the deficit in its 2019 budget, mainly to make up for the loss of revenue from the revocation of the unpopular Goods and Services Tax introduced in 2015.

Those not in favour of Petronas dipping into its cash reserves to pay for the special dividend argue the move would have a longer-term impact on impinging revenue flows from the nation’s crucial O&G sector, for a short-term gain to fill government coffers today.

It is true that Petronas, as the sole owner of the country’s petroleum resources, has to commit huge investments annually just to maintain its domestic crude oil and natural gas production, which combined stands at around 1.6 million barrels of oil equivalent a day.

In reality, as practised by the industry globally, the investments to develop petroleum resources are usually paid for in advance by the respective oil companies that are operating the fields.

These advances would be progressively recovered by the oil companies from the field’s future production.

As such, in Malaysia, except for the fields operated by its exploration and production (E&P) subsidiaries, Petronas typically does not have to put up money for upstream investments domestically.

This largely explains how Petronas continues to build its cash pile, which is further boosted by its share of profits from the oil companies’ production in Malaysia after deducting the recovery of the advances and operating expenses.

The super profits that Petronas enjoys from every drop of O&G produced in Malaysia is at the heart of the growing discontent among petroleum producing states, which have been asking for higher royalties from production.

Sarawak, a major domestic O&G producer, has introduced legislation for greater control of petroleum revenues generated in the state, in a direct affront to Petronas and its monopoly granted by the Petroleum Development Act introduced in the 1970s.

Petronas insists it has been prudently managing the pro- fits from the O&G produced domestically for the benefit of the nation, and cites a long list of projects undertaken over the years.

But constrained by its mandate, Petronas’ money rarely goes directly to where it is needed most — helping to improve the quality of life of disadvantaged Malaysians, especially those in the B40 (bottom 40) households.

While Petronas has played a crucial role in the development of the domestic petroleum industry and contributed to Malaysia’s progress, it has to be acknowledged that it may not be the best at generating the best returns from its idle cash reserves.

After all, it was not set up as a fund manager and it may be time for Petronas to recognise that.

Following from the examples of more advanced countries, the billions sitting in Petronas’ accounts could be put to better use elsewhere, run by professional fund managers with future profits generated by the fund dedicated exclusively for social programmes that will benefit Malaysians who need it the most directly.

On the current debate, Petronas appears more than able to afford paying the special dividend, but we should be looking for a more sustainable way to benefit off the profits earned from our depleting petroleum resources.

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A M Azmi is a financial analyst with more than 20 years of experience in various sectors. The views expressed are of the writer and do not necessarily reflect the stand of the newspaper’s owners and editorial board.