This article first appeared in The Edge Malaysia Weekly on December 17, 2018 - December 23, 2018

NATIONAL oil company Petroliam Nasional Bhd (Petronas) has been in the news a lot lately, for a number of reasons. Last week, for instance, it issued its annual activity outlook report for 2019 to 2021 to share its views on industry trends, demand outlook and activities, and to assist the industry in strategising and managing its resources better and making sound investment decisions.

Then, at the end of last month, it announced its financial results for its third quarter ended Sept 30, chalking up an after-tax profit of RM14.3 billion on revenue of RM63.9 billion — an improvement of 43% and 19% respectively from the previous corresponding period. For the cumulative nine-month period ended Sept 30, after-tax profit hit RM41 billion — up 50% from a year ago — while revenue strengthened by 12% to RM181.1 billion.

But not all of it was mundane news. Last Wednesday, for example, a relatively senior member of The Edge received a message suggesting that Petronas president and group CEO Tan Sri Wan Zulkiflee Wan Ariffin, popularly known as Wan Zul, could be replaced soon.

“It seems there is a high-level meeting every Thursday evening (among some of the current bearers of power in government) and they have set their sights on Petronas. They are trying to get their man (their nominee) to helm Petronas,” the message read.

But then again, rumours that Wan Zul is being replaced have been circulating since Pakatan Harapan came into power in May and made changes to the corporate lineup of several government-linked companies (GLCs). Wan Zul’s contract with Petronas, which is wholly owned by the government, was renewed for three years from April 1 this year.

Still, the speculation intensified in October after Petronas chief financial officer Datuk Manharlal Ratilal, who is better known as Datuk George Ratilal, was replaced by PricewaterhouseCoopers Malaysia partner Tengku Muhammad Taufik Tengku Aziz (who is a former employee of the national oil company) at a week’s notice. The announcement was made by Putrajaya, or the Prime Minister’s Office to be exact.

A couple of weeks later, Finance Minister Lim Guan Eng announced that the government’s revenue for 2019 was RM261.8 billion and included a one-off special dividend of RM30 billion from Petronas, over and above the regular annual dividend payment (see chart).

This caused much speculation as well and many pertinent questions were raised as to whether the special dividend payment would adversely impact the oil company. Petronas’ response was “given its strong fundamentals and liquidity position that is driven by the transformation efforts in the last few years in the areas of operational efficiency, cost reduction and portfolio optimisation and supported by improved oil prices, the company is confident that the special dividend payment will not in any way impede our ability to service debts, fund our ongoing operations and invest in future growth”. But this did little to curb the market talk.

In July, Petronas chairman Tan Sri Mohd Sidek Hassan, a longstanding civil servant, stepped down and was replaced a month later by Datuk Ahmad Nizam Salleh, also a former high-ranking executive of the company.

The story in the oil industry is that Ahmad Nizam had been in the running for the top job since February 2010 when Tan Sri Shamsul Azhar Abbas took over as president and group CEO from Tan Sri Hassan Marican. This brought up questions as to how influential Ahmad Nizam would be as chairman of Petronas.

Yet another notable departure from Petronas was that of independent non-executive director Datuk Mohd Omar Mustapha. Perceived to be a close associate of former prime minister Datuk Seri Najib Razak, he tendered his resignation a few weeks after Barisan Nasional lost the general election.

Petronas, which had cash and cash equivalents of RM175.31 billion and reserves of RM402.04 billion as at end-September this year, is the country’s only Fortune 500 company and has always been at the forefront of Corporate Malaysia. A well-managed institution without any financial scandals, it has been an integral part of the Malaysian government since its establishment.

Last week, The Edge’s Azam Aris, Kathy Fong, Jose Barrock and Adam Aziz had the opportunity to have a frank and insightful exchange with Wan Zul on how things are at the oil company. Here is an excerpt from the interview.

The Edge: The new government indirectly means Petronas has a new shareholder. Is there a fresh mandate from the Pakatan Harapan government with regard to Petronas’ operations? Or is it business as usual?

Tan Sri Wan Zulkiflee Wan Ariffin: The nature of the business is always long term. Thus, our strategies and execution plans are based on really long-term [projections].

