PETROLIAM Nasional Bhd (Petronas) released a set of results that left many
shaking their heads in amazement at just how profitable the country's
largest company has become.
 
Although it was no surprise given how oil prices have risen over the past
year, Petronas president and CEO Tan Sri Hassan Marican, when releasing the
group's results, chose to focus on issues other than how rosy the company's
performance was over the past financial year.
 
Not only pointing out just how much money the oil giant was giving back to
the Government and the country, Hassan painstakingly took the media through
how the gas subsidy was eating into the company's coffers and reserves.
 
Following a media briefing, Hassan spent the afternoon and evening speaking
with the Malaysian media, who were free to query him on any subject.
 
StarBiz's JAGDEV SINGH SIDHU and GOH EE KOON caught up with him at his
office for a more in-depth discussion on some of the key issues.
 
Q: CAN you elaborate how profit is distributed to the Government?
A: A lot of people say our profit never gets back to the masses but if you
look at the holding company, which actually pays off the dividends, 76.5%
goes back to the Government.
 
We are only left with less than 25% for reinvestment and expansion.
 
That is a substantial portion of Government revenue.
 
After that, how the Government uses it is beyond our control. The other
thing asked is what happened to the RM800bil from Petronas?
 
From day one, the day we were incorporated, our total profit is about
RM453bil. Of that, RM287bil has gone back to the shareholders, and we are
only left with RM166bil.
 
Yet with that, we have managed to grow, plus borrowings, to have assets of
over RM269bil.
 
 
Q: Your payment to the Government has increased a lot. Was there a request
for more money?
A: We look at what we need to grow and expand the business. And there is no
need to keep the cash with us.
 
Like any other business, cash is a value destroyer. The composite return of
cash is 2.9% because we don't go and speculate.
 
Q: Is the quantum of the dividend made by the Government or the board of
Petronas?
A: We are fair to the Government. The Government has never dictated what
Petronas should give as far as dividends are concerned.
 
But to smoothen things out, we have always consulted the Government and
worked on the basis of the next five years.
 
So, both parties know what to expect, taking in account our capital
expenditure and expansion requirements.
 
Q: So, your requirement comes first?
A: Yes.
 
Q: Do the politics of Petronas affect you?
A: I just take it. It is an occupational hazard. It takes a lot of effort
because we have 30,000 constituents and they do get demoralised. They know,
it is not the best paying company in the country.
 
They do a sincere and honest day's job. We set targets to reduce cost and
become more efficient. They work very hard to achieve all this.
 
And over the last three years or so, we have actually saved almost RM300mil
in costs for just the plants themselves. They get disheartened and I had a
talk with them. But it has an impact.
 
 
Q: Over the last few years, Petronas has been getting its story out,
revealing its numbers.
Has this helped the public understand Petronas, so it does not get blamed
for a lot of things?
 
A: I think that it is mixed. The general public doesn't really understand
what needs to be done, what we do to achieve all this and you can't really
blame the people. We have to let the media know not to quote the WTI (West
Texas Intermediate). WTI is a paper market, the US market. It is the OPEC
basket that is important because that drives the oil price.
 
As for product prices yesterday (Wednesday), gasoline was US$84.89 a
barrel, which is very steep and what the burden is. Diesel was US$84.24 per
barrel. So, when you talk about subsidies, this is what is driving it.
 
This time around, (the price rise has) been driven by product prices
because demand is from the transport sector.
 
If they want to see the financials, it is on the website. It stays there
for a whole year.
 
Q: Coming back to the public's perception, with all the money Petronas is
making, should it relieve the cost pressure the public is facing?
A: Like I said, it is an occupational hazard. But the explanation also is
not quite complete. For a long time, we went through a period of almost
zero increase. In the last 20 years, except for the last two to three
years, there was hardly anything.
 
In the pricing mechanism, the factor that floats is the duty. When the
price of oil goes up, the Government gets less duties, so before you get
into the subsidy environment, there is already a reduction in revenue to
the government. When the price goes down, the duty goes up.
 
As prices go up and up and up, duty becomes subsidy. So, from a positive
revenue flow to the Government, it is now a negative outflow for the
Government to maintain a certain level of price at the pump.
 
But it has never been explained in this manner. So, how long can the
Government take a high price environment, coming up with subsidies?
 
 
Q: Is the subsidy of RM15.3bil last year actual money or a paper subsidy?
A: No, it is cash. In other countries around the world, the duty is fixed.
So, regardless of the crude price, the duty is fixed. This means as crude
price goes up, pump price automatically goes up.
 
We have been so used to that low price environment for many years. But even
with the price increase in February, the volume is going up. So, how do you
connect the pain with increasing demand?
 
 
Q: Petrol consumption is increasing at a rate of 4% on an annualised basis
after the February hike.
Is that an indication that the public has gotten used to it and accepted
it, or are they ignoring it since there are a lot of subsidies out there?
A: Yes, because there are so many subsidies out there. And also, the need
to conserve is not in our way of life. Whether it is electricity or water,
it is very cheap.
 
We have gotten used to a low cost environment. But the pain being felt is
more among the wage earners. The small businesses can either increase the
price or reduce the portion.
 
