This article first appeared in Corporate, The Edge Malaysia Weekly, on May 2 - 8, 2016.

DATUK Wan Zulkiflee Wan Ariffin, or Wan Zul as he is popularly known, was said to have been handpicked by Tan Sri Hassan Marican to be his  successor when he retired in 2010. But the job went to Tan Sri Shamsul Azhar Abbass instead.

The speculation then was that Wan Zul was too young for the post. Now that he is 55, that is no longer the case, but the appointment could not have come at a worse time as the oil and and gas industry remains  battered by low prices.

The Petronas veteran acknowledges the minefields in his path. But the harsh climate, he says, could give him more leeway to implement reforms in the national oil corporation. 

The Edge: It’s been one year. How has the journey been so far?

Datuk Wan Zulkiflee: It’s been slightly more than one year. In April of last year, Brent crude — I’ll talk about oil prices first — was US$56 per barrel when I first assumed this post. Since then, it’s been a rollercoaster ride. It [crude oil] touched a low of US$27 in January and today, it’s US$43 to US$44 per barrel.

It’s a real test for the whole industry. It’s a structural shift for the industry, and for Petronas, we are responding to the environment. What we do not want to do is waste a crisis and not learn from it, so we are looking internally on how to improve. We’re looking how we can be more efficient in doing business. So, this has been the focus in the last few months.

We launched Project Cactus, where we look at cash generation, simplifying procedures and project delivery. Those are the first three, which are more for short-term responses. For the longer term, we are spending a lot more time on talent and technology development and to strengthen the culture of the organisation and our strategic response to the whole crisis.

Many things have changed. Today, slightly more than 50% of our staff are less than 35 years old and slightly more than 20% are non-Malaysians. I think people also forget that [being a multinational] there are about 11,000 staff in Petronas who are non-Malaysians. Overall, about 28% are women. The demographics have changed since we first started in 1974. The leadership style will need to adapt to these changes for the whole organisation to be effective.

Going forward, we intend also to look at what we can do to make the Malaysian oil and gas industry more efficient.

Petronas is a 42-year-old organisation. What kind of Petronas did you inherit?

We started off being purely a regulator, then we expanded our business to being a domestic player by having a subsidiary in the upstream and the retail business. In the early 1990s, we ventured overseas. So, it has been an evolution. What is key is that the leadership at the time — and the present — always takes a long-term view of the business. This is very important in the oil and gas industry.

So, over the years, we’ve expanded in a measured way. Today, we’ve got operations in some key geographies. For instance, in Asia-Pacific, we have big operations in South Africa, the Caspian, and of course, in Canada, with our recent acquisition of gas assets there. Others include North Africa [and in the Middle East, Iraq]. We are not all over the world but in selected geographies [with overseas operations in about 35 countries].        

Petronas is 42 and I have spent 33 years in the organisation. I grew up with the organisation. There is a very distinct DNA in Petronas, in terms of the organisation and its staff and the values that we subscribe to — loyalty, professionalism, integrity and cohesiveness. This unique DNA, I think, differentiates Petronas from many of its peers.

Today, it is still a very strong organisation, where the majority of them [the staff] really give their best. This includes Malaysians and non-Malaysians. Our role will be to keep on track our long-term objectives and goals.

So, is it about managing success?

We have been successful but what I can also say is that our success and resilience are being tested in a way that they haven’t been before.

This is a cyclical business, so you get ups and downs. But when you look at the various cycles, in most of them — with the exception of the late 1980s to the early 1990s — the dips were only for a few months before the market came up again.

This time around, we are being tested by the lower and longer price scenario. This is where the resilience of the organisation is really being put to the test. Our role here is also to prepare an organisation that can withstand the test of time in terms of all these challenges and work on a new normal (a low price environment).

The psyche of the organisation needs to be different, crude oil at US$100 or US$110 … and now US$30 or US$40. At the US$30 to US$40 price range, our psyche is that we have to be efficient. We have to be lean. And it is easier to get that kind of behaviour now than in a US$100 environment. So, we are being tested in a very different way today.

You mentioned that in the past cycles, the oil price dipped only for months, but this current one is longer than expected. With expansion and investment (continuing), does it put more pressure on Petronas, compared with the previous cycles, like those in the late 1980s and early 1990s?

