A new Malaysia, a new Petronas?


It has been over a week since the landmark general election in Malaysia, which saw the ruling coalition swept out of the government for the first time in 61 years. In its place is a new coalition, led by none other than the fourth Prime Minister of Malaysia – now the seventh Prime Minister – Tun Mahathir Mohammad. The impact of the election is broad and seismic, and while the promises of clean governance and the abolition of money politics is significant, we are curious about the impact on one of the country's corporate crown jewels – Petronas.

From the new government's manifesto, there is already an immediate effect. Alongside weeding out corruption, Pakatan Harapan also promised to re-instate petrol and diesel retail subsidies. This – along with the abolition of the unpopular GST, which is now zerorised – were part of series of measures that were criticised as being a burden on the population. The new government seems to be adhering to its promises, and in response, Petronas Dagangan – Petronas's public trading arm – saw its share price slip by nearly 5% on worries that the re-introduction of subsidies would impact the state firm's financials, with weekly market-derived prices introduced in 2015.  The re-introduction of subsidies does not directly impact Petronas, given that the previous subsidy structure in Malaysia places the burden on the federal budget, unlike in Indonesia, where Pertamina shoulders a direct burden. And even if it did, Petronas is on far better financial footing than Pertamina.

With crude prices currently far above the US$52/b budgeted for 2018, the revenue windfall will increase Petronas' contributions to the federal budget naturally, which would temporarily mute the burden of the subsidies. In March, the Petronas announced that revenues rose almost 14% to 61.8 billion ringgit. The Petroleum Economist reports that “While chief executive Wan Zulkiflee Wan Ariffin has talked of the premature exuberance over the oil price recovery, he also said the company is in a stronger position to execute its long-term growth agenda and that it would explore new business areas, such as speciality chemicals and new energy. The purse strings have already been loosened, with capital forecast expenditure in 2018 of some 55bn ringgit, some 23% higher than last year.” Would future investment plans for Petronas be affected now with the re-introduction of subsidies? Seeming so, as it impact Petronas's ability to re-build its coffers for future capex opportunities and research.

Tun Mahathir had also recently expressed concerns over the dominance of Chinese companies in the Malaysia economy, standing at 7% of total FDI in the country in 2017. Inflaming tensions could also bring risks to disputed claims over rich oil territories in the South China Sea, including fields new Sabah and Sarawak.

Would Petronas's autonomy be eroded with the new Government in power? This seems unlikely, given that Petronas' historic independence in terms of operations, as well as with former Petronas chairman Hassan Merican sitting on the newly appointed Council of Eminent Persons tasked with recommended federal policies for the new government. Petronas is already fairly well run with proper governance structures in place and the new government is unlikely to shake its precious boat.

However, with upstream production faltering in Peninsular Malaysia, Petronas has been depending on oil and gas volumes from East Malaysia to grow operations, including maintaining its status as the third largest exporter of LNG in the world. Part of the Pakatan's manifesto included returning state rights to Sabah and Sarawak eroded over the course of the years. This would include returning rights to manage oil and gas blocks to both states, which has already begun in Sarawak where a state oil company has been formed. This would blunt Petronas' grip over upstream production in East Malaysia – though it will remain a partner in most projects, its share or management of blocks would be reduced. Sabah fell in the election and with a state-focused new coalition government there, the demands for autonomy will increase. It's something that Petronas should have no problem adapting to, given its vast reserves from international investments, but would have rather wished that it didn't happen at all.

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