So, the noodle fellow takes off a bit. Instead of five bowls per kg, it now
becomes seven bowls. And that fellow is not caught in the tax environment,
it is the wage earners.
 
 
Q: In the press conference, you mentioned the imbalance the gas subsidy is
creating. What is your take on the gas subsidy if you look at it from the
petrol subsidy angle?
A: For the gasoline and diesel subsidy, we are not the only market player
and whatever the subsidy is, the Government bears it. Whereas on the gas
side, we are the sole player and that is why our contract is with the power
sector.
 
Petronas has a sale and purchase agreement and the formula of 1.04 times
MFO (medium fuel oil) stays but is suspended.
 
And also what people don't realise is that we buy gas from the
production-sharing contractors (PSC). But we still have to pay at formula
price, so there is a cash outflow to the PSCs to buy that gas and sell it
to the power sector at RM6.40.
 
Q: What is the difference in price now?
A: We pay US$7 for imported gas. We sell it here for US$1.68.
 
 
Q: But people say there is a social obligation.
A: That is fine. If you tell me the gas price should be at RM6.40 because
it flows down to the population, fine. But here, 56% of the subsidy of the
power sector goes to the IPPs. And they are doing very well.
 
So, there is a structural distortion here. At the top part of the chain,
the Government subsidises. At the bottom part of the chain, the Government
subsidises because there is Tenaga. So, in between is the free market ...
almost.
 
Q: So, that imbalance is wrong?
A: Yes. It's not just the gas price, it is the full subsidy that is
important.
 
Q: How would you do it differently?
A: I think Datuk Seri Dr Lim Keng Yaik and the Energy Commission are trying
to work these things out. We'll see what they come up with. We have
provided all the information to the Government, and where the inequalities
are.
 
And also, because gas is cheap, alternative generation fuel is not being
utilised to the maximum. For example, coal. As coal is around US$4.60 at a
MBTU (million British thermal units) basis compared with gas at US$1.68, I
can understand why Tenaga is not running their coal plants.
 
So, the Government's fuel diversification policy is not being implemented
and at the rate of growth of demand in the power sector, the gas resources
will deplete very fast.
 
 
Q: With the rate of consumption, the lifespan of gas reserves will be less
than 34 years?
A: Yes. Because the gas reserves of Sarawak and Sabah are for LNG. So, we
are only talking about offshore Peninsular Malaysia.
 
Q: Given the rate of consumption of gas, how much of a drag will the
subsidy become for Petronas?
A: Last year, it was RM7bil. This year it is RM14bil. And that is driven by
the increase in volume, the importation of gas, and increase in price
according to the formula. That is already an indication. Today, 18% of our
gas is imported and as we move forward, the percentage will grow.
 
 
Q: Is the price of gas used to produce electricity here arguably the
cheapest in the world?
A: Arguably, yes. Looking at gas to power prices, Malaysia is US$1.68,
Indonesia US$2.53, Vietnam US$3.03, Thailand US$3.29 and Singapore US$4.90.
This is not our internal numbers. So, we are about the cheapest. This is to
say, don't waste the resources that we cannot replace.
 
Q: Right now, Tenaga has 40% excess reserve margin. Is there a point
running plants that waste energy resources?
A: When the country keeps 40% reserve margin, it is costing them about
RM1bil a year, I think.
 
When they maintain that margin, we have to maintain it also. You have money
invested in assets that are not being productive.
 
Q: So, there is a lot of wastage going on?
A: Yes, a lot of waste ... about RM4bil between Petronas and Tenaga. So, we
are not being efficient. You know, Vietnam only has a 15% reserve margin.
 
Q: About what makes up the profit ... how much of it is tax you collect
from PSCs and how much of it do you make yourself?
A: It is not so much tax revenue, because you have Carigali, which is also
a PSC. So, it is not as high as it used to be. It is coming down.
 
Q: You have been very successful going abroad and expanding your overseas
market. But now, competition from China and India for such resources has
intensified.
How much more difficult is it going to be for that aspect of your business,
going forward?
 
A: It is difficult, because competition is now harder and people are paying
big bucks for reserves and so on. But we continue to be able to expand.
 
I guess we have been out earlier and proven ourselves in terms of
capability and the way we conduct business.
 
We connect with the aspirations of host countries, so we have that soft
advantage. We will not be reckless in paying high prices for reserves. This
is a long gestation business, which could take about 10 years from the day
seismic tests start to the commercial discovery for gas.
 
If you have a huge asset today just to explore, and lucky to get something
and want to start production in 10 years' time, are you going to be able to
recover your economic worth? So, we have been very conservative.
 
Q: Is it time for you to get a little aggressive and keep up with other
countries by paying higher prices?
A: There is a difference between being aggressive and being reckless. We
know of some of the prices that are being paid and how these are being
worked out.
 
They are really betting on the price to be at very high levels to make the
economics work. It is a bet that prices will remain around these levels.
 
We have been, I won't say conservative, but we have not been reckless. We
benchmark ourselves against the majors and run our projects at certain
price levels.
 
We always have to think of ourselves as trustees and not private investors.
We are trustees to the nation's capital. It belongs to the people.
 
