Since establishing in the early 1970’s, Petronas – Malaysia’s state owned oil and gas company - has been building the future of energy by applying expertise and advanced technologies to manage and add value to the nation’s oil and gas resources while meeting increasing energy demands. As the demand for energy solutions continues to increase, Tan Sri Dato’ Shamsul Azhar Abbas – the group CEO and President - says that the company is focused on applying research and innovation to deliver more imaginative and efficient energy products that Malaysia, the region, and indeed the whole world needs. Malaysia occupies a strategic geographical position on the Strait of Malacca. What is the potential for Malaysia to become the regional hub for Oil & Gas?
I think it is well established that the overall growth in Asia is spawning a voracious appetite for energy. Population growth, urbanisation and emergence of mega cities have led to not only GDP growth, but also the need for energy and petroleum products. No other region has experienced an increase in energy demand more than Asia.
Yet if we look at supply of energy, for many countries in the region – Malaysia included – production suffers from natural decline and fields are mostly maturing. Resources are available but they are no longer as straight forward to be developed; they require more capital and servicing activities. Efforts in Enhanced Oil Recovery (EOR) for example, are technology and investment intensive. Likewise, developing marginal fields cannot be attempted the same way as one was to approach a conventional PSC.
And currently in Asia; there is no oil and gas hub in the likes of Houston, Aberdeen or Stavanger, to cater for this intensified servicing activities required for this development in the region. It makes perfect sense to work on establishing one, and in this context, Malaysia is a perfect fit for this purpose. Our location is geographically strategic - it is a key route for Europe and the Middle East to major Asian energy buyers, such as China, India, Japan, and Korea. This is already a proven fact in history – back in the 15th century, Melaka was an established port with thriving maritime and trading activities. We are also blessed with safe natural landscape; waters deep enough for cargo ships to sail; supportive investment policies and attractive taxation regime for international investors; ease of construction and establishment of commercial centres; as well as available surrounding lands for expansion.
But in the last few years, with declining domestic production, ageing assets and minimal growth in downstream business, what was there to be excited about? So since 2010, our focus has been to uplift the dimming oil & gas activities – we intensified domestic exploration activities which has not only overturned the production trend but also led to new discoveries; we made investments and award contracts for EOR projects; as well as award Risk Service Contracts (RSC) for the development of marginal fields. We are also expanding our LNG business with the addition of the 9th train to the existing 25.7 MTPA capacity at the LNG complex in Bintulu, Sarawak; building the world’s first LNG plant on a vessel to develop small and stranded gas fields; not mentioning also our venture to develop Canada’s gas resources and export as LNG to the Far East Market. We have also recently given a go-ahead to Project RAPID in Johor for the development of refineries and specialty chemical products. All in all, I can safely say that we have worked hard to ensure that the domestic oil & gas industry is buzzing with activities and that excitement has returned as there are a lot of growth and opportunities.
So the ambition for Malaysia to be an oil & gas hub is not empty and blind. In fact, it is only natural that we expand our value chain further to include oil & gas services as well. Given the proximity to oil fields and cost competitive skilled workforce in this industry, as well as the ready infrastructure available, there is strong foundation for us to cater and service oil & gas activities in this region. The idea is for Malaysia to be the operation centre that is regional champion. In doing so, we attract top oil & gas service companies such as GE and Aker Solutions to partner with local companies and set up their service centres in Malaysia to cater for the region.
At the same time, establishing a hub would also build local capabilities. Once they develop the necessary skills, expertise and experience, they can then expand to offer their services internationally. Next year the ASEAN Economic Community will be established. What do you expect to be the impact of the single market on the sector?
Malaysia and PETRONAS have always had good relations with ASEAN countries; our first venture overseas was Myanmar, and to date we also have operations and business activities in 8 out of the other 9 member states.
The move to create one ASEAN market and economy under a single alliance is a positive move. Having said that, the Oil & Gas industry has always been operating on a global scale. While undoubtedly we acknowledge that the five core elements of ASEAN single market and production base carry tremendous impact to the member countries, perhaps its benefits are more critical to other industries.
