THE year was 2011 and not many Malaysians were aware that the nation was on the verge of a major power outage. It could have been the country’s worst blackout. Ironically, the reason for this was that Malaysia, which subsidises the fuel for its power and non-power sectors, including manufacturing, did not have enough gas to generate electricity at the time.
There was the usual finger-pointing, and Petroliam Nasional Bhd (Petronas) — the world’s third largest natural gas exporter, mostly in the form of liquefied natural gas — was blamed for not supplying enough fuel to Peninsular Malaysia. But the national oil company argued that though it had warned of an acute supply shortage for at least five years, no pre-emptive measure was taken to rectify the situation.
The gas shortage, which arose because of lower production, worsened when a major oilfield caught fire. In the end, Petronas and the federal government had to absorb a third each of Tenaga Nasional Bhd’s (TNB) massive loss of RM3.07 billion as a result of burning costlier alternative fuels, such as distillates.
Six years on, we are facing a different situation — declining demand for natural gas because power producers are burning imported coal to generate electricity.
Shrinking demand is one of the many things that keep Petronas president and group CEO Datuk Wan Zulkiflee Wan Ariffin awake at night. Being the sole supplier of natural gas, Petronas has to ensure the long-term security of supply to the power sector, but this also means regular investments to at least maintain minimum production offtake.
At the same time, Wan Zulkiflee, or Wan Zul as he is better known, has to be mindful of the national oil company’s investment expenditure because every sen counts in the current challenging operating environment.
The power generation industry is the country’s biggest natural gas consumer and determines the strength of the nation’s gas demand. “We [Petronas] first started to supply [natural gas] to the power sector in late 1984. At one time, in terms of fuel generation, it consumed 60% gas. Over the years, however, there have been more coal [power] plants, and subsequently, the contribution of gas is lower — just under 40% [now],” Wan Zul tells The Edge.
“What may not be obvious is that after so many years of supply, we need new investments upstream and downstream. Upstream gas is being depleted, so we have to find new reserves at higher cost. Downstream, many of the facilities [including the gas-processing plants and pipelines] are more than 30 years old and need upgrading, so the production of gas costs more now than in the 1980s.
“Thus, we need to be assured of minimum offtake so that we can invest further to ensure security of supply. We can’t be investing if the offtake falls to, say, 300 MMscf per day when we are supplying 1.2 billion standard cubic feet (Bscf) per day.”
Perennial pricing issue
Wan Zul could not have taken the helm at Petronas at a worse time because, compared with his three predecessors, he is facing tough times ahead. Apart from contracting earnings and dividend payments to the federal government, he has inherited several legacy issues, one of which is the pricing of natural gas for local consumption.
Petronas has forgone billions of ringgit in revenue from supplying natural gas to the domestic market at rates that are substantially lower than international prices since the government started regulating the pricing after the 1997/98 Asian financial crisis.
“I think the forgone revenue since we started is more than RM200 billion because we have not been able to sell natural gas at market value,” says Wan Zul. “In the past, we made investments just to ensure security of supply. But moving forward, there is this perennial issue of non-market pricing.”
In view of this, the government introduced a gas subsidy rationalisation scheme under the Economic Transformation Programme. Under the scheme, domestic natural gas prices would be revised upwards every six months.
In tandem with the hike in natural gas prices, electricity tariffs would be adjusted accordingly. The ultimate goal of the scheme was to adjust the domestic price gradually so that it would be on a par with international prices by 2015.
But that never happened — the domestic price is still below the international price.
“Now we have a RM1.50 increase every six months. The last increase was in January but the next increase has not been confirmed yet. We really hope the six-month increase will continue because that will lead us to market pricing in the end,” says Wan Zul.
Surely, Petronas, including Wan Zul, would not want to be picked for target practice if there were another acute shortage of gas in the future because the national oil company did not invest enough.
According to TNB’s latest annual report, the fuel mix for power generation is: gas, 45.2%; coal, 50.8%; hydro, 3.5%; and others, 0.4%.
