21 November 2011

Petronas CEO ... one and a half years on

Dear Reader,

Earlier this year The Star ran an article about the guy who took over Petronas CEO Hassan Merican's place. Actually, it was part of a larger article but there was a fair bit about the new Petronas CEO as well. His name is Datuk Shamsul Azhar Abbas, and below is the extracted text of the article that concerns him.

Datuk Shamsul Azhar Abbas
President and chief executive officer
Petroliam Nasional Bhd
Feb 10 of this year will mark Datuk Shamsul Azhar Abbas' first year anniversary as Petroliam Nasional Bhd's (Petronas) president and chief executive officer. 
Shamsul, who took over Tan Sri Mohd Hassan Marican's position as the Petronas' chief last year, is no rookie to the oil and gas industry having served with the Petronas group since 1974.

He was the president and CEO of Petronas' Malaysian International Shipping Corp Bhd between 2004 and 2009. 
Within his first year as Petronas' chief, Shamsul has made changes to the national oil company's strategy by scaling back on exploration works overseas and beefing up domestic exploration instead. 
The domestic oil exploration will see Petronas drill deeper for oil and gas in the shallow waters of Malaysia and increase the amount of oil it pumps out from existing wells in the country. 
The group's new direction is also to acquire proven oil and gas reserves instead of drilling for them. The fruition of the change in strategy will not be evident immediately and can only be seen in the coming years under Shamsul stewardship. 
Aside from that, Petronas took the lead in the newly released tax incentives for the oil and gas sector announced under the Economic Transformation Programme (ETP). The incentives are aimed at boosting the development of oil and gas resources and to stimulate domestic production of petroleum resources to arrest the projected 1%-2% decline in domestic oil and gas production. 
Shamsul says that the new incentives could spur the production of 1.7 billion barrels of oil equivalents from 25 marginal fields over the next two decades. The incentives will make developing smaller or marginal fields more commercially viable due to the heavy investments needed. 
Petronas says that it will encourage new foreign and local companies to develop these marginal fields and not confine it to the big oil companies. 
The new year will put the spotlight on how the development of new marginal fields will be farmed out and who will be the beneficiaries as well as Petronas' proposed introduction of a new production regime. 
An idea that is being floated for development of marginal fields is the commissioning of risk service contracts, whereby the contractor who explores and drills the field will bear the investment risks.  
Another area of focus for Shamsul will be the review of the gas subsidy borne by Petronas, which stood at RM19bil for its financial year ended March 31, 2010. Petronas subsidises gas for both power and non-power sectors and is working with the Economic Council on how to set-up new gas prices. - By JEEVA ARULAMPALAM 
(Source: The Star Online, 1st January 2011. "Those who will count in 2011" URL: http://biz.thestar.com.my/news/story.asp?file=/2011/1/1/business/7575052&sec=business)

Thanks to this article, I learned that the new CEO has several ideas about the strategy and direction of Petronas. By going into proven oil and gas reserves, it seems that Petronas will reduce risk of drilling for duds. The logic may be, why waste good money on unproven oil fields? But this does not mean the end of exploratory works. Indeed, the shift is from overseas exploration to local exploration, and drilling deeper and producing more from Malaysia's oil reserves. The question that pops up is whether doing so is in line with the so-called reservoir management plan.

To strengthen its competencies and to enhance its businesses, we can see from the market news recently that:

  1. Petronas Learning Center (formerly known as PERMATA) is signing an MoU with UniRazak's Razak School of Government to enhance its portfolio of programmes (Ref: The Star Online, 11th November 2011. "Two learning institutions team up" URL: http://biz.thestar.com.my/news/story.asp?file=/2011/11/11/business/9881592&sec=business);
  2. "... Petronas' decision to set up an industrial training and learning center in Kimanis to provide training programs and courses for Sabahans so that they could easily fit into the many segments of the oil and gas and related industries." (Ref: Malaysian Digest, 13th October 2011. "Petronas Projects in Sabah, a "1Malaysia Gift", Say Ex-Servicemen" URL: http://www.malaysiandigest.com/news/33289-petronas-projects-in-sabah-a-q1malaysia-giftq-say-ex-servicemen.html)
  3. "Petroliam Nasional Bhd (Petronas) and Shell Malaysia have signed a heads of agreement for two 30-year production-sharing contracts (PSCs) for enhanced oil recovery (EOR) projects offshore Sarawak and Sabah." (Ref: The Star Online, 12th November 2011. "Petronas, Shell in production-sharing oil recovery deal" URL: http://biz.thestar.com.my/news/story.asp?file=/2011/11/12/business/9886917&sec=business)
  4. It is improving the management and the margins of its wholly-owned hospital Prince Court, and aims to be profitable by 2013. (Ref: The Star Online, 20th August 2011. "Finding a Cure for Prince Court." URL: http://biz.thestar.com.my/news/story.asp?file=/2011/8/20/business/9187538&sec=business)
  5. In June 2011, Petronas invested USD1.1 billion on Canadian shale gas. The deal closed in August 2011. (Ref: The Star Online, 7th June 2011. "Petronas' bet on shale gas" URL: http://biz.thestar.com.my/news/story.asp?file=/2011/6/7/business/8847044&sec=business) (Also refer to LNG World News, 3rd August 2011. "Canada: Progress Energy and PETRONAS close Montney Shale, LNG Deal" URL: http://www.lngworldnews.com/canada-progress-energy-and-petronas-close-montney-shale-lng-deal/)
  6. "Petronas will invest in a major RM60bil integrated refinery and petrochemical complex in Pengerang, Johor, touted to be its largest.... it is is expected to be commissioned by the end of 2016." (Ref: The Star Online, 14th May 2011. "RM60bil Petronas project will fuel massive spin-offs, says PM" URL: http://thestar.com.my/news/story.asp?file=/2011/5/14/nation/8685234&sec=nation)
  7. "PETRONAS... has entered into an agreement ... to acquire a 30% stake in GMR Energy Singapore Pte Ltd (GMRE). The proposed acquisition marks PETRONAS’ maiden venture into the international power market." (Ref: LNG World News, 29th September 2011. "Petronas enters deal to buy 30 percent stake in GMR Energy Singapore" URL: http://www.lngworldnews.com/petronas-enters-deal-to-buy-30-percent-stake-in-gmr-energy-singapore/)
  8. Petronas may have considered, but currently denies "a 1.71bil (GBP?) (RM8.49bil) cash bid to buy Heritage Oil Plc, an independent upstream exploration and production company listed on the London Stock Exchange (LSE)." (Source: The Star Online, 11th December 2010. "Petronas denies report on RM8b bid for UK firm" URL: http://biz.thestar.com.my/news/story.asp?file=/2010/12/11/business/7601818&sec=business)

Actually, acquisitions are a quick way to gain entry into a foreign market as well as to avoid repeating the learning process for competencies already possessed by the target acquisition. What matters is whether the competencies developed earlier by the target acquisition are relevant to the acquiring company, and whether the skills developed thereto can be transferred to the acquiring party. Maybe there should be a piece about mergers and acquisitions in the future.

Thank you for reading!