Could you please describe the evolution of the sector in the past decade? And what is the prospective growth for the next years?
PETRONAS was established to bear the heavy responsibility to safeguard and develop the country’s hydrocarbon resources. For the past few decades, the industry, which is mainly driven by PETRONAS, has been consistently contributing an average of 40% of the country’s GDP. Not only PETRONAS has carried out its responsibility within the industry well, but also we can safely say that we are the largest contributor to the socio-economic development of the Nation.
Other than the revenue we contribute to the government, we have also been the sole contributor to the National Trust Fund (NTF), which was established in 1988, and is managed by the Central Bank of Malaysia. The NTF is vital as it sets aside funds to be used for the development of future generations. This is taking into consideration that petroleum and other natural resources are finite in nature. To this year, PETRONAS has contributed £1.46 billion into the fund.
But, we must remember that these hydrocarbon resources are finite in nature. I sound like a broken record when I say this – for Malaysia – the days of easy oil are over. Most Malaysian fields are already mature and the notion of ‘abundant untapped reserves’ is a concept of the past.
This is not an unexpected scenario for us; we have anticipated this inevitable decline and as you can see, we have undertaken measures to deal with it. We have accepted the fact that the reserves available today require more cost to develop – be they marginal or deep water, or both. This means that even with huge investments, there are massive risks involved in monetising these difficult reserves.
Together with our PSCs like Shell and ExxonMobil, we also embarked on EOR activities to ensure that existing fields continue to produce for longer. We also focus on new play types like deep-water and HPHT. Additionally, you saw that we have also introduced the RCSs to supplement the traditional PSCs, so that small marginal fields would also be deemed to be attractive to develop.
It is not easy to sustain the production level and these are parts of our effort to do so. I am extremely encouraged when my team continues to surprise me and not only that we have managed to tackle the decline, we have addressed the plateau head on and I’m certain you know that our production rose from 2.01 mmboe 2012 to 2.13 mmboe in 2013. That is an impressive 5.8% growth and what’s even better is that 2012 had already marked a 3% increase from 2012. We have also been working hard and new discoveries have ramped up our 3-year-average ORRR to a remarkable 3.1. We currently have 100 active PSCs and 4 active RSCs in Malaysia – 3 of which are already producing.Safety and environmental sustainability are two key challenges all companies operating in this sector have to address. What are the main initiatives PETRONAS is putting in place in these areas?
In our daily business operations, we manage a complex portfolio of risks, and we are exposed to minor incidents as well as major ones that could involve serious personnel injury other than substantial financial impact. As a responsible business and operator, of course we place HSE at the utmost priority. Given the ageing assets in our books, we place strong emphasis on asset integrity, for instance on rejuvenation and major maintenance activities. We have spent around £5.5 billion since 2011, and have allocated a further £3.6 billion for the next five years specifically for this purpose alone.
The challenge persists certainly. For example, we are making big gas discoveries domestically – which is a good thing – but they have high CO2 content; so the question for us is: how do we develop these newly found resources responsibly? This is one of the main reasons CO2 sequestration is one of the main technologies we are focusing on.
We have also embarked on a series of activities in support to achieve our PETRONAS Carbon Commitment, as part of the effort to strategically lower our emissions over the next few years.
How would you say PETRONAS fits in the economic transformation of Malaysia that has been spearheaded by the government’s ETP programme?
PETRONAS has been entrusted to act as regulator for the industry in this country. Other than that key role, until recently, PETRONAS has also been the sole player in the Malaysian Oil & Gas industry. So when we speak about the development of the sector and the ripple effect it has had on related industries, inevitably a major chunk of it is associated with PETRONAS.
The Oil & Gas sector in Malaysia, under the stewardship of PETRONAS has always played a proactive role in encouraging PSC companies and service providers by providing a positive investment climate. At the cornerstone will be clarity in policies, based upon the merits of economic feasibility and governance.
In fact under Malaysia’s Economic Transformation Programme, it has been agreed that the 12 National Key Economic Areas or NKEAs (in which Oil & Gas contributes the highest) will be private sector led industries premised upon economic feasibility, efficiency and productivity; free from unnecessary Government interventions that end up distorting the market.
