The Petronas Towers

The Petronas Towers

The tallest building in the world and symbol of Malaysia's oil power!

Owned and operated by the Malaysian Government

Kuala Lumpur, Malaysia

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 ( Mahathir Mohamad ), 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?

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.