As far as Petronas’ long-term strategy [is concerned], it will still be the same. We would like to stay the course. We will tweak our strategies over time but that will be driven by market forces and business requirements. I believe there isn’t a significant change in terms of mandate. We will continue to be responsible in how we shape the Malaysian oil and gas industry.

So, there isn’t much change?

There isn’t much change in terms of operations. We have a three-pronged growth strategy, which was developed after the oil price challenges (drop in prices) in the last few years. We have started some strategic responses and we believe the organisation is more resilient now and has a better culture of accountability. The three-pronged growth strategy is to maximise our cash generation, extend our value chain and step out into renewable energy and speciality chemicals. This is the long-term strategy and we can’t be tweaking strategy every quarter or every year.

Have you had any discussions with [Prime Minister] Tun Dr Mahathir Mohamad about Petronas’ operations?

Yes, we brief Dr Mahathir regularly, at least every month or even more.

Has he indicated the direction he wants Petronas to take or whatever important tasks he considers a priority [for the group]?

At the moment, I think he is — at least to my understanding — comfortable with what we are doing. He has not instructed any major shift.

There is a perception that the appointment of the chief financial officer was prompted by the government. We are wondering if there is any sort of interference or whatever you may call it?

Normally, appointments are made by the company and the announcements are also made by the company. We have succession plans and board governance processes in place. Of course, this appointment was made by the Prime Minister’s Office (PMO). After the appointment, I did write to [Dr Mahathir] to explain the processes that we have in place, and also our succession plans. Of course, this was after the event.

I think Dr Mahathir understands fully. We brief the board every six months on our succession plans for critical positions. This is something the board pays a lot of attention to, and rightly so. But having said that, it is my job to make sure the new CFO performs and succeeds in his role.

Did the appointment catch you by surprise?

Well, the notice given to me was short, yes.

With the new government, we have seen changes to the board and new people coming in — the chairman, the CFO and a few others. Will more new board members be appointed?

Like on any effective board, you need different skill sets. We have guidelines and procedures on the selection of board members. Every year, we appoint external parties to assess the effectiveness of our board members individually and as a group.

For Petronas’ main board, [the process] started recently. But for our subsidiaries, for our public-listed companies (PLCs), that [process] has been in place for some years now. These results are presented to a board committee known as BGRC (board governance risk committee). The processes that we have in place, in my view, are best in class; they are in accordance with all the corporate governance recommendations.

And in line with best practices, we also have a maximum of nine years for any non-executive board member. And we strictly adhere to this. Non-executive directors cannot be on the board for more than nine years. There are some members who will hit the nine-year limit next year, so there will be new faces.

Why nine years?

This is the recommendation of the Malaysian Institute of Corporate Governance.

What is the reason for the departure of [former CFO] Datuk George Ratilal?

You will have to ask the PMO.

It was not like his contract was ending ...

No.

Market talk is that you may not remain in your position for long either.

The appointment of the [Petronas] CEO and president is by the prime minister. So, I am very clear that I serve at the prerogative of the prime minister. As long as I am in this position, I will do my best to discharge my responsibilities and duties. And it goes deeper than just discharging my duties. This is very much in line with the concept of amanah or trust that we have in the organisation. When you are in a position of trust, you discharge your duties and responsibilities according to that trust. This concept of amanah is at the very core of the Petronas DNA.

Has there been any indication of your status in the group? Your contract has been extended this year.

No indication, unless you tell me. I have not heard anything from the prime minister.

How then has the journey been for you as the president and group CEO of Petronas?

It has been slightly over three years now. It’s very challenging but I must say it’s also very exciting. When I assumed the position, there were challenges in terms of prices (oil prices were dropping). So, we had to do a few things as a matter of strategic response to market conditions.

We had the opportunity to do it, so we did it. Some were painful. But I think today, we are a more resilient company. And the fact remains that price cycles are inherent characteristics of the oil and gas industry. This cycle is not the first and it will not be the last. It will come and go. That is why I felt compelled that the organisation, and also the Malaysian oil and gas service industry, should ride out these hard times. That is why we had to do what we did.

