01.07.2000
 

MYSTERY OVER PETRONAS

Amidst the euphoria of Petronas' stunning annual net profit (after tax) of RM
12.6 billion, does any one see anything wrong with the shareholders' funds (or
Petronas' net worth) standing at RM 45.6 billion?  45.6 billion is only less
that 4 times 12.6 billion, meaning Petronas' net worth is less than 4 times its
latest annual net profit.  But Petronas has been collecting oil revenue on
behalf of the Government for the past quarter of a century.  Shouldn't
Petronas' net worth be many times 45.1 billion?  Where has the mountain of cash
gone to?

True, 12.6 billion is a record profit.  But it does not alter the basic picture.
According to Petronas' Report, its total net profit for the past 5 years (1996
to 2000, when oil price was depressed through most of this period) is 42.3
billion, which is a little less than 45.6 billion.  Petronas still has to
account for the whereabout of it's income for the 20 years preceding 1996.

To get an idea  of Petronas' oil income, let us start by looking at a few
basic facts.  In the mid 70s, Petronas started signing up oil production sharing
agreements with foreign oil companies, whereby Petronas would pay these oil
companies (known as production contractors) for their production work by way of
giving them close to 20% of the oil produced, and the balance of the oil
produced would go to Petronas who would then sell these to oversea and local
buyers.  These production contractors would bear all exploration, capital and
operating costs, while Petronas would bear only the administration costs for
overseeing these contractors and for selling the oil.

During the past 25 years, oil production level has been hovering around 600,000
plus barrels per day through most of this period.  Price has fluctuated from a
high of US$40 plus per barrel (during the early part of the Iran-Iraq war which
started in 1980) to a low of US$12 or so (experienced for short periods in the
early days and in recent years).

For a conservative estimate of Petronas' total net oil revenue (excluding
natural gas) for the past 25 years, after deducting production contractors'
fees, State royalty and income tax, we make the following conservative
assumptions.  Grand average production level at 550,000 barrels per day, grand
weighted average oil price at US$18 per barrel, production contractors' fees at
25%, State royalty of 5% (fixed), average income tax relating to net oil revenue
at 35%, and administration costs at 5% of sales.

The resulting calculation from these assumptions is that we have a total
aggregate net oil revenue (excluding natural gas) of a little over RM 100
billion (using average exchange rate of RM 2.8 to the dollar).  If Petronas had
been doing nothing except selling oil and giving out loans and investing in
various assets, this RM 100 billion would have been compounded 2 to 3 times by
now, meaning Petronas' net worth would be reaching RM 200 billion to RM 300
billion.  Since Petronas has been active in pursuing many upstream and
downstream activities in the petroleum industry around the world and locally,
and it has also engaged in other businesses such as shipping (MISC), property
(Twin Towers, Putrajaya), infrastructure (KLIA) etc, its net worth should be
well above RM 300 billion, if it has followed sound management principles in the
conduct of its business.  But what do we witness today?  Petronas' net worth is
a pitiful RM 45.1 billion, which is only a small fraction of what it should have
been.  What has gone wrong?

As Petronas reports only to the Prime Minister, he must now provide the answer.
Where has the money gone to?  What has gone wrong with Petronas?

For a starter, the Prime Minister must provide the following data to the Nation:

1. What is the exact production sharing formulae for petroleum oil and natural
gas between Petronas and the production contractors?

2. What is the annual production of oil and gas for each of the years between
the start of Petronas' operation in mid 70s until now?

3. What is the weighted average price in US$ for oil and gas for each of the
year in the same period?
 

CONTROVERSY OVER OIL REVENUE

First, we have the Menteri Besar of Terenggau saying oil royalty of 5% is too
small, and should be increased (to perhaps 20%?).

Then we have the Prime Minister saying 5% to Terengganu is too much and he wants
to consider withdrawing or reducing that 5%.

At the same time, we have the Menteri Besar of Perlis saying that he wants to
take legal action against Terengganu so that Perlis too can share that 5% given
to Terengganu.

While it is not easy to ascertain the correct percentage of royalty that should
be paid to the State from which oil is produced, it is not so difficult to solve
the controversy arising from Perlis' claim.

Perlis' strongest argument is: it is not fair that Terengganu alone should get
that 5% royalty and the other states in the Penisular should get nothing.  This
assertion is factually wrong.  The truth is that the proceeds of the entire sale
of petroleum in this Country is split 3 ways: about 25% goes to the production
contractors, 5% goes to the State Government from which oil is produced, and the
balance of 70% goes to the Federal Government of Malaysia via the Inland Revenue
Department and Petronas which is wholly owned by the Federal Government.  Hence,
all States in Malaysia share the 70% including Perlis.  It is incorrect to say
that Perlis gets nothing.  Since the 5% that goes to the producing State is
relatively small in comparison with the 70% that goes to the entire country, I
do not think it is reasonable for Perlis to fight over it with Terengganu.
 

Kim Quek