The profits of many oil and gas companies have swung like a pendulum in the last three years, indicating the volatile nature of the business. Crude oil prices peaked at US$147 a barrel in July 2008, but dipped to a low of US$34 a barrel in December the same year. The average Opec basket price for that year stood at a record US$94.45 a barrel but prices fell to US$61.06 in 2009. So far this year, Opec’s basket price has averaged US$75.51 a barrel. At this level, prices are high, especially compared with Opec prices in 1998, which averaged US$12.28 a barrel.

But the volatility in price has not greatly affected Petronas’ ranking in terms of profit among Fortune 500 companies. During the last three years, the national oil corporation, which turns 36 years old this month, has consistently been among the top 25 most profitable companies on the Fortune 500 listing. It was ranked the eighth most profitable in 2008, with net profit of US$18.1 billion (RM56.7 billion), 13th in 2009 (US$15.3 billion) and 25th this year (US$11.6 billion).

Operating in a country with small reserves (crude oil at 5.8 billion barrels and natural gas at 14.8 billion barrels of oil equivalent as at Jan 1), Petronas could not have featured in Fortune’s top list in terms of profit or  turnover had it remained a domestic player. It expanded its business, both upstream and downstream, and globalised its operations.

Petronas was set up in 1974, and it spent the first 16 years learning the trade, building its expertise, technology and human resources capability at home, learning from three of the largest oil companies in the world — ExxonMobil, Shell and to a lesser extent British Petroleum. ExxonMobil and Shell have large exploration and production (E&P) units as well as downstream refining and retail businesses in Malaysia.

From being a custodian of the country’s hydrocarbon reserves and a regulator of the production sharing contract, Petronas is now involved the whole chain of the oil and gas business. It is in E&P of oil and gas, production of liquefied natural gas (LNG), shipping (mostly LNG and petroleum products), natural gas processing and transmission, petrochemical, refining, retail operations, production of lubricants and liquefied petroleum gas.

Former Royal Dutch/Shell Group of Companies chairman Sir Mark Moody Stuart, who in the mid-1980s was chief executive of the company’s Malaysian operations, had this to say about Petronas: “Within the national oil corporations fraternity, only a few operate effectively on the world stage as truly commercial operations as opposed to branches or creatures of governments. Petronas is in the leading group, which include Statoil and Aramco among others.”

Petronas’ globalisation route began in 1990, in the dense tropical jungles of Myanmar. As a partner of Idemitsu, its first overseas venture was a failure as the wells they drilled were dry. But the company has come a long way since that initial setback and now has operations in more than 30 countries in Asia, the Middle East, Europe, the Caribbean, South America and North America. For FY2010 (ended March 31), revenue from international operations was the highest at RM98.1 billion or 45.3% of Petronas’ total revenue of RM216.4 billion. Exports contributed RM75.7 billion or 35% of group revenue, while revenue from domestic operations was at RM42.6 billion.

For this special Merdeka pull-out, the The Edge catches up with Petronas president and CEO Datuk Shamsul Azhar Abbas. In this email interview, he talks about the national oil corporation’s globalisation journey, its challenges and aspirations.

The Edge: How best would you describe Petronas’ globalisation journey since the days of its first venture in Myanmar in 1990?
Datuk Shamsul Azhar Abbas: Petronas’ globalisation journey, as many are aware, started in 1990 under the late Tun Azizan Zainul Abidin, when a conscious decision was taken to expand overseas as the key to our future growth. Principally, we were motivated to go global by the fact that Malaysia is a small producer compared with other oil-producing nations, and our reserves were limited and depleting and needed to be augmented for future energy security.

Another important factor was to provide new experience and opportunities to our workforce, so they would be driven further and challenged more as we expand, gaining invaluable knowledge and expertise to stand shoulder to shoulder with their international counterparts. We have come a long way since then, from a fledgling national oil company (NOC) striving for recognition and acceptance, to a preferred partner among our peers and a respected global player among the international oil majors.

We have reached a certain level of capability, competency and capacity to be competing and collaborating with the best of the international players in both the upstream and downstream sectors of the industry. We are now in strategic partnerships and operations across the globe — in Africa, Europe, the Middle East, South America and Asia Pacific. More than 45% of our revenue for FY2010 ended March 31 came from our international operations. In fact, for the past couple of years, our international business has been the largest contributor to our group revenue. If you take into account our exports, then more than 80% of our revenue last year was generated outside of Malaysia, while domestic operations contributed less than 20% to our revenue.