I am happy that we paid a lot of attention to culture; there’s a better culture of accountability in the organisation. And along the way, despite the difficult times, there were a few milestones — we commissioned our floating liquefied natural gas (LNG) facility (the first in the world) and had RAPID (the refinery and petrochemical integrated development in Pengerang, Johor) sanctioned. It is now 97% completed. We expanded our upstream footprint into Mexico, Argentina and, hopefully, Oman in the coming weeks.

That is why I said it is important to stay the course. You can’t react to daily oil prices. We must have the capacity to do the things that we want to do, which is why I think prudent cash management is key.

On that note, will the RM30 billion special dividend announced for the government this year have any impact on the company?

It has been mentioned many times by the Ministry of Finance (MoF) that it is a one-off. But this is not the first time Petronas has given the government special dividends. What is important is that we have the capacity to fund our operations, service our debts and, most importantly, finance our future growth. These are the things that are important to any organisation.

Then, we have extra capacity and we would like to return value to our shareholder (the government). And in this case, it has been mentioned by MoF and several other government officials that this special dividend is for the reimbursement of the Goods and Services Tax and income tax refunds. I thought this was important and that the money would be injected back into the Malaysian economy. And because we are in a position to do so … that is how we agreed to that.

In which years did Petronas give special dividends?

In 1982, 2004 and 2008.

Were those upon the government’s request or at Petronas’ initiative?

I am sorry because at the time, I [was not the president], so I cannot confirm.

Was the RM30 billion special dividend a request from the government?

Yes.

But the amount was not as big in the past, right?

Petronas’ size was not that big [either]. The other fact is that we were in a position to issue the special dividend because of the efforts we put into transformation. If you look at our cost, we optimised our portfolio as we went along, so it was also a result of what we had done. We had the capacity to do it.

Your cash pile is over RM170 billion. The special dividend plus the annual dividend is about RM54 billion. This is slightly less than one-third of your cash pile. Have you had conference calls or meetings with bondholders or rating agencies?

Rating agencies, yes. As you know, there was no downgrade in our ratings. We are at A1 for Moody’s and A- for S&P (Standard & Poor’s) and Fitch. Only Moody’s outlook changed to ‘negative’ but there was no downgrade after the announcement of the special dividend. That is reaffirmation of our credit profile.

Critics say in terms of government revenue, there is an overdependence on Petronas and the oil and gas sector ...

I’m not sure what overdependence means but if you look at government revenue today, oil-related revenue is at about 20%. In 2009, this was 41%. The fact is that it is going down.

Has the government given any commitment that it will not ask for any more special dividends?

It has been said that this is a one-off. I have always believed that we have a responsible shareholder in the government. They are represented on the board, so they know what our plans are. They know about our growth programmes. They know the budget required to fund these programmes. I believe they will continue to be responsible in terms of not jeopardising the company’s operations and growth programmes. We do what we can. And the shareholder understands that this is a long-term business.

When the government asked for the dividend, did it state that it would be used for the reimbursement of GST and backdated tax refunds?

In our discussions, yes. So, a lot of people will accept it because it is like pump-priming ...

RM30 billion back into the economy. That’s how I understand it. That’s how I see it.

Was this proposed directly to the Petronas board? Was there an option for Petronas to avoid it?

There were discussions between the management and the shareholder before it was brought to the board. There were a lot of prior engagements between the MoF and our side. Once we agreed and once we decided the number was doable and would not affect [the company], only then did we bring it to the board. That’s the practice every time. The management will not bring to the board something that it thinks is not doable.

Some quarters in the oil and gas industry are unhappy because Petronas puts the squeeze on them, affecting their margins, and then gives RM30 billion to the government ...

It was painful for many players in the oil and gas sector when the prices went down. But I will give you our internal metrics — our PBT margin in 2016 was half what it was in 2008. So, you tell me, what would have been the right response by the management? I can’t just do nothing.

And this PBT margin [in 2016] was after our intervention, after Project Cactus, after we looked at our costs and how we could simplify things and deliver projects differently. After all this, it was [down by] half. Imagine if we had just been a bystander and done nothing. We had no choice. We had to intervene. At the same time, we can’t be — if the whole industry is reacting and responding — an outlier.

