Oil and gas wealth drove Malaysia’s go-go modernization during the 1980s and 1990s, with state oil firm Petronas emerging as one of Asia’s most profitable companies. That success was reflected its shiny iconic twin towers, once the world’s tallest, in downtown Kuala Lumpur.
But after more than two years of stubbornly low global oil prices, with prices falling from a per barrel high of US$145 in 2008 to a low of US$26 in 2016, Petronas is struggling to maintain its prominence as one of the world’s largest exporters of liquefied natural gas (LNG).
Last year, company revenue slumped to US$46 billion, around 17% lower than in 2015. Petronas maintained profitability through heavy cuts to capital investments and operating expenditures, including retrenchment of staff. Managers have announced plans to trim US$11 billion in expenses from 2015-2019.
The company has also said it would review ongoing investment in various global projects; Petronas has business interests in more than 50 countries worldwide. The austerity measures so far have helped the state-owned firm avoid a credit rating downgrade, unlike several other major oil firms.
However, Petronas plans to cut crude oil output by up to 20,000 barrels per day in 2017, a 3% fall from last year. The cuts come as part of an agreement reached in December by the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers, which includes Malaysia.
The agreement aims at curtailing global petroleum output to limit oversupply and raise prices. Petronas’ president and group chief executive officer, Wan Zulkiflee Wan Ariffin, meanwhile recently said that the firm is trying to make cost efficiency “part of our DNA.”
On other fronts, however, the company is still expanding. It recently invested almost US$90 million to expand a lubricant-blending plant it operates in China, while a floating liquefied natural gas (LNG) facility there – the first of its kind in the world – is set to begin operations in June.
Petronas also announced this month it aims to broaden its LNG business to meet rising demand in India, Pakistan and Bangladesh, as well as some parts of Southeast Asia, where it is currently the region’s second largest supplier of LNG.
Much hinges, however, on a major new joint venture with Saudi Arabia. In February, when Saudi King Salman bin Abdulaziz began his tour of Asia in Malaysia, the monarch oversaw the signing of an investment deal worth US$7 billion between the two nations’ state-owned oil firms.
Saudi Arabian Oil, more commonly known as Saudi Aramco, is set to assume a 50% share in a new Malaysia-based petroleum refinery development, a cornerstone project of the multi-billion dollar Pengerang Integrated Complex (PIC), in the country’s southern Johor state.
Started by Petronas in 2011, PIC aims to transform Malaysia into an international petrochemical industrial hub. There is political noise around the plan, though. There were widespread reports that senior Petronas officials were against the Saudi investment, criticism Prime Minister Najib Razak blamed on “unpatriotic people.”
Critics of the scheme had apparently briefed the Saudis that Malaysia was politically unstable and unable to pay civil servants’ salaries and benefits due to financial difficulties, unsubstantiated rumors that almost scrapped the deal, according to reports.
“We had to meet them and correct the facts that Malaysia is among the best countries in the world [for investors],” Najib was quoted saying by local media. “When they were convinced, they finally agreed to invest with us.”
Petronas group executive vice-president Md Arif Mahmood has denied there were any misgivings among Petronas executives and said that discussions on the deal with Saudi Aramco began in 2014, insinuating Petronas was not strong-armed into the oil-importing venture, as some critics claimed.
As part of the deal’s terms, Saudi Aramco will provide up to 70% of the crude oil to be processed at the plant, which is expected to be operational by 2019 and capable of processing 300,000 barrels of oil per day.
These developments will help but not necessary boost the Malaysian economy back to fast growth. Due to a global oil glut, Malaysia has seen rising unemployment, stubbornly high inflation and an overall slowdown in economic growth.
While foreign direct investment (FDI) was up 64% year on year in 2016, due largely to burgeoning ties with China, domestic investment fell by 5%. Trade Minister Mustapa Mohamed told reporters that the decline was largely attributable to a lack of new investments by Petronas.
As a state-owned firm, Petronas pays a dividend towards the government’s annual budget. Before the oil price crash, revenue from Petronas and the wider oil industry accounted for as much as a one-third of state revenue, according to media reports.
But that annual payout has diminished due to low fuel prices. For each US$1 drop in global oil prices, almost US$60 million is slashed from state revenue, industry experts say.
Petronas has said it will pay the government around 13 billion ringgit (US$2.9 billion) this year, its lowest annual dividend since 2007. That’s half the 26 billion ringgit (US$5.8 billion) it paid in 2015 and even less than the 16 billion ringgit it (US$3.2 billion) handed over last year.
Falling oil revenues were a key factor in the government’s 2015 introduction of a goods and services tax (GST), which Najib heralded at the time as a “savior” of the economy. The tax’s critics say it takes money away from private consumers just as austerity measures bite for the sole purpose of boosting state coffers.
Falling oil revenues were a key factor in the government’s 2015 introduction of a goods and services tax (GST), which Najib heralded at the time as a “savior” of the economy.
To be sure, Malaysia’s economic woes mirror other oil-rich nations, many of which have moved to diversify their economies to curtail the so-called “resource curse.” The 11th Malaysia Plan, an economic proposal laid out in 2015, aims to reduce the government’s dependency on petroleum-related revenue from around 33% to 15.5% by 2020.
It will be an uphill battle, analysts say, especially with an upcoming general election due before August 2018. While tough economic decisions are seldom taken in election seasons in Malaysia, Najib’s coalition is already campaigning on the notion it is better placed to solve economic problems than the unproven opposition.
The Saudi investment will thus have come at an opportune time for both Petronas and Najib. Despite criticism from some quarters, mainly from the political opposition but also within Petronas, Najib has touted the refinery project as a potential huge job creator, particularly in Johor, an important swing state at the next polls.