Tuesday, December 03, 2013

Petronas: Constraint or neo-liberal or hiding something?

The big story on Petronas today will be the resignation of Tun Dr Mahathir as Adviser of Petronas. The "official" reason as mentioned in his press conference after an UMNO forum yesterday was his age and health condition.

There are those speculating that it has to do with "ethnic cleansing" in Petronas that had been voiced by MTEM and a Johor group recently.

Petronas have made a reply to that allegation and basically directed their reply towards MTEM. More to come on this issue as Petronas is due to meet Perkasa in late December.

One news which received coverage by most business media but did not create much buzz is with regard to Petronas's lesser payout which will be compensated by GST. Perhaps, it is because it is an economic and business news, thus the general public is not attentive.

The public must be made aware because it means the days of easy oil is over, and the Petronas tap could not be depended to drive the economy. That statement could be perceived as public will have to pay more taxes.

Another and more basic concern is which is the truth? Lower or higher payout from Petronas?

GST and Petronas

The report by Business Times, below:

‘GST will cut Petronas payout to govt’

By Cheryl Yvonne Achu


KUALA LUMPUR: Petroliam Nasional Bhd (Petronas) will contribute less, in percentage terms, to the government’s coffers after the goods and services tax (GST) is implemented.

Minister in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar, however, said the lower contribution will not reflect the value of dividend and tax paid to the government.

Petronas is the largest taxpayer and source of revenue, accounting for at least 30 per cent of the government’s revenue.

Wahid said the percentage of revenue contribution from Petronas has been declining and the government has to broaden its other
sources of revenue.

“With revenue from GST, the proportion of Petronas’ revenue will come down as a percentage of total revenue. That is our long-term objective,” he said after delivering a keynote address at the 18th Malaysian Capital Market Summit, here, yesterday.

Wahid said in 2011, the petroleum sector contributed 35 per cent to the country’s revenue before easing to 33 per cent last year, due to higher contribution from other sectors.

"When GST is implemented in 2015, the government's dependence on the petroleum sector is expected to decline," he said, adding that the government has not set any percentage reduction yet.

This year, Malaysia's revenue is expected to hit RM220 billion, before rising to RM224 billion next year.

Wahid also said it is normal for a government to receive a big chunk of its revenue from petroleum resources if it has a strong oil industry.

Petronas' dividend payout ratio to the government ranges between 30 and 50 per cent. The rate is not too high, he said.

Even at 50 per cent, Petronas is still able to invest in new growth areas and give substantial returns to the government, Wahid said.

"Now, we will increase the source and quantum of revenue by implementing GST," he added.
Neo liberal agenda?

This report basically answers an issue raised by foreign observer as reported by UK's Financial Times and highlighted in an article by PKR-covert supporter, The Edge after the general election. The article reproduced below:

No cap on Petronas dividends?
Written by theedgemalaysia.com 

Wednesday, 22 May 2013 00:00

An article in the Financial Times in March suggests that Prime Minister Datuk Seri Najib Razak will not negotiate with national oil corporation Petroliam Nasional Bhd (Petronas) on capping dividend payments.

This means the government's revenue from Petronas will likely remain unchanged at a flat RM30 billion. In 2011, Petronas proposed to cap dividends to the government — its sole shareholder — at 30% of its net profit starting from 2014 as it sought to reinvest profits in global oil and gas exploration amid declining domestic supplies.

In the interview with FT, Najib talked about the need to strike a balance between leaving enough for Petronas' investment plans and providing reasonable revenue to the government.

In fact, Petronas' net profit has been declining. For FY2012 ended Dec 31, net profit fell 17.2% to RM49.4 billion from RM59.7 billion. It paid dividends of RM28 billion, which works out to more than 50% of its net profit, compared with RM30 billion the year before.

The contribution from Petronas made up about 14% of the government's estimated revenue of RM207.2 billion in 2012. However, taking into account oil royalty and taxes, this would go up to about 40%.

Following Petronas' proposal to cap the dividend payout in 2011, there was no word on whether this would be implemented — until now, that is.

