This article first appeared in The Edge Malaysia Weekly, on March 7 - 13, 2016.

Petroliam Nasional Bhd (Petronas) announced 1,000 job cuts at a town hall meeting with its employees last week. The news may surprise the man in the street, as Petronas is perceived to be rich. Some opine that it is not right to retrench employees during bad times.

But the number of job cuts is small compared with the retrenchments by other oil companies. The national oil firm had 50,949 employees as at end-2014, making it one of the country’s major employers. The 1,000 jobs cut is not even 2% of its total workforce, which had expanded substantially in recent years, from 39,236 in end-March 2009. The recovery in crude oil prices following the global financial crisis was probably the reason for the increase in staff back then.

More importantly, the majority of those being laid off are contract staff. Hiring contract staff is a common trend in the oil and gas industry as a large part of the operations is project based.

Royal Dutch Shell announced plans to cut 10,000 people from its 94,000 global workforce — equivalent to 10.6% of its workforce — as its earnings slumped 87% in 2015 to US$1.94 billion. Chevron Corp also plans to cut 11% of its workforce.

BP plc, which lost US$6.5 billion last year, plans to lay off 7,000 workers in its upstream and downstream businesses. The oil major had 79,800 employees as at Dec 31, 2015.

Ailing Petrobras of Brazil, meanwhile, has axed 30% of its administrative staff.

However, many Malaysians think Petronas should first scale back its operations and investments abroad before retrenching staff.

Simply put, many people take it for granted that a job with a government-linked company (GLC) is akin to life-long employment.

Against the backdrop of low oil prices, Petronas, on which many local oil and gas outfits count for contracts, has announced that it will cut RM15 billion to RM20 billion in capital and operational expenditure this year. A total of RM50 billion will be cut between 2016 and 2020, it says.

There are also calls for the national oil firm to stop its sponsorship of the Formula One team (see Stay On with the Silver Arrows on Page 69) and focus on operations at home.

Such sentiments show that Petronas, to a certain extent, will find it difficult to operate as a profit-driven international oil company (IOC). This is because of the social responsibility it has been entrusted with, and which has grown over the years.

By comparison, IOCs appear to have more flexibility in managing their financials partly because of the independence of their board of directors. Like any other public-listed companies, the boards’ fiduciary duty is to ensure the companies’ sustainability.

The oil slump has put a stop to many exploration and development activities in the upstream segment. Retrenchment is a natural move for the oil companies to survive in the current low oil price environment.

Perhaps a more pertinent question to ask CEO Datuk Wan Zulkiflee Wan Ariffin is, “Would Petronas have undertaken deeper cuts in both its expenditure and workforce based on a purely rational business decision?”

The national oil firm’s profit after tax more than halved to RM20.86 billion in the financial year ended Dec 31, 2015 (FY2015), down 56% from RM47.6 billion the year before. Revenue fell nearly 25% to RM247.7 billion in FY2015.

Its operating profit fell to RM39 billion, from RM78.6 billion in the previous year, as crude oil prices slumped to an average of US$53.60 per barrel from US$99.45 per barrel in 2014.

Balance-sheet wise, Petronas took up more loans in FY2015, raising its total borrowings to RM57.9 billion from RM36.9 billion a year before.

Petronas’ cash balance stood at RM120.7 billion in FY2015, slightly higher than RM116.8 billion in FY2014. Last year, Petronas’ operating cash flow was RM69.6 billion while it invested RM60.8 billion. In FY2014, its operating cash flow was RM103.6 billion while it invested RM57.6 billion.

Furthermore, Petronas’ dividends to its sole shareholder — the federal government — makes up a substantial part of the country’s annual budget. The RM16 billion worth of dividends that Petronas has declared for FY2015 and will be paying to the government this year will make up 7% to 8% of the latter’s revenue. On top of that, Petronas also pays oil royalties and petroleum tax.

It is a major employer, a key driver in the domestic oil and gas industry and the government’s main source of revenue. Petronas certainly can’t run away from its social responsibility, and it should not.

On the flip side, the national oil firm should also retain its profit-driven DNA in making sure it is cost efficient and profitable. It should never follow in the footsteps of scandal-ridden Petrobras.

Given the constraints, Petronas’ management and board have to strike a balance.

When oil prices are high, hiring staff and giving big increments are not a problem. But the top executives should not go overboard so that when the climate changes, the turbulence will not hit so hard.

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