Petronas Business Information, Profile, and History

History of Petronas

In 1988 Malaysia had the world's 22nd-largest reserves of oil and the 16th-largest reserves of natural gas. Its exports of the two commodities accounted for 15% of Malaysia's foreign exchange income in that year. The exclusive ownership and control of both resources rests with Petronas (Petroliam Nasional Bhd), the only Malaysian company to appear in the Fortune 500 list. Through subsidiaries and joint ventures, Petronas is deeply involved in almost all aspects of the oil and natural gas industries, across the range from upstream (exploring for and extracting oil and gas) to downstream (refining and distributing the products). Petronas was not the first company to extract oil or gas in Malaysia. Oil was first found in what is now Malaysia at the end of the 19th century, and Royal Dutch/ Shell, then as now one of the majors--the small group of leading private oil companies--first drilled for oil in Sarawak, then a British colony, in 1910. It was still the only oil company in the area in 1963, when the Federation of Malaya, having achieved independence from Britain six years before, absorbed Sarawak and Sabah, both on the island of Borneo, and became Malaysia. The authorities in the two new states retained their links with Royal Dutch/Shell, which brought Malaysia's first offshore oil field onstream in 1968.

Meanwhile the federal government turned to Esso, Continental Oil, and Mobil, licensing exploration off the state of Trengganu, in the Malay Peninsula, the most populous region, and the focus of federal power. By 1974, however, only Esso was still in the area. It made its first discoveries of natural gas in that year and then rapidly made Trengganu a bigger producer of oil than either Sarawak or Sabah. By 1974 Malaysia's output of crude oil stood at about 81,000 barrels per day (b/d).

Several factors converged in the early 1970s to prompt the Malaysian government into setting up a state company, as first proposed in the Five Year Plan published in 1971. These were years in which power in the world oil industry began to shift away from the majors, which then controlled more than 90% of the oil trade, toward the Organization of Petroleum Exporting Countries (OPEC), as well as a proliferation of new private and state companies joining in the search for reserves. By 1985 the majors, reduced in number from seven to five, were producing less than 20% of the world total. It seemed that Malaysia would either have to join the trend or continue to leave its oil and gas entirely to Royal Dutch/Shell and Esso, multinational corporations necessarily attuned to the requirements of their directors and shareholders, rather than to the priorities the government of a developing country might seek to realize.

Further, an agreement between Malaysia and Indonesia, signed in 1969, had settled doubts and disputes about each country's claims over territorial waters and offshore resources, at a time when both were heavily indebted to Organization for Economic Co-operation and Development (OECD) governments and banks as well as to the International Monetary Fund (IMF) and the World Bank. Setting up a state oil and gas company, through which the government could get international capital but avoid tangling with foreign oil companies or governments, had worked for Indonesia: why not for Malaysia as well? The oil crisis of 1973-1974 made the government even more aware of Malaysia's dependence on foreign oil and foreign capital in general.

Another factor in the decision was that the technology had recently been developed for extensive exploration and drilling offshore. The local geography includes a combination of broad basins of sedimentary rock with calm and shallow waters around the Sunda Shelf, making exploration for gas and oil relatively easier and more successful than in most areas of the world. Malaysian crude has turned out to be mostly high quality, with low sulfur content.

A final and crucial factor in the creation of Petronas, and its continuation in much the same form since, has been the political stability of Malaysia. Since the restoration of parliament in 1971 the country has been ruled by the National Front (Barisan Nasional), the heirs to the Alliance Party which had been dominant from 1957 to 1969, and the originators in 1971 of the New Economic Policy, designed to improve the economic position of Bumiputras--native Malays--relative to Chinese and Indian Malaysians and to foreign corporations. The difficulties this policy has caused for foreign companies and investors are outweighed by the benefits they believe they gain from Malaysia's political stability.

The Malaysian government chose to create a state company, rather than using taxes, production limits, leasing, or other familiar instruments of supervision. The government wanted, and needed, the cooperation of the majors but also sought to assert national rights over the use of the country's resources. A state company, having both supervisory powers over the majors and production activities of its own, was a workable compromise between allowing the majors full rein and excluding them, their finance, and their expertise altogether.

Petronas was established in August 1974 and operates under the terms of the Petroleum Development Act passed in October 1974. It was modeled on PERTAMINA, the Indonesian state oil and gas company founded in 1971 in succession to PERMINA, which had been set up in 1958. According to the 1971 plan, Petronas's goals would be to safeguard national sovereignty over oil and gas reserves, to plan for both present and future national need for oil and gas, to take part in distributing and marketing petroleum and petrochemical products at reasonable prices, to encourage provision of plant, equipment, and services by Malaysian companies, to produce nitrogenous fertilizers, and to spread the benefits of the petroleum industry throughout the nation.

