ON the 83rd floor of the Petronas Twin Towers last week, Tengku Muhammad Taufik Tengku Aziz, the president and CEO of Petroliam Nasional Bhd (Petronas), met up with The Edge for a 2½-hour interview, the longest that any CEO of the national oil company has had with us so far.
And the hours seemed to pass very quickly with humorous exchanges and banter, but with all questions answered and peppered with facts on the oil company and its direction. It was a frank and good interview.
Then again, the times they are a-changing — and for the first time since it was set up in 1974 to become the custodian of the country’s hydrocarbon resources and main regulatory body for upstream activities by concessionaires such as Shell and ExxonMobil at the time — Petronas may slip into the red. It is a situation brought about by the total collapse of the oil and gas (O&G) market and economic standstill owing to Covid-19 and impairments from the acquisition of assets a few years ago, when things were rosier and oil prices not so volatile.
And while all these challenges are looming and taking their toll on operations, there is the shareholder — the federal government — which looks to the oil company for dividends and other forms of support to help in its running of the country’s economy during the pandemic. This requires the top brass at Petronas to perform the delicate balance of meeting both the needs of the company and that of the government of day.
Quite recently as well, the O&G industry was abuzz with talk of several individuals at Petronas being investigated by the authorities for corruption — another issue Muhammad Taufik has to grapple with, as there is no longer this perception that the national oil company has high standards of integrity.
At 46, Muhammad Taufik may seem young, but his demeanour, how he handles himself, his stature, confidence and capability — how he explained the numbers at Petronas — were impressive, to say the least. And with age on his side, he could be at the helm of the national oil company for the foreseeable future, setting the direction for Petronas’ next phase of development, including diversifying into renewable energy and speciality plastics.
A Petronas scholar, Muhammad Taufik served in the early 2000s as executive assistant to former Petronas chairman Tun Azizan Zainul Abidin — the man who, among others, crafted Petronas’ mission statement to be an organisation of high integrity and professional values. The late Azizan was also the one who kick-started Petronas’ global expansion.
Five months into the job as president and CEO, Muhammad Taufik shares his experiences, views on the industry and the difficulties encountered in a Covid-19 economy and market. Here are excerpts of the interview.
The Edge: How has it been, managing Petronas, the country’s largest corporation and only Fortune 500 company?
Tengku Muhammad Taufik: The word challenging is probably an understatement. When I started, we were three months into the Covid-19 pandemic. We had already felt the full brunt of the glut in the market, combined with demand all but disappearing. So, first and foremost, was ensuring continuity of operations while maintaining our staff’s health and safety. We had to ensure that the company remains robust and strong enough to recover when the pandemic ends.
The key task for me was to take a long hard look at what we carry going into this battle. The immediate priority, after very open and candid conversations with my management team, was that we needed to reshape our portfolio because it needed to be a lot more efficient to weather this very turbulent period.
Also, in the light of what we are facing — we are standing between supply glut and demand dissipating because of Covid-19, and energy transition is upon us and no longer something on the horizon — we also realised that the most important asset, human capital, needed to be retooled. We did not have the time or luxury because it was no longer a normal energy cycle. Energy transition is just waiting to jump upon the entire industry. It was already a tough period for us but, thankfully, the government accorded us space during this time. It has been very frenetic, but it was an orderly chaos.
Your appointment basically took many, including those in the industry, by surprise. Can you tell us some background on how it came about? We were told that the PM interviewed you. What were his expectations, and yours, as well?
I’m surprised myself. What happened was, two weeks before the announcement was made leading to the transition period, Tan Sri Wan Zulkiflee Wan Ariffin (former CEO and president) had mentioned that the PM had indicated to him that he would be required to take on a different role (chairman of Malaysia Airlines), and he outlined to the executive leadership team the need to ensure succession planning was intact. I can still remember that meeting quite clearly, he was sitting in one corner and said: ‘I really think it is one of you guys.’
About two to three days after that meeting, I got a call to turn up at the PM’s office. During the meeting with the PM, he did mention he was considering candidates and my name had come up. He asked about my prior experience, what I did at PwC and my other stints outside Petronas, and if I were to take the job, what plans and what kind of portfolio I would [have]. All these answers I had to give him, and I [also] had some views on what we needed to do during the pandemic.
