By Lawrence Yong
In the second of a four-part series on Petronas KiniBiz examines Petronas’ overseas ventures and raises the question of whether there is just too much money – and too much risk – involved.
Here’s some examples of Petronas recent overseas dealings which may give us a clue about how Malaysia’s national oil company is making waves overseas.
Late last month, Petronas’ name turned up in Brazil, where they now mainly sell lubricants. The rumour went that they were going to buy Brazil’s OGX Petroleo, the country’s second biggest oil firm. Speculation began when the shares of OGX, controlled by billionaire Eike Batista, increased by as much as 12 percent in a single day before it gave back its gains, Bloomberg reported.
News of a possible partnership followed meetings between Batista and Petronas executives in Kuala Lumpur and Rio de Janeiro in the past six months, other news reports say. Were there any truths to the rumour? OGX denied it and Petronas declined to comment.
If anything, that is clear indication that Petronas is developing an international reputation that it is on the prowl – looking for oil and gas assets that it can capture and put under its fold. Direct acquisition of companies is on the cards too, which it had done in Canada earlier where it made a huge acquisition of a company which held shale gas reserves.
“There are two ways to grow reserves – organic or by acquisiton. The former is when you go and explore underground for oil and it can be a big gamble. Petronas probably thinks now it’s cheaper to buy,” said Aaron Tan, oil and gas analyst at MIDF, an asset management company.
Last December, Petronas made the biggest single buy in its 38-year history when it bought Calgary-based Progress Energy for US$5.3 billion (RM16 billion) to gain a foothold in British Columbia’s “unconventional” gas, or shale gas reserves.
Although just an indication and not a commitment, prime minister Najib Abdul Razak in lobbying the Canadian government for the deal said Petronas could invest as much as US$70 billion (RM217 billion) over 30 years, according to news reports.
At first, Canada blocked the deal for it had no ‘net benefits’ for Canadians. According to official documents obtained by Bloomberg, Najib told Canadian PM Stephen Harper that the Malaysian government “does not interfere with the commercial decisions and operation” of Petronas. Canada approved the deal.
Malaysians, strangely, did not raise much protest as Petronas pumped money into Canada in what is probably Malaysia’s biggest recent deal overseas. The only voice of protest that KiniBiz could find was from oil consultant, who used to live in Malaysia, and now moved home to USA.
“I believe they are moving very fast into areas where they do not know all of the local rules,” Alan Troner of APEC consulting wrote in an email reply to KiniBiz queries.
Shamsul Azhar Abbas
In Malaysia, the deal was even applauded by some as a ‘second wind’ for Petronas.
“This is the second life for Petronas,” the company’s CEO Shamsul Azhar Abbas told The Edge in an interview last week.
Liquefied natural gas (LNG) projects involve an elaborate process to construct pipelines and multi-million dollar plants capable of compressing gas into a supercooled liquefied form of natural gas. The idea is then to ship it via tanker to meet Northeast Asia’s soaring gas demand, particularly as Japan shifts away from nuclear power plants after the Fukushima accident. LNG projects can take 6-8 years to materialise, at its fastest.
Petronas in partnership with Shell and Mitsubishi has successfully done this back home, through its MLNG project in Bintulu Sarawak which first shipped gas in 1983, now reaching its ninth train of production.
But not a drop of Canadian LNG from British Columbia shale gas has yet been exported and the process to extract the gas, called fracking, has come under environmental scrutiny for it may contaminate underground water supply. Shale gas is only attractive because of current price gaps between U.S. and Asian gas prices.
Also, Petronas is not the only one who is after the same goal. PetroChina Corp., Shell, Mitsubishi Corp 
and Chevron Corp are among half a dozen companies in a neck-to-neck race with Petronas to turn shale gas into LNG exports.
Shell and Chevron have both recently received LNG export licenses from the Canadian National Energy Board.
And that’s just Canada’s British Columbia region.
Australia is also in a race against Qatar to be the world’s top LNG exporter, with about a dozen coal-gas based LNG projects in various development stages. ExxonMobil Corp is among those leading developments there. In 2008, Petronas also stumped up US$2 billion for a 40 percent stake in Australia’s Gladstone coal gas project, partnering Santos Ltd. The project is still due onstream in 2015, seven years after Petronas initial investment.
Analysts said not all LNG plants will come to fruition, as it is an emerging global business with first mover advantage.
Last month, some coal gas projects were jeopardised after New South Wales (NSW) tightened the rules on investments, with several projects likely to be shelved. Petronas’ stake in Gladstone is located north of NSW, across the border in Queensland.
Petronas, it was reported earlier this week, has roped in Japan Petroleum Exploration (Japex) as a partner in the Canadian venture. Japex has agreed to take 10 percent in the venture, which is now a Canadian $11 billion (over RM33 billion) venture, after factoring in pipeline costs, Reuters reported Monday.