Having created Petronas, the government had to choose what forms its dealings with private oil companies would take. Starting with its legal monopoly on oil and gas activities and resources, it could simply award concessions, without taking part in production, management, or profits itself; or it could try offering services at the supply end; or it could make contracts to cover profit-sharing, production-sharing, joint ventures--sharing both profits and costs--or all stages of the process, under "carried-interest" contracts. Petronas's first move was to negotiate the replacement of the leases granted to Royal Dutch/Shell on Borneo and to Esso in the peninsula with production-sharing contracts, which have been the favored instrument, alongside joint ventures, ever since. These first contracts came into effect in 1976. Allowing for royalties to both federal and state governments, and for cost recovery arrangements, they laid down that the remainder would go 70% to Petronas, 30% to the foreign company. Esso began oil production in two offshore fields in 1978, exporting its share of the supply, unlike Petronas, whose share was consumed within the country.

Petronas went downstream for the first time in 1976, when it was chosen by the Association of South East Asian Nations (ASEAN) to begin construction on the second ASEAN joint industrial project, a urea plant. The subsidiary, Asean Bintulu Fertilizer (ABF), is based in Sarawak and now exports ammonia and urea all over the world.

Also in 1976 Malaysia became a net exporter of oil, but exports were at such a low level as to make the country ineligible to join OPEC. This situation has perhaps benefited Malaysia, and Petronas, by allowing the company a degree of commercial and political flexibility and reinforcing Petronas's chief purpose, Malaysian self-reliance.

Petronas supervised its foreign partners' oil activities, taking no direct role in production, until 1978, when the government saw to the creation of a subsidiary for oil exploration and production, Petronas Carigali. It began its work in an oil field off the peninsula. Petronas retains its supervisory powers over all oil and gas ventures, particularly on issues of health and safety and environmental control.

The government was determined to develop Malaysia's natural gas as well as its oil. In 1974 it saw to the ordering of five tankers for liquefied natural gas (LNG) by the Malaysian International Shipping Company (MISC), of which it owned 61%. These were to take LNG exports out of Malaysia, save the cost of hiring foreign tankers, and expand the country's fleet under its own control--in contrast to cargo shipping, which is controlled by international conferences. Shell BV, the Royal Dutch/Shell subsidiary that was building the LNG plant off Sarawak with Japanese and Asian Development Bank aid, accepted production sharing with Petronas but baulked at sharing equity, transport management, or refining. Negotiations went on, pushing commencement further and further back, until 1977, when Petronas and the government, faced with the costs of maintaining the tankers between delivery and first use, surrendered management rights--leading to a repeal of part of the Petroleum Development Act--and settled for Petronas's taking 60% of equity in the new company Malaysia LNG. The Sarawak state government took 5%, and the other 35% was divided equally between Shell BV and the Mitsubishi Corporation. Production of LNG in Sarawak at last began in 1983.

After negotiations lasting from 1977 to 1982, Petronas had concluded contracts with Tokyo Electric Power and Tokyo Gas for the sale and delivery of LNG through to the year 2003. Malaysia LNG is to send almost the entire output of its Bintulu gas fields to Japan, under these contracts and another one, signed in 1990, to supply Saibu Gas of Fukuoka, in southwestern Japan, for 20 years from 1993.

When in 1982 Petronas Carigali formed an exploration and production company with Société National Elf Aquitaine of France, it allowed Elf better terms for recovering costs than it had offered in earlier ventures. This development came against the background of the government's imposition of a depletion policy on Petronas, Royal Dutch/Shell, and Esso, in an attempt to postpone the exhaustion of oil reserves. These were then estimated to be about 2.84 billion barrels, and it was officially predicted that by the late 1980s Malaysia would be a net oil importer once again. By 1980 oil and gas already represented 24% of Malaysian exports, and the government decided to impose a tax on these exports at a 25% rate. The new policy and the new tax combined to cause Malaysia's output and exports of crude oil to fall in 1981, for the first time since Petronas was established. Output rose again, beyond its 1980 level, in the following year, but exports took until 1984 to surpass their 1980 level.