“We are talking to the government, the Energy Commission, TNB and KeTTHA (Kementerian Tenaga, Teknologi Hijau dan Air) to continue with the gradual price adjustments and give us a floor [minimum gas demand], at least from the power sector, of just below one Bscf or even 800 MMscf per day,” says Wan Zul.
Without such an assurance, he stresses that it would be hard for Petronas to plan ahead. “Developing a gas field [and bringing it into the Peninsular Gas Utilisation pipeline network] is not something that you can do overnight or even in six months ... but I agree that there should be diversification in the fuel mix,” Wan Zul explains, although he notes that the import of coal could cause an outflow of foreign exchange.
He opines that the country needs to draw up a National Energy Policy that clearly spells the details, such as the ratio of unconventional energy to conventional energy, the fuel mix and the impact of environmental protection measures on, for example, carbon dioxide emissions.
Coal is classified as a dirty fuel by the World Health Organisation because it causes more pollution. Natural gas is viewed as a cleaner alternative to generate energy. However, the Malaysian government has yet to regulate coal consumption.
Adjusting to a low oil price era
Not many would envy Wan Zul his job of having to supply cheaper natural gas and causing the national oil company to continue to forgo billions of ringgit in revenue. The Petronas chief probably knows it too. Throughout his 34 years at the company, he had observed how his predecessors consistently put national interests first and how they juggled thorny problems, such as dividend payments to the federal government, capital conservation for future growth and fulfilling the bumiputera agenda without jeopardising Petronas’ interests.
In the past two years, he has taken bold steps to put the company on a sound financial footing in a low oil price environment. His sentiment on crude oil prices is bearish. “We are preparing ourselves for a ‘lower for longer’ (era) ... meaning the oil price will remain low for a longer period … than in previous cycles,” he says.
He concurs that the recovery in crude prices in the past few months was driven by a production cut by members of the Organization of Petroleum Exporting Countries and non-members. “If this [production cut] does not continue, I think we will see a different level … I don’t know what the level would be,” he says, adding that the higher prices have encouraged shale oil producers — helped by better and cheaper technology and funds — to start pumping more oil into the market. This has created a ceiling for crude oil price, something that was never seen in previous cycles.
Petronas’ earnings rebounded mainly due to a decline in asset impairment charges. In its financial year ended Dec 31, 2016 (FY2016), it posted a net profit of RM16.95 billion compared with RM13.16 billion in the year before. However, revenue was 17.3% lower due to a lower average selling price and sales volume.
Wan Zul paints a bleak but real picture of the future. The party, he believes, ended a long time ago. There will not be as many Petronas contracts up for grabs as when crude was trading above the US$100 level.
He will soon be meeting the local oil and gas players to tell them about the industry’s new landscape. “The work will be a lot less; we want the industry to be prepared for that ... it is up to them how they want to react to the reality,” he says.
During the 90-minute interview with The Edge, Wan Zul appears more cheerful and speaks with a lot more confidence than in an interview about a year ago. This is probably because he has become more adept at handling delicate and stressful situations now.
Some of the tough decisions he has already made and executed include cutting more than 1,000 jobs — something never seen before in the history of Petronas — freezing salary increment for top management and renegotiating tougher contracts with the licensed vendors.
Simply put, these are measures few would have expected to take place in the national oil company. But they happened. They obviously did not make Wan Zul popular in the industry but he did not back down.
Wan Zul is said to have been groomed by former president Tan Sri Hassan Marican. Perhaps he learnt to summon the will to do the right things from Hassan.
Shortly before Hassan stepped down, he made a tough call to sponsor the Mercedes-Benz team in Formula 1 instead of another team owned by Malaysian businessmen. This met with strong criticism on the national front and Petronas was accused of not being patriotic. Was Hassan’s unpopular decision the right one? The F1 race results — with the Mercedes-AMG Petronas team having won the driver and constructor titles in the last three years and being the favourite to win again this year — say it all.
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