“Overall Petronas has to still prove that it can organise and lead an LNG development, let alone one of a non-traditional type. I would give it more than 50 percent chance of completion, but by no means are they sure things,” Alan Troner said.
Elsewhere, Russian gas giant Gazprom also has a multi-billion dollar plan to develop large gas fields in eastern Siberia with 3,200km pipeline to a proposed LNG export plant.
Is Petronas jumping on natural gas because they have missed out on securing oil resources after prices jumped in the last five years? Yes, all the oil majors are similarly excited about gas but does Petronas have the same scale of expertise and deep pockets?
It is hard to say because real figures of Petronas’ asset holdings overseas are hard to come by. But experts say that the natural gas business only makes sense if oil prices stay above US$50 a barrel. Otherwise, Petronas has just bought a lot of air trapped in sand.
According to its own website, Petronas said it has total hydrocarbon reserves of 27.12 billion barrels of oil equivalent and about only a quarter of this comes from its exploration and production presence in over 22 countries worldwide. Petronas said in its 2011 annual report that it has 1.114 billion proven and probable crude and condensate reserves overseas.
BP’s statistical review puts Malaysia’s proven oil reserves at only 5.9 billion barrels. U.S. Energy Information Administration (EIA) puts it even lower at 4.0 billion barrels. Analysts said Malaysia could become a net oil importer before the end of this decade. Petronas officially reports Malaysia’s proven and probable crude oil and condensate reserves at 3.74 billion barrels as of January 2012. Another 2.2 billion barrels are contingent reserves.
With the Canadian and Australian buys, some analysts said that Petronas may have tripled their gas reserves. With gas more amply available than oil worldwide, is Petronas decision to pump RM21 billion initially into LNG projects – which are purely commercial ventures – really meeting its mandate for Malaysia’s energy security? And how much more will it have to invest before these become productive?
What Malaysia needs to replenish its crude oil reserves, not gas. Through Bintulu’s MLNG project, Malaysia is already a major gas exporter.
Unfortunately, Petronas does not reveal how much proven oil reserves it has gained from its 23 years of exploration overseas. In contrast, Shell, after being caught short in 2004 in a misreporting of reserves scandal, now reports only proven reserves and categorises it into developed and undeveloped. Shell also gives a detailed geographical breakdown of its revenue sources.
In contrast, Petronas simply states that they have written down their international resources by 5 percent in 2011 compared to the year before.
“The decrease reflects the result of de-booking resources for relinquished assets in 2010 and 2011 namely in Ethiopia, Pakistan and Sudan,” the company said in its 278-page annual report,
Although Petronas operates in Sudan, which may hold Africa’s second biggest oil reserves after Nigeria and also in Iraq, potentially holding the world’s biggest oil reserves, both are troubled spots where output has been rocked by political turmoil. Petronas estimated that it lost $1 billion (RM3 billion) in the first nine months of last year as south Sudan oil production was halted by a war.
Petronas reported that in 2011, it’s international operation accounted for 41 percent of its total revenue but Sudan and Egypt alone contributed 70 percent of its total international oil and gas production. Petronas does not say how profitable they are.
Petronas is otherwise famous as a major oil refiner all over Africa through its subsidiary Engen but Africa has one of the slowest oil demand growths in the world. And in 2008, Petronas launched a new ambition to be a top five lubricants seller in the world, after taking over the operations of FL Selenia, a 100-year old Italian company, which is Europe’s largest independent producer of lubricants. They paid one billion euros (RM5 billion). Petronas now sells lubricants in some 20 countries worldwide.
After 38 years, Petronas core profits still comes chiefly from selling Malaysia’s oil it seems — For the nine months ended September 2012, Petronas said its exploration and production (E&P) business recorded revenues of RM 79.7 billion while downstream hit RM110.5 billion. However profits were reversed. E& P operating profits for the same period stood at RM27.3 billion or almost 30 percent of revenue, while downstream profits were a meagre RM4.6 billion.
At the end of the day, Petronas’ operations overseas is a closed book – no one but Petronas knows how much money they make or lose. This is even more worrisome now when the national oil company stands poised to sink tens of billions more into foreign operations.
Also, the Petroleum Development Act of 1974 under which Petronas was set up dealt specifically with owning and making use of Malaysian resources in oil and gas with no mention of overseas ventures.
But the Act also specifies that Petronas takes directions from the prime minister and is bound to do what he directs, the clear implication being that all its overseas ventures have been approved by prime ministers past and present.
Still, the overriding concern is whether Petronas is risking too much by venturing overseas. With the kind of information that Petronas releases it is impossible to say. If Petronas has done well overseas, why does it not just reveal the information?
And if it has done badly, don’t we have a right to know?
Yesterday: Some serious questions about Petronas
Tomorrow: Politics, subsidies and expanding local production
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