As a Malaysian company, what do you think is the significance of Petronas’ success overseas for the nation, as well as for other Malaysian companies? What is the secret of its success and biggest lessons learned?
As a homegrown company, we are proud that our efforts and track record have been recognised by others in Malaysia and overseas. In as far as other NOCs are concerned, some have emulated our business model while some would like to learn from us.

Our success has not only helped nurture the capability of local service providers but also encouraged them to seek exposure and experience overseas, either in our ventures or elsewhere on their own. Petronas’ success, both at home or abroad, did not come by default. Nor do we have a secret. Our success has always hinged on carefully and clearly developed (and reviewed) business and people strategies to guide our growth from one stage of our existence to the next.

Another important aspect of our success is our ability to build the capability and competency of our workforce serving in our operations across the globe. This special breed of employees is also sought-after by our peers and competitors. In every phase of our journey, we are also always reminded of our responsibility, the amanah (trust) vested in us by the government and the people of Malaysia, which has also guided us and our people in the conduct of our business everywhere in the world. As a government-owned company, we have also been able to get to where we are because the government has allowed us. We have been given the flexibility and freedom to continue to develop, to continue to expand our business as a business.

What was the biggest challenge in the early days of the quest for globalisation? Is it any different from today, as an established player?
In the early days, we faced many challenges trying to make our mark ... Many host countries and potential partners did not know us, so it was a challenge to gain their trust and acceptance and to convince the international community of our capability and capacity. Many doubted whether Petronas, an NOC, could deliver the goods [as well as] the more established international oil companies (IOCs). Doors were not readily open to us.

It was during this time that Petronas also decided to embark on an aggressive international branding campaign with involvement in motor sports, particularly in Formula One, which helped the company gain global recognition. The international community started to look at us and at our track record, and doors began to open for Petronas. On the people side, the challenge was how to bring up the technical competencies of our staff to support our expansion, particularly in frontier projects in climatically taxing environments. We have, however been fortunate that our work force is made up of a special breed of people with a pioneering spirit who readily took the challenge and delivered.

Today, we have a different set of challenges. Competition — both from other NOCs and from IOCs — is getting stiffer, with all eyeing the few areas open for investment. And these few areas are located in far more challenging locations — in deeper waters; in high-pressure, high-temperature zones; in remote, frontier areas — which require additional resources and advanced technologies.

Just as for everyone else, escalating costs are a challenge. As the industry continues to grow and develop, and as more competition comes into play, cost becomes a critical factor. We will continue to look for ways and means to become more cost-effective. The volatility in global geo-politics adds to an increasingly difficult industry environment, and this requires us to be more agile and robust in managing our business to remain relevant and resilient.

What were Petronas most challenging investments/projects in the past (before Iraq)?
We currently have strategic investments in more than 30 countries. We treat all of our projects as serious commercial undertakings. Each investment or project — whether in the wet swamps of Africa, the hot desert in the Middle East or the extreme cold of Greenland — presents us with a spectrum of challenges that add up to invaluable experience and lessons for us in moving forward.

Iraq is going to be a big operation. When will it start and what challenges do you expect in terms of capex, human resources and technology?
Yes indeed, Iraq is going to be a very important operation for Petronas. We entered the country as part of our continuous efforts to replace and augment falling domestic reserves. Our share of oil and gas reserves from the four Iraqi blocks exceeds 3.6 billion barrels. And our share of production is expected to be about 770,000 barrels per day, more than the entire current production of Malaysia. When added to our pool from other overseas projects, Petronas now holds more reserves outside of Malaysia than inside.

Iraq is the first country with which we signed a service contract — as opposed to the more conventional production-sharing agreements — for each of the four [blocks] we have been awarded. This means our success will depend on how well we perform and deliver within the stipulated service period. We are now gearing ourselves towards fulfilling our commitments, while looking for potential upsides within the four fields. Operationally, we have set up offices in Dubai and Iraq and have been mobilising staff as well as finalising pre-development plans for the fields.

The Majnoon field, in which we have a 40% interest [with Shell (60%) as the operator], is expected to produce oil in 2011. The rest — Badra [where Petronas has a 20% stake with Gazprom’s 40% as the operator, KOGAS 30% and TPAO 10%], Halfaya [Petronas 25%; Total 25%; CNPC 50% as the operator] and Garraf [Petronas 60% as operator and JAPEX 40%] — within  three years as per the terms of our service contract signed in late 2009.