This is a long-term business, so if the cycles are short, you can [easily adapt]. Today, our challenge is more in cash management. A very important piece is the cash that we get from our operations.

So, if the cycle is short, the dip in our cashflow will not be severe. So, for a few months, the cash flow from our operations comes down but later in the year, for instance, we catch up … so, it doesn’t significantly affect our capex programme. But if it stretches longer, for up to four or five years, then our cash flow will really come down and this is where the resilience bit comes in. For Petronas, we are in the period where we are investing a lot ... Our capex programme is high.

And one feature that is in all of these big projects [like RAPID, the US$16 billion refinery and petrochemical integrated development project in Pengerang, Johor] is that, once you are in it, you have to follow through. You can’t have a project that takes five years to complete and when you’re in the second year, you [say you] don’t want to do this … so that’s why making the final investment decisions are so crucial. You must have a view of what your cash flow, your financial capacity over the five or six years, will be.

That’s the test we are going through now. That’s why it’s important for us to really have enough financial capacity to complete the projects that we have started … and which we have. So that’s why in terms of going into new projects, we need to be very careful and prudent. Consequently, there have been some cutbacks in our projects upstream, for instance, and this affects the local oil and gas industry.

Oil and gas is a cyclical business, so did you expect the downturn to be this bad?        

I don’t think the industry saw or anticipated the price to be this low for such a long period. It caught the whole industry by surprise. That is why you see many companies downsizing and big projects getting cut back. Australia, for instance ... 

If the industry had anticipated this, probably the investment decisions and the psyche during the years of US$100 oil would have been different. 

So what’s your reading of the oil price?

I don’t have a crystal ball but I think it’s prudent for us to be conservative. For this year, we are planning for US$30 Brent. But don’t get me wrong, today it’s US$44 but when we say US$30, it’s an annual average. So far, the annual average has been about US$34 to US$35. People get distracted when it spikes for one day or two, but to us, it doesn’t make a difference, it is the annual average that we are looking at.

So you anticipate a lower oil price and you are working in a US$30 environment? 

We are working in that environment. We think that it is conservative enough. So, all our projects and cash planning is based on US$30 oil. Any upside will be a bonus.

At US$30 a barrel, what would it mean to your financial performance, in terms of earnings? And more importantly, how does that impact your ability to pay dividends to the government?

There are two different things … this is what we planned for. The things that we do, projects that we invest in, and how we want to control our expenditure, are based on US$30 oil.

But the actual [price] could be higher and I hope it’s a lot higher (laughs). This actual price is what really dictates our ability to pay dividends and to do other things, but as an organisation, we need to plan and we think that US$30 is a conservative plan.

If our annual average drops lower than US$30, then we need to be agile enough to change our plans, to adapt and do more to face the different depths of the crisis. So, it’s important that our executive leadership deep dives into this — what would be our plans. It involves a lot of scenario planning.  

Do you have a breakeven point — an average price — where projects and operations become profitable?         

It’s difficult and it is a moving average. Now, we have shut down some wells where the unit production costs were high. If the oil price goes down, more wells will be shut. What we need are fields that are profitable … that’s the plan.

What’s the scenario for the next three years?  

We expect a slight increase in the oil price but nothing too fancy. We are budgeting for US$42 a barrel next year — based on today’s market. The message is we have very conservative planning, so that we push ourselves, where we can do more, and how we cut our opex and capex. This is to ensure that we will not be caught by big surprises. That is the philosophy that I would like to take for the organisation.

Do you think we’ll see US$100 oil again? The shale equation changed the whole market scenario.

I don’t know, but given the trends, I don’t think we may see it in the next few years. But now, a lot of shale companies are going through bankruptcy. The dynamics in the Middle East between big producers like Saudi Arabia and Iran will have a big impact.

So now the whole organisation accepts that the US$100 days are over?

Yes, we don’t have a choice. You look at the late 1980s to the early 1990s, when the oil price went down very low for a few years, then you saw a steep return … very steep. Normally, when it is a short dip, the comeback is gradual but when you have a really long period of low prices, most companies will hold back on their investments and there will be a point where demand cannot be met. These projects cannot come onstream overnight. If you study the industry’s history, the longer the duration of low oil prices, the steeper the increase will be.