However, the depletion policy was being undermined by external circumstances. Through the early 1980s a worldwide oil glut, which OPEC proved unable to control, forced the Malaysian government to increase production to offset a deterioration in its balance of increased payments to a deficit of US&dollar1 billion. It became clear that this could only be sustained by relaxing the conditions for joint ventures between Petronas and the major oil companies. In 1982 the Petronas-government share, which had risen to 80%, was cut to 70%, and taxes on company income were also cut.

Petronas went into refining and distribution in 1983. It initiated the construction of refineries at Malacca and at Kertih, in order to reduce its dependence on Royal Dutch/Shell's two refineries at Port Dickson and Esso's refinery in Sarawak. These two majors, and other foreign companies, already covered much of the domestic retail market, but the new subsidiary Petronas Dagangan was given the initial advantage of preference in the location of its stations. By 1990, 252 service stations carried the Petronas brand, all but 20 on a franchise basis, and another 50 were planned. Some were set up on grounds of social benefit rather than of strict commercial calculation.

As production from Royal Dutch/Shell and Esso's existing fields moved nearer depletion, the companies sought new fields and new contracts. In 1985 the government and Petronas revised the standard production-sharing contract, increasing the rate of recovery of capital costs from 30% to 50% of gross production in the case of oil and from 35% to 60% in the case of natural gas, abolishing signature, discovery, and production bonus payments, and increasing the foreign partners' share of the profits. At first the drastic fall in oil prices during 1986, which cut Malaysia's income from exported oil by more than a third even though the volume of exports rose by 16%, discouraged interest in the new arrangements, but by 1989 Petronas had signed 22 new contracts with 31 companies from 11 countries. However, the contract period was still restricted to five years--compared, for example, with the 35-year contracts available in neighboring Singapore--and there was still a 25% levy on exported crude oil, intended to promote the domestic refining industry. These conditions have been cited as disincentives to foreign investment, and may be relaxed during the 1991 round of negotiations.

The government and Petronas have aimed to encourage the replacement of fast-depleting oil within Malaysia itself and simultaneously to foster heavy industries which can help reduce the country's overwhelming dependence on exporting its natural resources. In 1980 petroleum products accounted for 88% of the country's commercial consumption of energy, the rest being provided from hydroelectric plants in Sarawak, too far away from the main population centers to become a major alternative. Five years later gas accounted for 17%, hydroelectricity for 19%, coal for 2%, and petroleum products for 62% of such consumption, and about half of each year's gas output was being consumed in Malaysia.

The Petronas venture responsible for this shift in fuel use, and--along with Malaysia LNG--for Malaysia's becoming the third largest producer of LNG in the world, is the Peninsular Gas Utilization Project (Projek Pennggunaan Gas Semenanjung), the aim of which is to supply gas to every part of the Peninsula. Its first stage was completed in 1985, following the success of smaller gasification projects in the states of Sarawak and Sabah, and involved the extraction of gas from three fields in the Natuna Sea, between the Peninsula and the island of Borneo, its processing in a plant at Kertih on the Peninsula's east coast, and its distribution to the state of Trengganu by pipeline and abroad via an export terminal.

Petronas's least happy venture was its ownership of the Bank Bumiputra, the second-largest, but least-profitable, of the commercial banks incorporated in Malaysia. Petronas spent more than M&dollar3.5 billion, over five years, trying to rescue the bank from the impact of the bad loans it had made, starting with its support of the Carrian property group of Hong Kong, which collapsed in 1985, taking the bank's share capital down with it. Petronas sold the bank back to another state company, Minister of Finance Inc., in 1991, and announced its intention to concentrate on oil, gas, and associated activities in future.

Just as Petronas was disposing of this liability the crisis caused by the Iraqi regime's invasion of Kuwait culminated in military action against Iraq on behalf of the United Nations. Petronas had already raised Malaysia's oil production rate from 605,000 to 650,000 barrels per day in late 1990, as the crisis unfolded. This move only reinforced the company's awareness of the need to vary its policies, since, with known reserves of 2.94 billion barrels, and assuming no new major finds of oil, Malaysia risks seeing output decline to 350,000 barrels per day in 2000 and running down to depletion within another five years. This possibility is exacerbated by the likelihood that Southeast Asia in general will enjoy rapid economic growth in the 1990s, so that demand for oil there will rise twice as fast as demand in the relatively more sluggish, more mature, economies of North America and Europe. The Malaysian government, and its state oil and gas company, must decide what mixture of policies to adopt in response.