We are price-takers for our crude, our diesel, our petrochemicals … we don’t set the prices. It doesn’t matter where a petrochemical is produced, whether it is in the US or Indonesia. It is the same price [in the market] for that particular petrochemical. It is a commodity. That is why we needed to do [what we did] so that we were as competitive. It was not just painful for the service providers but also Petronas. What is important is that we need to have an industry that is resilient to these cycles. They will come again, and we should be better prepared. That was the whole rationale, to be resilient as a whole industry.

Domestic players also fear that Petronas will reduce its capex for the local market in view of the high dividend to the government ...

If you look at our capex, every year, it ranges from RM40 billion to RM50 billion, even during the difficult times. Many of our projects have long gestation periods. Whether we say go or no go, [depends on] how we think the oil price [will perform] in five years’ time. When we sanction a project, it [depends on] our view of the prices of the related products in five years because that is when the project will be completed and the products are rolled out.

You can have a look at the Petronas Activity Outlook, which we produce every year. It is something new that we are doing. It gives visibility and transparency of our plans to the industry. While we are not bound by the plans, they are an indication. We are trying to balance our capex and projects so that we have fairly constant work activities.

People talk about money, about funds. For Petronas, it is also about optimising our human capital. If we peak in projects, we need more engineers, project managers for one or two years. I pay as much attention to the talent required to deliver these projects as to capital. I always believe in balancing the work activities because I think we can do better with the people, the money and the time we have. That would be my approach to projects. It is not about peaking — I don’t think that will be good for the service providers, the banks and all those involved in the value chain.

In terms of Petronas’ contribution to the government (and state governments) — dividends, royalties, taxes and duties — is there a figure from 1974 up until now?

It is huge because I believe since day one, Petronas has been a responsible resource manager. We try to maximise value for the shareholder.

Our calculation shows that it has exceeded RM1 trillion.

I am not surprised.

There has been talk about listing Petronas. Is it just market talk?

Firstly, it is a shareholder’s matter. There has been no serious discussion about this with the management.

The government needs to raise more funds to pare down its debt and so forth. So far, has there been any indication from the shareholder that maybe Petronas should consider an IPO of some of its assets, say, its lubricant business?

We have subsidiaries. We have five listed subsidiaries (Petronas Gas, Petronas Dagangan, Petronas Chemicals, MISC and KLCC Property Holdings). But there is no indication from the shareholder.

What about the sale of stakes in any of Petronas’ listed entities to raise funds for its shareholder?

No. First, is there a need [to sell]?

The shareholder may need more money …

The shareholder gets money from the dividend that the holding company gives out.

So, whatever listing route taken in the future will be through the subsidiaries?

It’s a shareholder’s matter. I have to speak as the management. This is not a management’s matter. It is the prerogative of the shareholder. What I can say is that there is no serious discussion with the management on this topic.

Would you like to offer your view on that?

No, it’s a shareholder’s matter.

There is a lot of fake news out there about the organisation being squeezed by the government to raise revenue. That’s why we had to ask that. So, for Petronas, if there is an IPO, it will be through a subsidiary?

Like I said, listing Petronas is a shareholder’s matter. All I can say is that there’s no serious discussion on the subject. And in whatever we do, we can fund our operations, service our debts and finance our growth. Over the next five years, our capex will be about RM240 billion, in line with the RM40 billion to RM50 billion set for each year.

People have brought up the issue of corruption in Petronas. One name that came up is Petronas Trading Corp, which has huge revenue but small trading margin. Is there an issue with corruption?

We don’t tolerate corruption — this is in the company’s DNA. We have our code of business ethics, we have a no-gift policy, and we have a chief integrity officer seconded from the Malaysian Anti-Corruption Commission who reports to me. We have a whistle-blowing policy.

So, I think all are in place. My point is, we definitely don’t condone [corrupt practices] and we will act against any employee who is found to not be in line with any of these guidelines.

PetCo is not a full-fledged trader. It does more system-balancing today, which means that if we are short on crude at any one time, it goes out. Of course, it is our face in the market and deals with hundreds of counter-parties that need to meet our criteria. And now, there’s KYC (Know Your Customer). All those are in place.

As it is a trading company, I am not surprised about its thin margin. Volume is a lot but the margin is typical of a trading company. We don’t condone it. If there’s anything, we have all the [structures in place] and we will fully support any investigation and cooperate with MACC.

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