Chan Zhe Sheng

Born in Kedah, Zhe Sheng studied Mechanical Engineering at Universiti Sains Malaysia. Graduated in 2015, he loves travelling, food hunting, and lotus eating. He supports Manchester United and thinks Paul Scholes is a football genius.

Oil and gas industry has always captured people’s imagination, with the perception that this industry is extremely lucrative and is the indispensable pillar in the economy of Malaysia. Ask any graduates of their preferred career destinations, oil and gas industry is most probably their holy grail – the promised land of eternal prosperity and prestige.

With 4 billion barrels of proven crude oil reserves, Malaysia embarked in oil and gas industry since 1910, when the first oil well was drilled in Miri, Sarawak. Situated on top of Canada Hill, the “Grand Old Lady” began production for Shell until 1973, spanning 63 years of service.

In 1974, Petroliam Nasional Berhad (PETRONAS) was established as Malaysia’s national oil company (NOC). As the custodian of Malaysia’s oil and gas resources, PETRONAS is also the regulator of oil and gas upstream industry. PETRONAS was identified as one of the “new seven sisters” of NOC, a group of most influential and state owned national oil companies.

The other 6 NOCs of the “new seven sisters” are Gazprom (Russia), CNPC (China), NIOC (Iran), Pdvsa (Venezuela), and Petrobras (Brazil). PETRONAS’ achievement is truly remarkable given that Malaysia has the smallest reserves among the “new seven sisters” countries, which is only one-fourth of Brazil’s reserves, the second smallest after Malaysia. It is also exemplified by PETRONAS status as the only Malaysian company ranked among Fortune 500’s largest corporations in the world.

The slump in oil price has hit PETRONAS hard, resulting in 25% reduction of its revenue to RM 247.7 billion, 56% reduction of its profit after tax to RM 20.8 billion, and 33% reduction of its cash flow from operations to RM 69.6 billion. The slump in oil price has also raised people’s interest to the sustainability of government revenue.

As a net oil and gas exporter, people have a very interesting perception towards government’s dependence on oil and gas. When the oil price was soaring high, it heavily favoured Malaysia as more revenue can be raised to support government expenditure. Just not so long ago, in 2009, oil and gas revenue constituted 41.3% of government revenue. It is a warning sign that if government is not able to diversify its revenue away from oil and gas, we will be hit hard when the oil price crashes.

Coupled with increasing government debt and worrying budget deficit, government embarked on Economic Transformation Programme (ETP) in 2010 to diversify our economy away from oil and increase government revenue to support national development. The result is impressive – in 2017, it is estimated oil and gas revenue will only constitute 13.8% of government revenue, with a CAGR of -12.8%.

The reduction of dependency to oil and gas revenue is catalyzed by the slump in oil price and the increase of non-oil revenue, e.g. taxations. The slump in oil price certainly expedited the reduction of dependency, but government’s efforts to diversify revenue away from oil and gas should not be overlook. In 2017, government revenue is estimated at RM 219.7 billion, growing 3.4% from previous year.

Also under ETP, government aims to achieve three objectives, (i) consolidating existing upstream exploration activities, (ii) growing downstream economic activities, and (iii) expanding oil & gas field services and equipment (OGSE) market to overseas, with the ultimate aim of enhancing sustainability of oil and gas industry in Malaysia.

To consolidate existing upstream exploration activities, government is rejuvenating existing oil fields through enhanced oil recovery methodology, developing potential small fields through innovative exploration and production solutions, and intensifying exploration activities via boosting new and sizeable discoveries.

Our efforts to grow downstream economic activities include unlocking premium gas demand and increase petrochemical outputs. This is exemplified by the development of Refinery and Petrochemical Integrated Development (RAPID) project in southern Johor. RAPID comes timely to the whole economic scenario now as low oil price favours downstream activities and brings down the cost of petrochemical production.

Expanding OGSE is essential to ensure Malaysia’s position as a global player in oil and gas industry. Hence, government through Malaysian Petroleum Resources Corporation (MPRC) aims to attract MNCs to bring their global OGSE operations to Malaysia, to consolidate domestic fabricators, and to develop engineering, procurement and installation capabilities and capacity through strategic partnerships and joint ventures.

Building up domestic capabilities is essential because natural resources could not be exploited without essential core technology. A classic example is African countries, where they have abundant natural resources, but due to the lack of domestic capabilities, the countries face great difficulties to explore and extract their natural resources. This, in turn, will allow foreign entities to demand concessionaires which will forego significant portions of natural resources in exchange of the development of oil fields.

Currently, the domestic OGSE landscape is too fragmented and inefficient, with more than 3,700 companies registered with PETRONAS, while in Norway, the number came in less than one-fifth at around 700 companies. The consolidation among OGSE players within Malaysia is not happening as quickly as it should. The call for consolidation is crucial to enable local players to combine forces and become stronger players to ride out the current oil slump storm.

In 2009, oil and gas industry constituted 17% of all economic activities in Malaysia. By 2020, its share is estimated to drop to 14%, with other economic sectors, such as financial services, plantation, and retail market, expanding at a higher rate than oil and gas industry. This is in line with our dwindling proven reserves of oil and gas.

In the future, when Malaysia is a high-income nation, and our oil and gas reserves has depleted, we will come to appreciate the wonders of this natural resources gifted to us, which propels us beyond the middle income trap, to be a rich country for everyone, and for a long time, so that we have a high quality of life.

*The views and opinions expressed in this article are those of the author’s and do not necessarily reflect the opinion of DuaRinggit.

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