Fortunately for Malaysia, exploration is by no means at an end, and could yet produce more reserves. Thus the Seligi field, which came on stream at the end of 1988 and is being developed by Esso Production Malaysia, is the richest single oilfield so far found in Malaysian waters, and further concessions to the Majors might encourage exploration of the deeper waters around Malaysia, where as yet unknown reserves may be discovered. Meanwhile computerised seismography makes it both feasible and commercially justifiable to re-explore fields which have been abandoned, or assumed to be unproductive, over the past century. In 1990 Petronas invited foreign companies to re-explore parts of the sea off Sabah and Sarawak on the basis of new surveys using up-to-date techniques.

Another way to postpone depletion is to develop sources of oil, and of its substitute, natural gas, outside Malaysia. Late in 1989 the governments of Vietnam and Myanmar (Burma) invited Petronas Carigali to take part in joint ventures to explore for oil in their coastal waters. In 1990 a new unit, Petronas Carigali Overseas Sdn Bhd, was created to take up a 15% interest in a field in Myanmarese waters being explored by Idemitsu Myanmar Oil Exploration Co. Ltd., a subsidiary of the Japanese firm Idemitsu Oil Development Co. Ltd., in a production sharing arrangement with Myanmar Oil and Gas Enterprise. Thus began Petronas's first oil exploration outside Malaysia. In May 1990 the governments of Malaysia and Thailand settled a long-running dispute over their respective rights to an area of 7,300 square kilometers in the Gulf of Thailand by setting up a joint administrative authority for the area and encouraging a joint oil exploration project by Petronas, the Petroleum Authority of Thailand and the U.S. company Triton Oil. In a separate deal, in October 1990, the Petroleum Authority of Thailand arranged with Petronas a joint study of the feasibility of transferring natural gas from this jointly administered area, through Malaysia to Thailand, by way of an extension of the pipelines be laid for the third stage of the Peninsular Gas Utilization Project.

That project is on course to becoming a major element in the postponement of oil depletion. Contracts for line pipes for the second stage of the project were signed in 1989 with two consortia of Malaysian, Japanese, and Brazilian companies. This stage, due to be completed in 1991, will include the laying of 730 kilometers of pipeline through to the tip of the peninsula, from where gas can be sold to Singapore and Thailand; the conversion of two power stations--Port Dickson and Pasir Gudang--from oil to gas; and the expansion of Petronas's output of methyl tertiary butyl ether (MTBE), propylene, and polypropylene, which are already being produced in joint ventures with Idemitsu Petrochemical Co. of Japan and Neste Oy of Finland. The third stage of the project is to lay pipelines along the northwest and northeast coastlines of the Peninsula.

Another new venture in 1990 was in ship-owning, since Petronas's existing arrangements with MISC and with Nigerian state oil company would be inadequate to transport the additional exports of LNG due to start in 1994, under the contract with Saibu Gas. Petronas has not lost sight of the government's commitment to Malaysian self-reliance, and the company's second refinery at Malacca, due to be completed in 1992, with a capacity of 200,000 barrels per day, will promote the same policy. The fact that it is being built in a joint venture with Samsung of Korea, the Chinese Petroleum Corporation, of Taiwan and Caltex of the United States does not negate the policy, for the subsidiary company Petronas Penapisan (Melaka) will have a decisive 45% of equity, while sharing the enormous costs and advanced technology of the project. More to the point, a side effect of the refinery's completion will be that Petronas will be able to refine all of the crude oil it produces, instead of depending for a portion of it on facilities in Singapore.

It is important to place Petronas, with its policies of promoting self-reliance, helping to develop associated industries, and varying the sources and uses of oil and gas, in the context of the Malaysian economy as a whole. Under governments which--by current, if not historical, Western standards--are strongly interventionist, the contribution of oil taxes to the federal government's revenue hovered at around 12% to 16% until 1980, when it showed a marked increase to 23%, followed by another leap to 32% in 1981. From then until 1988 the proportion has fluctuated between 29% and 36%. Petronas, then, is not just another big oil company: it controls a crucial sector of the economy and remains, for better or worse, an indispensable instrument of state.

Principal Subsidiaries: Asean Bintulu Fertilizer Sdn Bhd; Malaysia LNG Sdn Bhd; Petronas Carigali Sdn Bhd; Petronas Dagangan Sdn Bhd; Petronas Gas Sdn Bhd; Petronas Khidmat Sdn Bhd; Petronas Marine Sdn Bhd; Petronas Penapisan (Melaka) Sdn Bhd; Petronas Penapisan (Trengganu) Sdn Bhd.