At the back of our minds, we need to position Petronas to be ready for that situation. That is why as much as we cut back, we do take a longer-term view in some of these [programmes]. RAPID, for instance, is one of the biggest projects that the organisation has undertaken, in terms of complexity, magnitude and funding.

We will continue … Of course, there is a small scale back at the tail-end projects within RAPID. It’s a deferment. But we will continue with it in anticipation that we’ll be ready when the [high] prices come back. 

It’s quite a tough process, deciding which project to continue and which to abandon or put on hold. Of course, it’s a long-term view, but what are the key criteria or priorities that you look at?

Very easy. We look at the money that we have for upstream and downstream. Then, we rank them and, of course, take into account profitability. Let’s say we have 12 projects. When capital allocation is a problem, maybe we will drop to five projects. We have a ranking of projects based on resource allocation — both financial and talents to run the projects.

So it’s not like ‘this project needs more money, so we chop it’?

Sometimes, if it costs us more money but it gives us better returns and we have the capacity to do it, we will continue. But sometimes, even if it’s a smaller investment but the returns are low and because we have criteria such as profitability, index and all that … it will still not get the money. So, it’s capital allocation in the true sense.

Are local projects given priority?

For local projects, a few things govern [the process]. First, we intend to maintain our current crude [oil] production … If we don’t do anything, we get a 10% to 12% depletion, this is natural depletion. People forget that in order to maintain crude production, a lot has to be done, otherwise every year, there will be a decline in production.

On the gas side, we look at the markets, in terms of what is the liquefied natural gas (LNG) market [mostly for exports] and what is the Peninsula Gas Utilisation (PGU) market, which is domestic. We need to meet the market requirements for both domestic and exports. That is not an option. For domestic gas, if we can’t get from offshore, we’ve got to import LNG via terminals. So, the development of our projects will essentially depend on our crude production target and demand for gas.

Being an integrated oil company … are you in a better position to face the current situation? Looking forward, do you want Petronas to concentrate more on gas or strengthen its integrated business?         

I come from the school that believes in an integrated model. So we’ve got upstream … we’ve got, to a certain extent, midstream and downstream businesses. It has been proved — at least to me — that this model provides natural hedging. That is why you see — looking at our numbers last year — we did a lot better than some of the international oil companies, which are very heavy on the upstream.

Our numbers show that we are No 2 to ExxonMobil … [in terms of] PAT (profit after tax). Of course, there are impairments and all that, but we are No 2. This integrated model has proved to be useful for us, especially during these times. We may want to do some tweaking in terms of our portfolio. With the completion of RAPID in the next few years, it means our portfolio will be a little heavier on the downstream. But, by and large, Petronas is still an exploration and production (E&P) company.

For the E&P portfolio, we’ve got gas and crude. Today, we are at around 70% gas and that will be the percentage in the next few years. If there are opportunities, I would like to increase crude’s percentage. Because crude is easier to monetise, it’s faster compared with some of the gas projects that take a longer time to monetise.

So you may go more aggressively into oil?

If you ask me … yes.   

Based on the assets, you can call Petronas a gas company?

Yes, today, we are very big on gas, around 70% is gas. But going forward, maybe if there are opportunities, I would like to increase the oil portfolio.

Talking about gas … There’s a lot of news coming out of Canada, so what is the actual status and position? (see accompanying story)

First of all, we are just a partner in that venture … we are the majority partner but there are other partners. Today, what we are waiting for is an environmental report. So, once we receive this final report — we have seen the draft — we will know exactly the conditions that are being imposed.

When conditions are imposed, they could have a bearing on the cost of the project, so we will take another look at the economics and the overall project again. We will make a decision once we see the impact on the schedule, costs, the markets and how we anticipate the markets to be.

So there’s a possibility that you could walk away from it?

I would really like to clarify ‘walk away’. We have a big gas asset there. Today, we are producing gas for the domestic market … that is half a billion cu ft.

Production has already started?

Yes, so there is no ‘walking away’. We have the gas and we have a lot of proven reserves there. It’s not exactly apple to apple, but in general, you can say the Canadian reserves are about 25% of the reserves we have in Malaysia. So, that’s how big the Canadian gas resources are. We have big reserves there that we can monetise.

What we are talking about is just the LNG plant, whether we proceed with the plant as designed or we find other ways to monetise the resources. The resources, our assets, are in the ground. How do we monetise that? We are already selling in the domestic market. We’ve got a proposal to build an LNG plant, but the fact is, we will monetise the gas somehow.

