Monday, August 13, 2007

Master of Our Own Destiny

Master of Our Own Destiny

The year 1974 was a landmark year for the oil and gas industry. Seventeen years after Merdeka, through the passing of the Petroleum Development Act (PDA) and later the initiation of a production sharing contract (PSC), Malaysia finally got its chance to manage its own hydrocarbon resources and participate directly in the industry.

Prior to the PDA, the country's hydrocarbon resources, in this case oil, which it had been producing in Miri, Sarawak since 1910, was managed through the concession system that was practised and accepted worldwide.

Lack of expertise and financial resources among many host nations in the developing world had allowed major oil multinationals like Shell, ExxonMobil and British Petroleum to dictate better business terms for themselves. They were normally granted long-term concessions and large tracts of areas to explore.

In the case of Sarawak, Shell's concessions there had been granted by the then colonial government for "as long as the moon, sun and stars are in the sky." In short, the concession was in perpetuity.

And once oil was discovered, the multinationals became the owner of the commodity. Without active participation by the host nations, the respective governments only benefited through royalty payments and corporate taxes, a meagre sum compared to the returns the oil companies got.

For Malaysia, the PDA was a political mechanism that fulfilled the aspirations of an independent nation. But foreign critics likened it to "nationalisation" via the back door. The PDA paved the way for the establishment of a national oil corporation - Petronas, which became the sole custodian and owner of the nation's hydrocarbon resources.

Under the PSC, first signed in 1976, oil and gas discovered in any exploration areas would belong to Petronas, and the multinationals - now serving as investors and contractors and not as owners Ð would only be entitled to a percentage of what was discovered. On top of this, they had to pay income tax to the government.

The PDA was one of then Prime Minister Tun Abdul Razak's aggressive efforts to broaden the country's economic base and lessen its dependence on agriculture and commodities like rubber, tin and timber, and ensure that national assets like oil, gas and plantations remained in the hands of locals.

It also coincided with the early years of the introduction of the New Economic Policy (NEP), under which the government's priority was to redistribute national income fairly among the different races in an environment of an expanding economic cake and corporate sector.

To reap maximum return from the oil and gas sector, Petronas, the custodian, also became an active commercial participant. In 1975, it marketed its own crude oil to the Japanese and two years later, started airport refuelling activities at the Senai Airport and bunkering services at Pasir Gudang Port in Johor.

The year 1978 was a momentous year as Petronas set up its own exploration and production arm Carigali and a gas joint venture company MLNG - which in later years would become major revenue components of its domestic and international businesses. In 1981, it opened its first service station in Taman Tun Dr Ismail, Kuala Lumpur.

Getting into the industry, learning the trade and participating in the upstream and downstream sectors like its multinational counterparts was a farsighted move on the part of the government (the shareholder) and the pioneering managers of Petronas. The dedication shown by the pioneers and subsequently, those who worked with the company during its expansion years must be commended.

As the nation celebrates its 50th anniversary, Petronas' success in growing from a domestic company into a full-fledged oil and gas multinational should rank as one of the country's greatest achievements.

The success story is there for us to see. The company set up in 1974 with shareholders' funds of RM10 million had by 2007 grown by 17,000 times. This feat was achieved without Petronas going back to the government to ask for a single ringgit more to be added to its shareholders' funds.

When Petronas announced its financial results for the year ended March 31, 2007 on June 28, the RM10 million investment had turned into the following staggering figures: shareholders' funds (RM170 billion), assets (RM295 billion), revenue (RM184 billion) and net profit (RM46.4 billion). During the same financial year, it contributed RM48.3 billion to the government's coffers in terms of taxes, dividends, royalties and export duties. Since its inception, RM366 billion has been returned to the government.

Today, Petronas contributes about 35% to federal government revenue. The company has operations and investments in more than 30 countries and was ranked by Fortune as the 120th largest company in the world last year.

Certainly the government would not have earned this much if the PDA was not put in place and the concession system had remained. The attractive returns were also made possible by the excellent civil servants and professionals who have managed and served Petronas with a high level of integrity.

Source: Azam Aris, TheSun, Monday, August 13, 2007

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