The ability of Malaysia's national oil company Petronas to continue as a major revenue provider to the national budget is quickly waning, raising the specter of reduced spending, which in turn would mean cancellation of infrastructure works and health and education services, as well as trimming the bloated civil service, as potential nightmare options.
Oil and gas contributions to federal government revenue through petroleum income taxes, dividends and royalties averaged RM53.7 billion (US$12.1 billion at current rates), or 31.6 percent of the total between 2005 and 2015, peaking at 41.3 percent in 2009. This fell to 23 percent in 2019 and is expected to fall much further with both demand and the price of oil dropping below the floor due to the Coronavirus crisis.
In addition, Petronas has provided a convenient cash drawer for successive administrations over the years in cleaning up financial scandals, including Bank Bumiputra, Malaysian Airlines and the Proton national car project. Petronas provided the money to build some of former Prime Minister Mahathir Mohamed's most grandiose projects, including the KL Twin Towers, the Putra Jaya administrative capital and bring Formula One racing in Malaysia.
Petronas was used to get Malaysia out of an RM31.5 billion forex scandal perpetrated by Mahathir in the early 1990s in which the financier George Soros outfoxed Bank Negara, making billions and earning Mahathir's eternal antagonism. It paid off US$800 million in losses from Mahathir's ill-fated Perwaja Steel project. In 1998, it bailed out Mahathir's eldest son Mirzan, purchasing his Konsortium Perkapalan for RM226 million and assuming debts of more than 324 million. It also in 2012 awarded an RM700 contract to a firm in which Mahathir's other son Mokhzani was a vice president.
The energy giant, which would become a world player in petroleum markets, was established just after the New Economic Policy (NEP) was crafted in 1971 to enhance bumiputra involvement within the economy. Petronas wrenched control of Malaysian oilfields from Royal Dutch Shell under nationalistic fervor. Through political maneuvering led by the inaugural chairman and UMNO politician Tengku Razaleigh Hamzah, it took control over the rights to Sabah and Sarawak's oil reserves in exchange for a 5 percent oil royalty, which has been a subject of controversy for years.
Today, however, the pride and financial backstop of the federal government is suffering from the sudden crash in demand for oil and gas caused by the reaction to the advent of the corona virus. This is on top of other issues facing the company, including delays in the rollout of projects, and lackluster downstream activity performance.
In the federal government, Petronas also now faces a principal stakeholder that has been used to a steady revenue stream. This is particularly the case when Malaysian national budgets of late have been in deficit. Public debt has grown to 52.5 percent of nominal gross domestic product as at December 2019. Finance minister Tengku Zafrul Tengku Abdul Aziz just announced that Malaysia's 2020 budget deficit will rise to 4.7 percent of GDP because of the RM260 billion package to counter the economic effects of the corona virus crisis.
This figure could be expected to further blow out as growth and revenue projections are not met due to economic contraction resulting from the extended time of the Movement Control Order (MCO). The government, realizing this, is now very quickly trying to get the economy operating once again to prevent further financial stress upon the national budget.
Petronas has a number of serious issues to contend with, which cannot be ignored in the uncertain coronavirus environment. Oil and gas reserves are quickly depleting. Former economic affairs minister Azmin Ali last year, in answer to a parliamentary question, stated that Malaysia's oil reserves are expected to last based on current production, only for another 10 years. This is probably a pessimistic estimate, particularly when Petronas is cutting production by half from May, and any return to previous demand levels may take a long time. This will eat deeply into the company's revenue for months, if not years to come.
Petronas has been expanding its production capacity through the purchase of a stake in Brazil's Petroleo Brasileiro SA oil production, Argentina's Vaca Muerta shale oil fields, a future oil drilling contract in 10 offshore fields in Mexico, and existing fields in Vietnam.
In recognition of the need to diversify, Petronas over the last decade and a half attempted to develop its retail presence across the ASEAN region. The Petronas foray into retail petrol kiosks led to a disappointing start-up and sell-off in Cambodia, Indonesia and Thailand. The company has also skirmished into property, mainly local Malaysian developments, and entered and exited the private hospital industry with its sale of Putra Place Medical Centre a few years ago to Khazanah.
Petronas entered the lubricants business in 2008, producing and distributing motor, agricultural, and ancillary oils, distributing them across 27 countries. Although Petronas lubricants are the title sponsor of the F1 Mercedes-AMG Petronas motorsports team, the brand is still within the ruck of brands, far out of reach of market leadership within a highly competitive market. Although the downstream business grew by 11 percent in sales value last year, it represents only 8 percent of group revenue.