Operating in Iraq has its own challenges, issues and risks. Operationally, because the fields have proven reserves, risks related to exploration have been removed. But a substantial amount of capital investment is still required. We need to build infrastructure and related facilities to bring the fields to production. There are also security issues. However, we believe that with our wealth of experience and the tenacity of our people, we will be able to deliver.

Petronas’ overseas ventures comprise mixed fresh investment/start-ups and acquisitions. Will this continue or will it now go on the acquisition trail, looking for good assets upstream and downstream?
Our approach to global expansion has always been a mix of organic growth and acquisitions, and the key to our success is the integration of our downstream and upstream businesses — within and across countries wherever viable — to add and optimise value. We remain focused with our business strategy in our chosen geographies and will continue to monitor new opportunities within these select areas. 

Upstream, we will continue to build a robust international portfolio by intensifying our efforts in acquiring quality assets and developing discovered resources, undertaking strategies and plans to maximise recovery, and striving to achieve world-class production, operation and maintenance across our activities. Downstream, our investment policy continues to be focused on pursuing the growth and sustainability of selective value-adding businesses in strategic locations and targeted markets. Again, integration will be key to optimising value-creation across our operations.

Where is Petronas concentrating its overseas investments (including acquisitions)? Will it continue to be upstream E&P, LNG, shipping and lubricants? Will there be any new areas?
Petronas will remain focused on building on its core businesses and their value chain, be it in the upstream, downstream or gas businesses, when making investment considerations and decisions. All investment considerations must take into account strategic fit in supporting our overall growth strategy.

In terms of geography, will Petronas  continue to invest in regions where it is familiar or will it seek new frontiers?
We have always been highly selective in identifying our chosen geographies. When we first ventured overseas, we started with markets that would give us better opportunities and opportunities to compete. This meant going to countries closer to home first, like Myanmar and Vietnam, before we ventured further afield to Africa, the Middle East and so on. Over time, these regions — Africa, the Middle East and Southeast Asia — have become our core geographies, along with other selected markets in Europe, South America and the former Soviet Bloc countries. Going forward, we will continue to seek opportunities in regions and markets with sustainable growth opportunities.

Recently you mentioned that Petronas would concentrate more on domestic investments, notably in E&P, and improving production in existing fields. How does this balance in the overall globalisation picture?
In recent years, Malaysia’s reserves have been falling. We need to arrest this if we are to maintain our production and prolong the life of our reserves. To do this, we will now dedicate extra efforts in domestic upstream activities, finding new reserves, bringing to production and monetising reserves from marginal, smaller fields, as well as enhancing our recovery [rate].

This, we expect, will not only enhance our reserves and maintain our production numbers, but will also help rejuvenate upstream activities in the country, which will attract more investors and benefit service providers as a spin-off. However, this does not mean that we will pay less attention to our global operations. After all, about a quarter of our reserves and more than 36% of our production now comes from our international ventures.

We made a decision long ago that, to sustain our growth, we needed to venture overseas. We will continue with our globalisation strategy. What is different is that from now on, we will be much more selective about where we go and the kind of assets we look for. The focus is more on finding and acquiring quality, proven assets. This will mean freeing ourselves from exploration risks and concentrating our efforts and resources on development and production which, in turn, will translate into faster cash flow generation. This is what we are doing in Iraq, where all four fields we have acquired are proven fields.

How do you see Petronas  as a global player, let’s say in 10 to 20 years?
Petronas turns 36 this month. We are relatively young, yet we have made considerable achievements ... Going forward, we hope to remain operationally resilient, technically competent, technologically agile and financially robust to maintain and sustain our growth trajectory.

It is critical for Petronas to be all this to compete with other international oil majors in all available opportunities — and tackle the challenges that come with them — for its future survival. Our recent transformation initiative, which involves the enhancement of our business and organisation structure and the reconstitution of our board, will put the company in a stronger position as a global player.

Our new streamlined business organisation will optimise synergy throughout the group, while the reconstituted board — with the inclusion of independent directors with a wealth of experience in the industry — will enhance greater transparency and corporate governance to help Petronas meet its global business aspirations as a truly global company.

Yet, all of this would not be possible without the support and dedication of our employees, who are our greatest asset. It is important for Petronas and its work force to stay firm and true to the values which have guided its growth and resolve to leave a legacy for future generations.

This article appeared in Special Focus page, The Edge Malaysia, Issue 821, Aug 30- Sep 5, 2010