So Canada was not a mistake …

Canada is not a mistake. The resources are long-term assets. Being a large integrated oil company, we need an organisation that is sustainable in the long term. We are a big gas player and we need reserves to continue being a big player. I’m very bullish on the LNG market and [because of the impact of climate change] it will be the preferred fuel of the future.

The low oil price environment often presents opportunities for oil companies to look for distressed assets. Is Petronas looking at any?

Other than Shell’s acquisition of British Gas (BG), there has not been many mergers and acquisitions (M&A), the reason being the difficulty in predicting future prices. There is a very big gap in terms of expectations of the buyers and sellers. The buyers will be saying that the oil price will continue to remain low for a long time while the sellers will say it will pick up.

So, if you look at the statistics — and I’m not talking about the petrochemicals sector, which has seen active M&A — in terms of pure E&P companies, this is the scenario we have. For Petronas, any opportunity must fit into our strategy. We’ve got some geographies that we want to focus on and we need to see if we have the financial capacity to undertake our plans there.

When the consolidation takes place locally, will Petronas be at the forefront or will you leave it purely to market forces?

Consolidation is more on the services companies. I have talked about it in the past. The current state of the whole industry is that it’s not efficient. Too many players and small players who don’t have the size and critical mass to do bigger things. So, in the next few months and probably towards the end of the year, we hope to do an internal study to facilitate this consolidation. There will be a blueprint.

How will you do it? Will you become a matchmaker?

No, no, no … you know that registration is part of the Petroleum Development Act (PDA). We will be looking at the options we have internally, including registration. The study is ongoing, we will probably have a clearer picture at the end of the year of how we’d like the industry to be. And the whole intent is just to make it a more efficient, lower-cost and competitive industry.

We can’t sacrifice competence and competitiveness but there will be more opportunities for us to give priority to local players. It is not a blanket rule, but whenever we can, and wherever there are players who are competitive and who have the competence to deliver, we will give priority to the locals.

Would Petronas consider taking in players that are going belly up?

Except for MHB [Malaysia Marine and Heavy Engineering Holdings Bhd], which is a subsidiary of another … we don’t intend to be in the oil and gas service industry.

So the consolidation could be a challenge for yourself? 

Politically, it will be, but I think we just have to give it a shot because that’s the right thing for the industry. We have to take it one day at a time.

Are there any new capex figures?   

Our planning and budgeting process is a very dynamic one. The thing that really affects us is the crude oil price, but don’t forget forex. We always talk about budgets in ringgit, but the equipment that we buy is denominated in US dollars, and the ringgit today is 3.89 [to the dollar], so that’s why we have a very agile planning process that takes into account all these factors.

This year, our capex will be slightly below RM70 billion. And it is an ongoing process to reduce our opex. We are trying to keep our opex the same as last year, despite all the increase in business.

I think the whole behaviour of the organisation will have to change and pay attention to details. If we want to drill a well, we have to think about how we can save. Where our vessel will go and which route it will take. How many chopper flights a day? Can we share a chopper with other contractors so that we can save on fuel? So, it’s really about paying attention to details.

We want to make individuals really accountable for every ringgit they spend. It’s so that Petronas will come out stronger after the crisis.

How has the response been?

I’m quite encouraged. In the organisation, people are anxious. We had our separation exercise and the organisation is now structured differently. The company accepted the whole exercise in a very sensible way.

Do you see more of such separation exercises?

I think the trimming of staff should be an ongoing and natural process. Those who don’t perform or are not aligned, those who do not share our values, or have integrity issues — we need to take them out of the organisation.

The general perception is that getting a job in Petronas is like getting life-long employment.      

That’s the thing I want to change. You can’t take your job for granted. If you don’t perform, there’s a chance that you won’t have a job in this organisation. It must be merit-based. We’ve placed a lot of emphasis on meritocracy and that’s why our performance assessment will get sharper. And we will reward our staff accordingly. 

Recently, you announced that top executives will not get an increment whereas the lower-rank employees will. How did you come up with this? 

These are challenging times. The leadership team should set an example. We have cut back on opex. You probably wouldn’t believe this but last year, we cut opex by 23%. It’s only right for the leadership team to forgo an increment this year.