On the other hand, the Government will play an active facilitation role by putting in place encouraging pro-business policies and processes to encourage both domestic and foreign direct investments into Malaysia. An example, which I often quote, is the recent Marginal Field PITA incentive, which PETRONAS and the government worked hand in hand, resulting in the incentive being endorsed and enforced within record time.
These efforts seem to be bearing fruit and the numbers can attest to this. In the World Bank Ease of Doing Business Report 2014, Malaysia was ranked 6th among 189 economies.Oil & Gas is one of the most competitive sectors worldwide. How would you describe the role of PETRONAS in setting a benchmark in terms of business practices in Malaysia?
I have said earlier that oil and gas is a global industry, and we have been “exposed” since the 90s since we made the decision to venture overseas. We are the sole Malaysian company to be listed in the Global Fortune 500, and we have continuously made every effort to ensure that our governance and business conduct are at global standard – because let’s face it – we operate in 36 countries with multinational human resources and we have to compete with IOCs (international oil companies) of the world; we have no other choice than to be at par with them just to get onto a level playing field.
Our evolution over the last few years is in line with the economic transformation driven by increased efficiency and meritocracy. We no longer identify ourselves as an NOC (national oil company) but rather as an IOC. We are now global and as such we go for the best in order to be competitive.
Speaking for the industry within Malaysia in particular, what we want is to elevate the local players to global standards too. It is heartening to see the local oil and gas service providers – the likes of SapuraKencana, Scomi, and Bumi Armada to name a few – to be independently venturing overseas after gaining experience and competition in domestic oil and gas. Because of natural depletion it is essential that other players are able to operate outside the domestic market.
And I foresee that this is the only way to go about it. I believe that PETRONAS has built sufficient infrastructure for the domestic oil and gas, one that is at par with global standards. The next step for us is to demand the same standards from our local suppliers and service providers. We must be uncompromising so much so that over time, this becomes an accepted level of operation and conduct. I don’t believe in having a “handicapped system” to ensure local companies’ participation in our projects, and I also don’t believe in handouts. Human capital is an essential driver of the economic transformation that Malaysia is undergoing. What are the main activities PETRONAS undertakes in order to develop high-skilled human capital?
Education is definitely one of the key focus areas, as we believe that this is a long-term solution to growth and progress. I think we have a role to play to ensure that the Oil & Gas industry is deemed attractive to new talent. Despite the size and magnitude of our operations, I feel that perhaps not many students are fully aware how exciting this industry is; the technologies involved; the breakthroughs you continue to strive for. Having said this, I am somewhat encouraged to learn that in Malaysia, we rank #1 in the Top 100 IDEAL Employers inaugural student survey recently disclosed by Universum.
Also, given the intensity and risk level involved in the Oil & Gas industry, I believe that the human capital and skilled workforce must progress in line with the industry and be more strategic and collaborative in its scope. As interlinked as we now are, the term “growing our own timber” no longer applies to one single company – but should instead be applied to the entire industry. Together, we should be growing a “forest of timber” to cultivate a continuous pool of talent, for the benefit of the entire industry as well as the country.
PETRONAS has built a highly skilled workforce by up scaling internal talent with strong technological base. Our people are equipped with the capability and technical know-how not just in traditional extraction methods but also in new areas. We have expanded our investment in R&D to develop advanced technologies. Yet, all the technologies in the world are worth naught without skilled workers to maintain and operate them. Hence, comprehensive technical training benefits both nation and industry. We are also aggressively accelerating our global talent development through tie ups with leading industry and technology players – we partnered with Petrofac, a British company, for the INSTEP Integrated Oil and Gas Training Centre (IIOGTC) as well as various scale collaborations with Halliburton, Shell, Schlumberger, Mitsubishi, and Technip under the umbrella of Universiti Teknologi PETRONAS.
