Petronas profits create friction

Asia Times Online
10 March 2006


Southeast Asia

Petronas profits create friction
By Anil Netto

PENANG, Malaysia - Petronas, Malaysia's national petroleum
corporation, like many other multinational energy companies, is
riding the crest of soaring global fuel prices and raking in record
revenues and profits. However, those globally pumped-up profits are
causing a stir on the Malaysian street, with protesters calling the
company's historically opaque finances into question.

For the fiscal year ending in March 2005, the state-run corporation
recorded a pre-tax profit of US$15 billion, up 55% from the previous
year, contributing 30% of the Malaysian government's total revenues.
This year's profits are tipped to climb even higher on the back of
spiraling global oil prices, potentially representing the best
financial results in Petronas' 32-year corporate history.

But those gains are not coming without controversy. Last week the
Malaysian government reduced fuel subsidies and allowed the local
price of gasoline, diesel and liquefied petroleum gas to float,
leading to a rise of 18% to 23% depending on the fuel source. The
policy move was the latest in a series of incremental and unpopular
price hikes over the past two years. More recently, rising domestic
prices have renewed national arguments for more interventionist and
less neo-liberal economic policy prescriptions.

Malaysia famously bucked conventional economic wisdom when it applied
capital controls in the wake of the 1997-98 Asian financial crisis -
a move that in effect insulated the Malaysian economy from the
ravages sharp currency depreciations wrought on Thailand and
Indonesia. Now, in the era of spiraling global fuel prices, many in
Malaysia believe that, as a net fuel exporter, fuel subsidies could
provide the country's export-dependent economy a competitive boost
and insulate the domestic economy from inflationary pressures.

That argument is finding popular expression through a string of
street demonstrations and protests that have put Prime Minister
Abdullah Badawi's government on the defensive. The government says
the price hikes are necessary to curb over-consumption, to discourage
smuggling and to remove subsidy-generated market distortions. The
government also argues that Malaysia's fuel prices are still among
the lowest in Southeast Asia, apart from oil-rich Brunei.

Public anger has perhaps predictably focused on Petronas' big bottom
line and, perhaps more important, on how those massive profits are
used and potentially abused. The company's critics have long
complained that elected politicians, rather than pumping petro-
profits back into sustainable economic activities, often dipped into
Petronas' reserves to finance economically unsustainable ventures or
to bail out politically connected firms with funds that could have
been better used for national development. No Malaysian minister or
senior politician has ever been held to account for misallocating or
squandering Petronas-generated revenues.

Shrouded disclosure has often stoked suspicions, though. For
instance, controversy erupted in 1998 when Petronas, through its
shipping carrier Malaysian International Shipping Corp Berhad (MISC),
inexplicably acquired a debt-laden shipping concern, Konsortium
Perkapalan Bhd (KPB). Some analysts felt the suspect deal amounted to
a bailout of then-prime minister Mahathir Mohamad's son, Mirzan
Mahathir, whose KPB was then floundering under debts estimated at
about RM1.7 billion (US$457,000).

The 'dark holes' of the future

When Malaysia's oil wells finally run dry, which could come sooner
than many of Malaysia's 24 million population anticipate, concerns
are growing that the resource-rich country may have little to show
for decades of bumper petroleum profits, apart from a few fading
trophy projects and deep, dark holes in the ocean floor.

To be sure, Petronas' record profits have to be tempered against
Malaysia's limited oil reserves and the steadily increasing cost of
exploration. Total domestic crude and oil-condensate reserves are
officially estimated at about 4.8 billion barrels, equivalent to a
reserve life of about 19 years. For natural gas, which makes up some
75% of Malaysia's total reserves, the reserve life is estimated at a
longer 33 years. At current rates of production, however, some energy
analysts predict that Malaysia could swing from being a net exporter
to net importer by the end of the decade.

Petronas has recently aggressively expanded its exploration and
international business operations, leveraging its technical expertise
into joint ventures in resource-rich and often politically unstable
countries such as Sudan, Myanmar, Turkmenistan, Niger, Chad and, to a
lesser degree, Egypt and the Malaysia-Thailand Joint Development
Area. The company has also ramped up exploration activities at home.

Petronas, Malaysia's only bona fide multinational company, currently
manages 59 energy ventures in 26 different countries around the
world. Last year, it spent RM7.5 billion on new international
explorations, mainly in Sudan's war-ravaged oilfields, as well as
liquefied-natural-gas work in Egypt. These ventures have allowed the
company to build up international reserves of 5.92 billion barrels of
oil equivalent (boe), of which crude accounts for 2.15 billion boe,
with the remainder in gas.

Apart from boosting profits, those ventures have exposed Petronas to
periodic criticism that its overseas activities help to prop up
financially some of the world's more loathsome, human-rights-abusing
regimes. Still, most energy-industry analysts believe that Petronas,
the only Malaysian company in the Fortune 500, has managerially done
well for itself considering the heightened global competition for new
finds from China, India and the United States.