Najib's comments shed light on the government's need for oil money, especially at a time when it has been generous with handouts to the lower-income group, for example, under BR1M.

Nevertheless, the prime minister hinted in the interview that payment of dividends from Petronas could change in the future, taking into account the government's expectation of total revenue.

Assuming Najib means putting a 30% cap on dividends, that is certainly a good sign as the government embarks on fiscal consolidation. Also, as domestic reserves dwindle, the need for capital expenditure for exploration activities cannot be overemphasised.

Furthermore, when the government depends so much on this source of revenue, it must learn to wean itself from it.

It's more than just about rising income

The 2012 Household Income Survey found that the average monthly income of Malaysian households rose from RM4,025 in 2009 to RM5,000 in 2012, an increase of 7.2%.

According to the survey, urban household monthly income increased from RM4,705 in 2009 to RM5,742 in 2012, an increase of 6.6% annually, while that of rural households rose from RM2,545 to RM3,080, or at an annual rate of 6.4%.

Kuala Lumpur registered the highest increase of 14.9% — from RM5,488 in 2009 to RM8,586 in 2012. The numbers show that the income of most Malaysians has gone up.

However, whether the people, especially KL-lites, find they have higher disposable income is another matter. The cost of living has gone up significantly, especially in the bigger urban areas.

In the Klang Valley, property prices have risen steeply from 2009 to 2012 while day-to-day expenses such as transport and eating out have also shot up.

One sign that disposable income has not risen can be glimpsed from the resistance to the government's plan to reduce subsidies.

Even if the average Malaysian feels purchasing power has increased together with the rise in income, the trend is that more people are spending longer hours at work and less time with their families.

The challenge for the government is to ensure that income continues to grow and at the same time that this translates into better purchasing power and quality of life.

One way is to continue reducing leakages and channelling resources into areas where the returns are the highest, such as improving public transport and investing in a cleaner environment, higher education and improved security.

It is meaningless if average Malaysians see their income growing but having to spend more on sending their children to expensive private schools because of the the declining standard of public schools or paying a lot more for enhanced security.

The Cyprus lesson

Money in the bank? You would be better off putting it under your pillow.

That's how Cypriots are feeling after their government raided their bank savings in a deal with the EU to save the country and its banking system from bankruptcy. While it is accepted that investors/shareholders of failed companies can expect that they have to take a haircut, the idea that savers can lose part of their savings has come as a great shock to many.

Cyprus is heavily indebted with a debt-to-GDP ratio of 127% at end-2012. Only Greece's, at 153%, is higher. Cyprus' banking system, boosted by Russian money in search of a safe haven, was many times the size of its economy and credit was easy. Cypriot banks also extended huge loans to Greece and were hit by the problems there.

Any nation that is reckless in the way it manages its finances and banking system will eventually run into problems. During the 2008 global financial crisis and at the start of the eurozone crisis, it was the taxpayers who bore the brunt of bailouts. But as Cyprus has now shown, people who squirrel their money away for the future will not be spared from having to pay for those who spend like there is no tomorrow.

This story first appeared in /The Edge weekly/ edition of Apr 01-07, 2013.

In the past, the economic structure was based on maintaining low wages in order to maintain the nation's competitiveness to attract FDI. The government compensate the lower wage by subsidising basic goods, low fuel prices, free education, etc.

Subsidy rationalisation is something the people will find it hard to accept. Apart from keeping low wage for competitiveness to attract FDI, it was partly a mechanism to share the prosperity of the country with the people.

The government will have to face the criticism that the vision of high income nation has not been realised yet but the people's pocket is being heavily taxed by taxes like GST and squeezed by rising prices.

The reality we've been constantly been told is that there is no more the era of oil prices going at US10 to 15 per barrel but now at around US$100 per barrel. It is just not possible for the government allocate for the larger subsidy bill to maintain the same level of price level.

Such warning of lower Petronas payout have been coming from former CEO, Tan Sri Hasan Merican in his last days. The rationale was the need to invest in new fields and foreign exploration. Back then, there was a problem of rising cost of exploration and production. 

