PETRONAS in the news-1

 

In the last 2 weeks, PETRONAS was in the news for the wrong (?) reasons.

First- PETRONAS was ranked badly in a 2010 Report on Promoting Revenue Transparency in Oil & Gas companies. The report is published by Transparency International (TI) and Revenue Watch Institute (RWI). PETRONAS performed badly in all three key sections.

These are 'Reporting on Anti-Corruption Programme', 'Organizational Disclosure' and 'Country-Level Disclosure for International Operations'. PETRONAS' respective scores were 30, 38 and zero percent, compared to the average scores of 43, 65 and 16 percent. UK's BG Group, India's Oil and Natural Gas Corporation and Norway's Statoil top the three sections respectively with scores of 93, 100 and 69 percent. PETRONAS was ranked in the bottom 25 percent of the 20 international and 24 national oil companies surveyed.

Reporting on Anti-Corruption Programmes' refers to companies reporting their anti-corruption programmes according to the TI-UN Global Compact Reporting Guidance on the 10th Principle against Corruption.

Organizational Disclosure' measures reporting of a company's organizational structure, operations, partnerships and standards used for published financial accounts.

Country-level Disclosure for International Operations' refers to companies' reporting on meaningful country-level financial and technical data relating to their international operations.

What is the purpose of the Report? I think we need to look at it positively and not succumbed to a xenophobic reaction treating the Report as work of some insidious organization out to discredit Malaysia. As Malaysians concerned over the management of a national asset, we have every reason to be circumspect. PETRONAS is the biggest revenue earner for this country.

The report aims to promote accountability in resource-rich countries by improving awareness of the importance of revenue transparency of major oil and gas companies. We have to remember that Oil and gas producers generate and transfer considerable funds to national and host governments. Natural resources wealth can fuel large-scale corruption and mismanagement, if not properly managed.

Second- PETRONAS is in the news for its announcement in introducing the new commercial methodology of RSC- risk sharing Contract. What is that?

In introducing the Risk Sharing Contract, PETRONAS has this to say. It said that in not too many words. We are left to second guess what our national company means and intends.

"The RSC model strikes a balance in sharing of risks with fair returns for development and production of already discovered fields. In this arrangement, PETRONAS remains the project owner while contractors are the service provider. Upfront capital investment will be contributed by the contractors who will receive payment commencing from first production and throughout the duration of the contract," PETRONAS said.

"The new arrangement facilitates direct participation of Malaysian companies in the country's upstream oil and gas activities, in line with PETRONAS' efforts to leverage on their existing capacity while fast-tracking their capability in development and production in a structured manner," it added.

We haven't been told- how is the marginal field defined? How are the local players chosen? How is the foreign technology partner selected? How did we come up with a ballpark figure of RM 800 million? Who provided that figure? Why can't it assign PETRONAS Carigali for instance to partner with the Petrofac for instance?

Unless the consortium of the 3 companies in unison proposed to PETRONAS to work on the marginal fields, then I think the choice of the 3 can be defended. We can't fault the private companies for coming out with a commercially viable solution to PETRONAS when PETRONAS itself feels further work on the fields is uneconomical.

But unless PETRONAS is forthcoming with more revelation, its silence will only fuel speculation and wild guesses.

So if I were to second guess and translate it into simple language, perhaps it can be this way: hey guys, you want to make money? Here's the deal. We want to appoint a foreign player to extract oil and gas from our marginal fields. Don't worry marginal is a misnomer- plenty of oil and gas there. But you people can share by being equity partners to these people. Just get the capital and join them. They are your technology partner. They do the work, maybe you get to supply support services and other things. PETRONAS will oversee and make sure you make money. And we will also be fulfilling our political objectives- fast tracking the capabilities of the chosen local ones.

PETRONAS has come some way from Production Sharing Contract to Risk Sharing Contract. The he contractors now assume all the risks (?) and get compensated when they strike oil or gas? Will they get to recover all their set up costs? They get to share the value that's above the costs? How will the sharing be structured?

Let's study a little bit of history.

The production sharing contract (PSC) is a scheme where the resource owner contracts out the extraction and production of oil and gas to exploration companies. Basically the idea is this. The exploration companies or contractors do all the work to extract and produce oil. Hence the term produced oil. Once oil is produced, the contractor gets to recover all the costs incurred in extraction and producing the oil- this is termed as cost oil. After all the costs are deducted, you get to share the profit- hence the term profit oil. It's divided between the resource owner and contractor on an agreed basis. Usually 80% to the owner and 20% to the contractor.

This idea was first introduced in Malaysia by Tengku Razaleigh Hamzah when PETRONAS was formed in 1974. The Petroleum Development Act 1974 empowers PETRONAS to be the custodian of our oil and gas reserves. It sets out to manage and operate our oil and gas reserves. It owns the oil and gas on our behalf.

Tengku Razaleigh worked hard to convince the oil majors operating in Malaysia then to accept the arrangement. The Americans were of course livid and complained to the then PM, Tun Abdul Razak. But Razak chose to stay the course with Razaleigh.

Update: I hear sound whispers that the whole cost of the project is financed by Petrofac. Haiya, cilaka, saya pun boleh bikin ini marginal field punya projek ma...