INSTEP trains 69,000 operators all over the world. IIOGTC is a full size simulator that covers the whole supply chain, upstream and downstream. It is the one and only in the world in terms of its scale and complexity. Now we receive applications from all around the world by companies that want their personnel to be trained at INSTEP. The idea is to create centres of excellence involving global talent for the benefit of the industry at large, and not just focusing on Malaysia or PETRONAS alone.
As a strong advocate of education, our effort is also embedded in our CSR activities too. Besides INSTEP, we have established a solid network of learning centres for our staff (for instance, PERMATA and ALAM); a university in Perak; and we sponsor schools as well as students especially in the areas we operate in. We began sponsoring students for tertiary education way back since 1975 – just one year after our inception – and to date this program has benefited about 21,000 students nationwide with an estimated investment value of £511 million.OTC 2014 has been an incredible opportunity to showcase the potential of the industry. How could technology and strategic partnerships be a game changer in the sector considering the increasing complexity of the operations?
We believe the inaugural OTC Asia 2014 was a resounding success with over 25,000 attendees from 88 countries. Apart from the interest of participants and exhibitors, we were also duly impressed by the quality of presentations, debates and ideas discussed throughout the event. In fact, the success of this conference has surpassed all earlier expectations.
One of the keys of PETRONAS’ success is based on our willingness to accept partnerships with foreign companies. To me, global exposure pushes people to think outside the box, and in turn this will drive costs down and pushes for projects to be delivered in a timely manner. The development of marginal fields, for instance, is part of our strategy for the years to come. However, we need to open up because we need foreign expertise in order to reach our goals and be efficient. Therefore, in order to nurture our local talent and meet our requirements we invite foreign niche players with the necessary expertise and competency to send their proposals. The only requirement they have to comply with is that there has to be a 30% local participation. They have of course also the opportunity to identify who are going to be the local service providers that best match the kind of skills required.
This bears testimony of the growing interest and prominence of Asia, and perhaps even more specifically Malaysia in the global Oil & Gas industry. Realising JVs with local players is a big step forward for the industry as a whole and it does represent a major milestone. For Malaysia, we believe the thriving domestic Oil & Gas industry will provide various opportunities for service providers to establish their base of operations to serve the ASEAN region.
Moving forward, PETRONAS and Kuala Lumpur will be hosting a few other major industry conferences such as International Petroleum Technology Conference, IPTC 2014 (10 – 12 Dec), Asia Oil & Gas Conference, AOGC 2015 (17 – 19 May) and Asia Pacific Geoscience Conference & Exhibition, APGCE 2015 (12 – 13 Oct).
IPTC will focus on showcasing the scientific advancement and technology related to upstream E&P, AOGC will serve as a platform for both oil and gas producers and buyers to converge whilst APGCE is establishing itself as the premier geoscience conference for Asia. I believe all these major events will significantly highlight the potential of Malaysia’s and Asia’s Oil & Gas industry to UK investors, apart from providing opportunities for them to showcase their technology and services. You joined PETRONAS one year after its inception, in 1975. Your professional career mirrors the exponential growth of PETRONAS and Malaysia. How would like PETRONAS to be perceived globally?
The role of the CEO is to prepare and strategise for continuity. It is not about self-preservation here. I have no fear of leaving even tomorrow morning. And it is for this reason that I can push for a change in the agenda. Compared to many other companies within and outside Malaysia, PETRONAS has a different DNA in this sense.
I want PETRONAS to be a global partner of choice. We act as the custodian of strategic assets for Malaysia. We have never been a government agency, and we have high standards of corporate governance. By the same token, integrity is essential to us, so much so, that it is one of the PETRONAS’ Shared Values [others being Cohesiveness, Loyalty and Professionalism]. And now thanks to the emphasis we put in place in terms of meritocracy and gaining exposure, we are globally recognised; we have reached that stage. Malaysia is immediately associated with PETRONAS all around the world, and I hope we continue to make the country proud with a strong brand name. Over the last two decades or so, the name PETRONAS is even more established thanks to our sponsorship in Formula 1, as well as the distinctive Twin Towers of our headquarters, which has turned Kuala Lumpur’s skyline to be one that is globally recognised.