Petronas: Malaysia's ailing financial lifeline

Petronas is not experiencing a smooth rollout in its development projects. A venture into Canada to build a pipeline to exploit natural gas reserves, after purchasing Progress Energy Resources for US$6 billion back in 2012, has been met with delays over native titles and environmental impact studies, drawing out costs without incoming revenues. It has also caused local controversy in Canada by offshoring rig construction to China. Green advocates, Ecojustice and Sierra Club have taken Petronas Canada to court over environmental assessments.

The Pengerang Integrated Complex in Johor recently experienced an explosion, fire, and death of five workers. Repairs to this plant are delayed due to the current difficulty of getting replacement parts from China, thus delaying the rollout of this recently commissioned plant to full production.

Perhaps one of the most fundamental problems with Petronas is the lack of ethnic diversity of the board of directors and senior management. All top positions within Petronas, excepting one person, are Malays. It is a group that is the cream of the Malay business elite, who are recruited and nurtured through a scholarship scheme that recruits those connected with the Malay elite circles and from professional middleclass family backgrounds.

Although one could congratulate Petronas as being one of the success stories of the NEP, the resulting conservative management establishment is more akin to a civil service rather than a corporation. This weakness will be very challenging in a time where the evolution of the coronavirus crisis will dictate uncertainty well into next year. Even core drilling operations within Malaysian waters are under potential threat from the Chinese Coast Guard as recently reported in Asia Sentinel.

Petronas has slipped from 68^th in the Global Fortune 500 during 2012-14, to 158^th last year. The company has also slipped from being the largest producer of LNG to fifth. Racial politics has slipped into business decision making within distributorships, trading, and retail, sheltering management from experience necessary to deal within open business environments.

During the last few months of Mahathir's second stint as prime minister, he tried to look at possible ways Petronas could raise funds. One of his ideas was to break up Petronas into smaller business units, the Petronas Chemicals Group, Petronas Carigali, and Petronas Gas, selling equity off to Sabah and Sarawak state governments.

As the US based Energy International Administration (EIA) forecast that demand for oil would drop to 95.5 million barrels per day from the 105 million average during 2019, Petronas has just raised USD $6 billion in two bond issues to refinance subsidiaries, capital expenditure, working capital, and general corporate expenditures.

In Kuching, the High Court ordered Petronas on May 5 to pay RM1.3 billion in state sales taxes from 2018 on sales to the Sarawak government, following the dismissal of Petronas' application to stay the implementation order, issued by the Comptroller of state sales tax. Petronas tried to suspend this payment on the grounds that it would suffer financial hardship, and that its ability to pay dividends to the federal government would be affected.

Financial performance within the international oil and gas industry looks uncertain and fragile. ExxonMobil reported its first quarterly loss since 1999, Shell has cut its dividend to preserve cash, announcing austerity measures aimed at increasing liquidity. With crude prices around $20 plus per barrel, the oil market is almost totally at the mercy of the pandemic, with a glut of oil in storage to keep prices depressed for some months into the future.

With tourism, air transport, and logistics depressed, national governments, including Malaysia will have to go deeper into deficit financing to pump their respective economies.

This is a dilemma for Petronas which will be under extreme pressure to pay some form of dividend to help the government manage the forthcoming budget. Without help from Petronas, the finance minister will have to canvas a reintroduction of the GST, maybe even at a higher rate than previously, increases of income and corporate tax, and even the introduction of new taxes. The company has been a major contributor to Malaysia's wealth. However, times are changing where it may not be a dependable lifeline for much longer.