"It is easily the best, that is, the most professionally run,
corporation in Malaysia, with a proven track record of competing not
only locally but internationally," said political scientist Andrew
Aeria, a Malaysia-based academic who closely monitors political and
economic developments. "[It's just a] pity its coffers have always
been raided by the BN [Barisan Nasional, Malaysia's ruling coalition]
government to bail out crony project failures."

At the same time, some company insiders contend that Petronas' recent
rash of profits have also bred a measurable degree of complacency.

"Petronas can afford to take risks now as it is sitting on a pile of
reserves and making huge profits," said a management staffer for a
joint venture between Petronas and a foreign firm. "When a firm is in
such an enviable situation, wastage, slow transfer of technology and
a lack of top management oversight in certain areas are not usually
apparent, but these can happen."

Fading trophies

During the tenure of Mahathir Mohamad, Petronas profits were often
used to fund massive, one-off prestige projects. The list of Petronas-
funded trophy projects is as long as it is extravagant, including the
posh new administrative capital at Putrajaya, sponsorship of a
Formula One motor-racing team, and the company's own twin-tower
office buildings in downtown Kuala Lumpur, which fleetingly stood as
the tallest skyscraper in the world.

Under Abdullah, there appear to be fewer big-ticket projects, though
ailing public and private firms, such as Malaysia Airlines, have
asked for and received financial assistance in times of need. Because
30% of the government's revenues come from Petronas, the company at
least indirectly helps to bail out government-favored businesses.

"Petronas has been very responsible. They have made a huge
contribution towards the development of the country," Abdullah
recently said.

Petronas profits, critics contend, could have been more prudently
invested in smaller, self-sustaining ventures that would act to
enhance the country's future competitiveness. There is a growing
sense that, with the limited life of the oilfields, a golden national
opportunity was squandered. Other oil-rich countries with diminishing
oil and gas resources, most notably Norway, have set aside funds for
economic development once the national wells run dry.

"The fact is that all those years of financial profligacy under Dr
Mahathir are now coming home to roost,'' said political scientist Aeria.

Petronas, for its part, argues that its involvement in Formula One
racing has allowed it to develop its automotive engineering
technology, enhance its lubricants and heighten its brand recognition
globally. In January, Petronas signed a memorandum of intent with
national car maker Proton, whose market share has been steadily
declining in Malaysia and has not been notably successful in the
export market, to explore the possibility of using the new-fangled
"Petronas E01" commercial engine technology, engineered through its
involvement in Formula One, to develop environment-friendly fuel
systems for Proton.

During Mahathir's tenure, Petronas was also roped in to provide
generous subsidies for new independent power producers (IPPs), which
built a string of gas-fueled electricity generating plants in the
1990s. Since the 1997 crisis, Petronas has supplied heavily
subsidized processed gas to Tenaga Nasional Bhd, the national power
corporation, as well as the IPPs. So far those subsidies have totaled
RM25 billion, according to Petronas. These subsidies helped ensure
that the IPPs' venture into the power industry has been largely
profitable.

Critics complain that the special arrangement enriches a handful of
well-connected, wealthy tycoons. Last year, business news group The
Edge identified the IPP beneficiaries as Genting Sanyen Power, YTL
Power, Malakoff Bhd and Tanjong Plc/Powertek Bhd, saying that "these
companies are controlled by the families of Tan Sri Lim Goh Tong, Tan
Sri Yeoh Tiong Lay, Tan Sri Syed Mokhtar Al-Bukhary and Ananda
Krishnan, four of the richest families and individuals in the
country", according to its website.

It is still unclear whether the subsidies on processed gas supplied
by Petronas to the IPPs will also be affected by recent price hikes.
If so, it could mean higher electricity prices just around the
corner. Many Malaysians are unaware of the subsidies to IPPs and the
local media have been largely silent on the issue. But the issue
threatens to become a political hot potato.

"Petronas' subsidies to the IPPs of RM14 billion since 1997 must be
abolished," said Lim Guan Eng, secretary general of the opposition
Democratic Action Party. "As the IPPs are private companies enjoying
special rates for generating electrical power that Tenaga is forced
to purchase, there is no reason for IPPs to enjoy such huge
subsidies ... at Tenaga's and Malaysian consumers' expense."

True or false, Petronas now stands at a somewhat uncomfortable
crossroads. Many Malaysians are unclear about how the savings on
subsidies will be used, although the government says the money will
be used to improve public transport and other undisclosed development
projects.

Despite decades earning massive profits for state coffers, as the
government rolls back subsidies on domestic fuel prices, the
company's opaque finances are finally being called into question.
Hopes are rising that the unexpected upshot in the national oil
firm's record profits, ironically, could also generate a clearer
account of exactly how Petronas distributes and spends its massive
profits.

Anil Netto is a freelance writer based in Penang, Malaysia.

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