 
Q: You have overseen the growth of Petronas for the past decade or so. How
much pride does that give you to see where Petronas is today?
A: It is not so much my pride. I am proud of the people in this
organisation. They are willing to take the challenge, to share the single
vision.
 
When we first went out, a lot of people said: "Why go out, you are
comfortable here." If you make money, there is no hardship. But as the
momentum began to gather, everyone followed. They were wiling to, whether
male or female, work in Sudan or Turkmenistan and in harsh conditions.
 
I think the mindset of the people in the organisation has changed into
being willing to take the challenge, the risk. For each individual, it is
personal pride, challenge and being able to develop skills.
 
Q: Petronas is today the global champion of Malaysia. What more can you do?
A: There are still opportunities to add value. We will go through the next
stage of petrochemical development in Kertih and all to add value further
down.
 
Our joint venture partners - the chemical majors - have proprietary
technology and are able to bring the technology here and go further
downstream.
 
We take the optimal joint ventures at the first level - produce the
commodity, then intermediate and it goes into the post stage of
derivatives.
 
We will squeeze whatever value we can get out, because we cannot expand
capacity. We are not a big reserve holder, so we cannot compete with the
Middle East.
 
We are building a base oil plant in the Malacca refinery to extend the
lower end of the refinery.
 
This is one of the few facilities of the world to produce Group 3 base oil
that will be globally marketed.
 
This gives us a lot of value. It is used for high quality lubricants and so
on. So, that will be ready by 2008 and will produce about 6,500 barrels a
day of base oil.
 
This triggers a competitive edge for our own lubricants, as that is the
base oil we use for our lubricants. In a prelude to that, we started
lubricant marketing in China, India and Indonesia.
 
All this should come together in 2008. We are looking at the market for
lubricants in Europe.
 
Q: What about your international business?
A: Internationally, we will look downstream. We want to have 200 service
stations in Malaysia by 2010 and are working towards that.
 
We are in some preliminary discussions for refining in Indonesia, as we
need it. In Sudan, our expansion is into aviation fuel supply. As the
market grows, we hope to grow with the market.
 
In the upstream side, we grew our presence in Sudan and Egypt. So, if you
notice, we were in 30-plus countries and now we are down to 29.
 
The shift is to get bigger in a country you are present in rather than
throwing stones all over. We have done that and now we are looking at
growing within that same country.
 
 
Q: Are you happy with the Petronas branding?
A: As far as the brand is concerned, our participation in Formula One has
helped tremendously. And because of brand awareness and the acknowledgement
of who and what we are, this translates to lower borrowing costs.
 
So, there is that financial impact. And for us, savings of 25 basis points
or so is a huge amount of money.
 
In the retail segment in Malaysia, our market share is just under 30%. But
for the overall market, it is about 41%.
 
So volume is flowing and we can see it through Petronas Dagangan results.
It is important to come up with innovative ways to keep customer loyalty.
 
Q: What about the succession plan in Petronas?
A: One of the things this organisation has done well in is succession
planning. We work on three names to fit into one division.
 
We have been very focused on developing people and that is why you see we
rotate our people at all levels. We give them exposure and a different view
of managing.
 
At the end of the day, we have a single employer and that is Petronas. So,
at all levels, we try to work and it is a whole web of potential
individuals who can occupy a position.
 
I spend about 25% of my time on human development.
 
 
Q: Are you happy with the management programme in Petronas?
A: I think if you talk to my committee, people from within and outside, the
industry recognises we have a good leadership and management programme.
 
We do not want people to be growing up in a silo and we spend a lot of
money on people development. We want engineers to be exposed to management
and think a little bit differently when they come back.
 
 
Q: Do you prefer someone with an engineering background running things?
A: It depends; it is not so much of what you are but how you can manage.
The other thing a lot of people don't know about us is that we have two
different lines.
 
We have a technical line where a person is rewarded differently. The
hierarchy is different and the highest position is the custodian level.
They are independently assessed and are rated and paid at global rates.
 
 
Q: What about your corporate social responsibility (CSR) programmes? How
much do you spend on that and what is your objective?
A: We have always focused our CSR on education because at the end of the
day, we believe that is what it is all about. We have our own university
and over and above that, we spent RM497mil on education last year.
 
Since we started, we have awarded 16,900 scholarships at the university
level and 11,800 minor scholarships for secondary schools for the lesser
income group. We have put through 7,000 people through technical training
schools.
 
Our staff also has a stake in minor programmes. They go out and commit two
hours a week of their time, teaching Maths, English or Science at schools
which we adopt. It doesn't involve money and is based on volunteerism. In
such schools, the PMR and UPSR results are good.
 
The young executives are the ones who volunteer. When you see that it is
successful and producing results, more people will want to volunteer.
 
So, we spend a lot of money on scholarships and we have another industrial
programme to train highly specialised welders.
 
We fund that particular course because it is expensive. We provide
materials and pay instructor fees. Those skilled people are now working
around the world.
 
We do not employ them. Malaysian contractors employ them. That is the
focus. Even in Sudan and other parts of the world, our focus is on
education.