Petronas: The model of a modern national oil company
The Malaysia state firm is putting a legacy of underperformance behind it
Malaysia's state-owned oil company Petronas used to be the butt of jokes. Its critics called it a “cash cow” with “no discipline as to how funds are managed”, the company’s chief executive, Shamsul Azhar Abbas, recalled recently. But the mocking has stopped. Petronas is well on its way to becoming one of Asia’s more dynamic national oil companies (NOCs).
True, Petronas, which was established in 1974, had a terrible track record internationally. At home, naturally declining oil production, coupled with rising demand, presented problems too.
Abbas took the company’s helm almost three years ago. Since then the firm has started to change for the better.
Petronas was proud to tell anyone that would listen that it was a Fortune 500 company. When Abbas took the top job, however, he questioned whether it really behaved like one.
The NOC had invested in exploration prospects that made it seem like a global player, but with 42% of its revenues from overseas netting only 10% of its earnings, something was amiss.
Speaking in June, Abbas said his company’s focus was now increasingly on geology not just geography. “It is pointless to be present in more than 30 countries globally if they do not contribute to our bottom line,” he said.
Fields in Timor Leste, Equatorial Guinea, Pakistan and Ethiopia have been closed since Abbas took the reins. At the same time, Petronas, which is more widely identified with the twin, steel-clad towers of the same name that pierce the sky over Kuala Lumpur, has invested in Canada, Australia and Brazil. And after studying how some of the biggest international oil companies (IOCs) operate, it appears that Abbas and his team are succeeding.
The company’s three-year average return on capital is 23.6%, better than the 16% achieved by BP and Shell, and within range of ExxonMobil’s 25%, notes ratings agency Moody’s.
At the end-2012, its domestic oil and gas resources – pegged at 32.6bn barrels of oil equivalent (boe) – had an average estimated lifespan of 37 years. Its international resources, excluding its C$5.2bn ($5bn) takeover of Canada’s Progress Energy at the end of 2012, has a projected lifespan of 43 years.
But like most Asian NOCs, its proved reserves are geographically concentrated – nearly 70% of its resources lie in Malaysia. Nevertheless, this is partially mitigated by the large 75% contribution to its total revenues from exports and other overseas activities.
Petronas is one of the world’s largest liquefied natural gas (LNG) exporters, shipping some 26m tonnes from Malaysia last year. Furthermore, among its Asian peers, aside from China National Petroleum Corporation (CNPC), Petronas has the most headroom for further acquisitions.
It can spend more than $10bn on debt-funded acquisitions on top of its capital spending plans over the next year, says Moody’s.
Already, it has an ambitious expansion plan totaling 300bn ringgit ($92.2bn) for the next five years. The firm will expand its upstream activities and build its LNG portfolio by investing in further export capacity at home and in Canada.
It is also moving ahead with the development of its refinery and petrochemical integrated development (Rapid) complex in southern Malaysia – designed to produce 9m tonnes per year (t/y) of petroleum products and 4.5m t/y of specialty petrochemicals.
Following its earlier misadventures overseas, Petronas appears to be on a firmer footing now.
It is balancing its taste for high-risk geopolitical investments – Egypt, South Sudan and Iraq – with less risky moves into Australia and Canada, which compliment its LNG export business. But highlighting its exposure to operational risk, its production in South Sudan was suspended for most of 2012 due to government disputes over transmission tariffs.
This, combined with an impairment charge of 5 billion ringgit in Egypt - smaller than expected gas reserves eyed for export were redirected to the domestic market – contributed to a 17% decline in net profits to 49.4bn ringgit last year.
Its average daily production, excluding Sudan, in 2012 was just below 1.99m barrels of oil equivalent per day (boe/d), similar to the 1.92m boe/d posted in 2011. However, the dispute in Sudan, which made up 28% of its total production overseas in 2011, cut output there by 84% to 23,000 barrels per day.
At the same time, Petronas has also made a name for itself in Iraq, a notoriously tricky place to operate. Among the oil companies operating in Iraq, patience, or the lack of it, has proved something of a flashpoint.
There has been considerable frustration about how much the IOCs have complained, whereas the Asian NOCs, particularly Petronas and the Chinese, just get on with it, Valerie Marcel, an expert on NOCs at UK-think tank Chatham House told Petroleum Economist. It “makes them much more agreeable partners”.
Jaafar Altaie, managing director of Middle Eastern-based consultancy Manaar Energy, agrees. He told Petroleum Economist that they have an edge in places like Iraq. “They are more nimble, less mired by conflicting commercial interests and are better able to adapt to the realities of doing business. They go the extra mile in terms of patience with cultures, markets, delays and bureaucracy.”
Altaie added that the commercial dynamics today favour the Asian companies in terms of adapting and responding to the challenges of the Middle East, Africa and other producing “hotspots”.
Petronas has interests in the four Iraqi oilfields of Majnoon, Garraf, Halfaya and Badra, where capital expenditure is expected to peak over 2012-2016, followed by rising cash flows as production ramps up.
But when it comes down to the nuts and bolts, Petronas is still a small NOC, similar to a mid-cap company.It’s not top tier in terms of technology, says Marcel. However, the company is on track to operate the world’s first floating LNG (FLNG) export plant by 2016.
Albeit with a 1.2m t/y capacity, it will be much smaller and less technically challenging compared to Shell’s pioneering 3.6m t/y Prelude floater, due online by 2017. However, what is impressive is their investment in human capital, which is a real strength, not only for their own workforce but the Malaysian workforce, adds Marcel.
Petronas’ presence in the pinnacle of motor sport, the high-technology world of Formula 1 racing, predominantly as a sponsor to the Swiss-based Sauber team for 15 years, before teaming up with Mercedes in 2010, is telling.
The tie-up with Sauber was not a typical sponsor-team relationship, instead at the core of the concept was a strong technical partnership. A talent exchange programme that provided many benefits to the Malaysian NOC, as well as the racing team, through rotating scores of Swiss and Malaysian engineers.
Petronas is also a multi-cultural company, which makes it quite different from a Saudi Aramco or CNPC, says Marcel. “They are dealing with human resource issues that IOCs address, not like a monolith, which effects the culture of the company”.But like most Asian NOCs, Petronas does have an Achilles heel: subsidies. The NOC will spend 10bn ringgit this year covering transport fuel subsidies, which mean retail prices are about one-third those in the international market. It will also pay around 19bn ringgit to subsidise natural gas consumption.
On top of this it pays between 26bn and 28bn ringgit per year to the government – its sole shareholder. And despite its proposal to cap dividends at 30% of its net profit starting from 2014, its position as a source of funds is likely to remain unchanged.
But with national elections behind it, the government is starting to push through economic reforms that should ease the subsidy bill and free up more spare cash for investment.