Government reputation will be taken a back when after much denial before and immediately after the general election that BN means "barang naik" and government borrowing is not as high that the government actions points in that direction.

Confidence with the vision of high income nation that comes with the New Economic Model will plummet.

Sceptic will say it is only relevant to those in the high income bracket like state Menteri Besar, Assembly Speaker and wakil rakyat, but not for the common man like security guard. [Read previous posting here.]

But when the whole economic transformation is looked at, it is only a convenient for neo-liberal agenda.

Although it is highly sceptical they could, but the Government's information and propaganda machine to rise to the occasion and be effective. Only comfort is Selangor's steep payhike but the propaganda could not sustain the issue more than 1 week.

Or hiding something?

In the meanwhile, Wahid's words of caution and lower reliance on Petronas seemed in contradictory with the words at the recent regional oil conference in Vietnam. The following report taken from Investvine here:
Malaysia government to cash in $43b from Petronas

November 30, 2013

Malaysia’s national oil company Petronas is required by 2020 to deliver $43 billion of gross income to the state, a company executive has said. The target may be achievable given that last year alone the company’s revenues were $95 billion, he added, according to a report in Upstream.

Vice president for exploration and production Dato’ Wee Yiaw Hin, Malaysia’s representative at the regional oil conference Ascope conference in Vietnam, told delegates at the chief executive summit that revenues were “very robust” and Petronas expects this to continue in 2013 and increase going forward.

Petronas generates much of its income from overseas assets, but there has also been success on the domestic front – Malaysia last year accounted for 72 per cent of the oil and gas discoveries in the region.

He said, however, that Malaysia is facing challenges: “The easy oil is over, meaning there is a need to be creative and innovative”.

Malaysia, through Petronas, has embarked on a three-pronged strategy.
  • Increasing production from existing assets through enhanced oil recovery (EOR). Two such pilot projects are already on stream and Tapis is set to follow in 2014;
  • New contract models such as the risk service contract (RSC) that offer solutions to exploit marginal fields. The third RSC project is due to start production by year-end. There is also the progressive volumes PSC that gives larger shares to contractors which exploit “difficult” fields;
  • Aggressive exploration.
The government has also lowered petroleum income tax from 38 to 35 per cent. In addition, there are better tax breaks for EOR projects, ultra-deepwater and high-pressure / high-temperature operations. Malaysia last year was home to 22 oil and gas discoveries with a combined 1.4 billion barrels of oil equivalent recoverable reserves.
That is an optimistic forecast for a revenue for government from Petronas at US$43 billion and at exchange rate of 3.10 Ringgit per US dollar, it translates toRM133.30 billion at current exchange rate.

The earlier reports mention stated Petronas' latest net profit has been declining to RM49.4 billion and dividends to paid to government at RM28 billion.

If this is true, it is like government is telling something to the public but holding out the truth. That will only make more distrust on the government.  

Lagi pening la Dato Shaberry Chik.


Anonymous said...

Tak yah shaberry chik. Mat maslan ada

Anonymous said...

Small National Oil Companies (Not big enough to join OPEC) will be facing challenging situations in the near future. Pertamina that was strictly domestic is now going international and will pose challenges to Petronas (they have just acquired acreages in Algeria).The same goes to other National Oil Companies such as PTT of Thailand and PNOC. Petronas should be cautious in recruiting so many exPertamina or other Indons as they may very well be still under their previous employers payroll. This is also at the behest of local Malay Technocrats.

Petronas efforts at moving into oil shale/Shale oil is mired with controversies courtesy global environmentalists. development economics is still suspect due to the immense number of wells required as a result of rapid depletion rate for each development well.

Perhaps Petronas management decided to appointed Non Bumi Upstream Heads because they are the only ones left around after the Dismissal or Migration of Bumi Expertise out of the Company. Dato Idris Mansor Former Upstream VP who is still? on the Board may want to answer to that?

Anonymous said...

Quote, "If this is true, it is like government is telling something to the public but holding out the truth. That will only make more distrust on the government"

As if you are so ignorant not to know that the majority of Malaysians have voted against the cheat and cheap UMNO government.

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