How have talks, especially on dividends, with your shareholder been?

The shareholder — the government — understands and takes a long-term view. You normally have a top and bottom band, that’s the negotiation piece. But you show your numbers — this is how my cash would look like if I pay this much and this is what I need to invest. And this is why I want to continue investing. It’s all backed by figures.

We do it in a very transparent way — we share our plans for the next five years. The Ministry of Finance’s representative on our board is fully aware of what we want to do in 2019 and 2020. The government understands the business and the implications of decisions that it makes.

So, the shareholder wouldn’t mind getting lower dividends?

That you have to ask the shareholder, don’t ask me.

It’s all pointing to a lower dividend …

But the implementation of the GST (Goods and Services Tax) helped. It was timely. It kind of helped the shareholder.

Your impairment figures for the last two financial years were very high. What does that indicate?

We want to be prudent, these are non-cash items, so last year alone we impaired close to RM17.7 billion and in 2014, RM23 billion. We want to be prudent and, of course, when the price comes back up, we can always write back.

Your impairment is for equipment and investment. Would you like to share more with us? Actually, there is speculation that Petronas’ impairment is because of the Canadian project.

I have to check specifically about the Canada project but we have not made a decision on it yet, so we have not invested in the LNG plant, but we will continue to supply the domestic market.

There are probably some issues. For example, the quality of the asset may not be as good, so that is also reflected in the impairment numbers. As we go along, we will spend more time high-grading our portfolio. But I think some of the impairments may be receivables from overseas operations, we wrote off something.

Do you think you will have to borrow to finance your capex and dividend payments?

If you compare us with our peers, our ratings have not been affected. With the exception of ExxonMobil, the rest were all down. That says something about our cash generation and all the ratios that they look at.

We have a very agile and nimble planning process now. We are able to raise [funds] — if we want to — in a short time. But for the rest of the year, we will continue to monitor the situation and see how the oil prices move. We don’t have immediate plans [to raise funds] but we will be able to do so in a short time.

You are confident that Petronas will emerge as a stronger organisation after this crisis?

If we get support from the organisation, at least the leadership team. And we are confident that these are the things that need to be done, both to address the current crisis and also to prepare to make the organisation stronger. What is important is the support of everyone in the organisation and also the various stakeholders.

We think these are the right things to do — both Project Cactus and the focus on the culture — to make people more accountable.

Throughout the interview, you have been talking about cutting costs, capex and opex. What is the implication on your non-oil, non-core spending such as education, corporate social responsibility and the Malaysian Philharmonic Orchestra?            

I would say only profitable companies can get themselves involved in CSR.

That’s a strong statement …

That’s my view. You can’t be big in CSR if you’re not making money. But having said that, we will continue — with due respect, we have the capacity to do so — and you will not see a cut in our scholarship and education programmes. I feel strongly that these are long-term investments. Education is big for us. [Petronas run a university and a few training institutes.]

We will continue to sponsor the MPO as it’s a part of Petronas. Of course, we have lowered our contribution but we will still continue to support it, though it needs to find other ways to raise funds. We will still give to KWAN [national heritage fund Kumpulan Wang Amanah Negara]. We remain the only contributor to the fund today [other resourced-based industries are supposed to contribute]. Last year, we only gave RM100 million. It was a difficult year, but we still gave.

Since you took the helm, what you have encountered? Was it within your anticipation?

I didn’t know that we would be taking a RM17 billion impairment (laughs), and to be honest with you, I expect this year and next year to be just as challenging, if not more.

And the whole challenge for Petronas is because the oil price fell, cash flow dropped and we were undertaking big projects. So it’s a confluence of these factors … this is the unique situation we are in. If we didn’t have big projects, it would have been a different set of actions.

If you look at the past four or five years, it’s been a record capex commitment. I think we’re doing okay, we have adopted the right strategic responses. Now, we have to stay the course. Petronas takes a long-term view. It doesn’t really matter that leadership teams come and go, the journey continues.

But the Petronas DNA was sort of threatened when the oil price was at US$100?

You are right. At that time, there was a lot of emphasis on production growth. It’s what we chased for, but we hope to work more on the corporate culture … staying the course is important. It’s not only Petronas that is being impacted by the high price. It’s the global oil and industry as well. A lot of inefficiencies crept in because of the high oil price.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.