Petronas Bashing

I have always tried to be frank on business issues. I have no problem highlighting business missteps and poor business decisions and strategy.

Over the last two weeks, following the hike in fuel prices in Malaysia, there has been a lot of public anger and frustration looking for the right punching-bag. Petronas is now a prime target for the general public and political opposition to focus their venom at.

Is it fair? Has Petronas been badly managed? If they had been poorly run, then yes, bash away. Let’s be clear. Don’t whack first and then ask questions later.

Petronas has always published solid annual reports in accordance to international accounting standards and reporting requirements. It’s all there on their website. The information provided is deemed sufficient to raise billions of dollars from international banks. Or else, banks will not be lining up to provide credit to the corporation.

So far, it appears that what most of the criticisms have been focused on are the “additional information” – do they have planes?; how much do they spend on the philharmonic orchestra?; and what’s the senior executives pay? – to name a few.

We have to remember that how much they pay to the government is not determined by Petronas. It’s decided by the government. Hence if you want to attack Petronas, it ought to be on how well they manage the operations, and did they fritter away funds at unnecessary expenses.

Whether the funds had been deployed properly by the government is a separate issue and that does not involve Petronas.

Let’s get the nitty-gritty out of the way.

Executive planes – even if they have it, it’s a necessary business investment for a company like Petronas. Petronas is not a Malaysian oilfield business entity but has operations in over 30 countries. Its not like the executives are flying to LA to buy art or visit their second home.

Philharmonic orchestra – If Petronas had not invested, we would not have a world class concert hall and an orchestra that is of international standards. Should we even have a world class concert hall? That’s like asking if we need to have good museums.

If we had a few great concert halls and a half decent orchestra that is of international standards, then yes, Petronas would have been throwing funds at superfluous needs.

Some critics scoffed when they heard that members of the orchestra are paid between RM20,000 to RM30,000 a month, and the majority of them are foreigners. When building something of international stature, then international benchmarks (which includes salaries) will have to be used to draw them in.

Then you ask, “Why so many foreigners?” One would be naive to think that we can start an international standard orchestra dominated by Malaysians. This is not another Malaysia Boleh project.

The idea is to get the best from abroad and hope that by doing that, we can groom Malaysians in their footsteps. Think of it as a grand CSR project.

That’s pretty good but revenue and profit are still not good enough. I would look at return on capital employed as that shows how effectively the company has invested – 2003: 25.6%; 2004: 28.7%; 2005: 38.5%; 2006: 41.6%; 2007: 40.9%. The figures should speak for themselves.

To the general public, it may appear as if Petronas is staffed by fat cats sitting around twiddling their thumbs, signing joint ventures with foreign big oil companies to drill for oil in Malaysian waters. They pump, we sell – surely its easy money. If Petronas had done just that, we would have been a net importer long ago.

Petronas had reinvested well, with solid operations in Turkmenistan, Egypt, Cuba, Chad, Vietnam, to name a few. Petronas is to these countries, what Shell and Exxon are to Malaysia.

Petronas has generated total profits of RM570bil since formation in 1974 to last year, of which RM335.7bil had been given to the Government (in taxes, royalties and dividends). Effectively, that’s a 58% tax on Petronas’ profits.

The other often cited criticism is how other oil producing nations can still maintain selling fuel at deeply subsidised rates to their people. Why can’t Malaysia do that anymore? Answer – it’s a simple maths equation which has not been properly communicated.

It depends on the ratio of total net export to domestic consumption. If it’s 1:2 it means if we consume 1 million barrels, we are net exporting 500,000 barrels, which is not a lot of net exports. Some countries have a ratio of 5:1 which is to say they may be consuming 1 million barrels but they are net exporting 5 million barrels. Suffice to say, some countries benefit a little but some benefit enormously. Malaysia is at the shorter end of the curve.

The second and more important reason has to do with tax.

As shown from the table above, the effective tax rate is between 40%, and 58% if you include special dividends and royalties. If Malaysia subsidises 35% of the real price of oil, then we would NEVER have to remove the subsidy because what the government gets from oil tax will always be greater than the subsidy amount. But we all know that we subsidise a lot more than 35%, maybe 60%-70%.

Collectively the government has taken a 58% cut of Petronas’ profits. Not all of that goes to subsidy as the funds need to be diverted to other expenditures.

The government could have preempted the problem by having a graduated tax scale. For example: for amounts up to US$40, impose a 60% tax on profits; amounts from US$41 - US$80 impose a 70% tax; and amounts more than US$81 impose an 80% tax. That way, your subsidy should always be handily covered.

If oil stays at US$150, a lot more reinvestment will have to be done to dig deeper and it will incur more capital deployment to use more expensive equipment and technology for oil. Higher price of oil means the low hanging fruits have been mostly harvested. To find more oil now requires getting to the more difficult locations and methods.

To keep subsidy on would mean whacking Petronas with a bigger windfall tax stick, but at the same time reducing its ability to invest properly in its global business.

The other thing critics cry foul at is in relation to executive compensation. My guess is that the top guys get fetch salaries in the region of RM1mil - RM6mil a year. Before you get all knotty about those figures, it is fair to say that they are still underpaid compared to their peers in the industry.

Petronas Malaysia is by and large regarded as one of the best managed companies in the industry.

And yes, it can improve its disclosure. The people deserve that. There is room for improvement with regard to disclosures on executive compensation, justifications for special projects and events (e.g. F1, Monsoon Cup, Cyberjaya, etc.), actual deployment of funds into petro-related projects, including cost, joint venture terms, payback calculations, return on capital deployed, success rate and so forth.

At the end of the day, the people need to be clear on how RM234.3bil (retained profits) had been spent through the years. It’s just a matter of coming clean if you have nothing to hide.

But don’t make the mistake of interchanging Petronas with the Government. The uprising criticisms against Petronas Malaysia is largely misdirected. Aim your arrows elsewhere.

p/s photo: Deanna Yusoff