The PM mentioned that Petronas couldn’t stay the same. It is a key investment for the country and I would need to make sure — if I got the job — that Petronas was going to remain robust. It is a revenue earner for the country. He did mention too that he was also considering other candidates. Two days later, there was a call, to say that he had made up his mind. After considering the shortlist, it was going to be me. The board was supportive.
What was the mandate?
De-risk Petronas, make sure its stature is protected, both financially and as a robust investment vehicle. He reminded me that we also have a sort of catalytic role within the local O&G services industry. He understood why we made forays internationally as it was part of a revenue diversification geographically, but now we had to find new avenues for earnings, not just geographically, but in fact, entirely new businesses. So, it was quite a stretched mandate. We de-risk it, but we are also asked to enter a new place that we perhaps are not entirely familiar with. And at that point, I could even remark to him that we had already consciously started with step-out investments into solar, renewables, that kind of space. He said that’s good, but the core engine still needs to perform.
When the appointment was announced, people in the industry said you had the Petronas DNA in you. What actually is this Petronas DNA?
The Petronas DNA is one that acknowledges that this is not just a company. We incorporated as a company, with value creation for the shareholder at the heart of everything we do. But we also recognise that it is an institution because it carries far more than just the stature of being a national oil company. There is an expectation that we carry out a trustee role given the maximisation of the value of hydrocarbons that we have been accorded under the Petroleum Development Act 1974. We must make sure the beneficiaries and shareholders get what’s coming to them, and deliver this in a professional, clear and transparent manner. Ultimately, the realisation is that the job you get at Petronas is an amanah. You are entrusted with doing this on behalf of the citizens of Malaysia. You have to make sure you get the best bang for the buck when you spend. The late Tun Azizan did put this in the form of our shared values: loyalty to both nation and corporation, integrity at all times, remaining honest and upright, professionalism. We work together cohesively and collaboratively with not only those within the group but also with stakeholders and counterparts. So, those are the shared values that we believe to be timeless and that we need to hold on to.
You have worked under Tun Azizan and then, Tan Sri Hassan and subsequent CEOs. What was it like learning from these experienced professionals?
If I were to pick the best attributes and put them in a memoir at the end of my days ... I think Tan Sri Azizan’s was a distinguishing one. He was a man of integrity. He would behave, speak and conduct himself in the same way, the right way, and with a degree of consistency when approaching decision-making, that I think spoke to his many years in the government. He was unusually commercial for a person who had started out in the civil service, but I would say he would weigh the merits straight off and make consistent decisions, no matter what stakeholders and interest groups said to him — he could manage it. He had the ability to manage different interest groups, but the integrity shone through every time.
Of course, the legendary Tan Sri Hassan Marican, I was part of the president’s office and had to work with him. I could probably find very few names in my database to match the person’s multidimensional commercial and strategic awareness. He approached every problem from so many angles, that you’d come into a meeting with a degree of fear that you’d missed out something. Oftentimes, you had. But no matter how fierce or how commanding he was, he was always constructive. He was a little bit more accommodating to his staff, and that commercial and strategic awareness is something that I hope has rubbed off on me. Tan Sri Shamsul Azhar Abbas, probably from the time during his trading days, one thing you could pick up from him was that he was never afraid to speak his mind, and had the attributes of being bold and assertive. Tan Sri Wan Zul, I wouldn’t want to play poker with him because no matter how chaotic things got, no matter how much the world exploded around him, the degree of unflappability was there. So, from each of them, there are dimensions that I hope I could leverage, but I’ve also got to craft my own ways [of doing things] at the end of the day, because the mandate that I had described to you is not an easy one, particularly during this period.
Unlike your predecessors, you also have experiences outside Petronas, including accounting firm PwC (as well as at Sapura Kencana). What does that stint add to your Petronas DNA?
I left Petronas because I wanted to enrich my entrepreneurial and financial muscles, because there are some things in capital structuring or doing commercial deals that Petronas would naturally not embark on. Capital preservation is also a philosophy; we want to make sure Petronas never ever goes into a place where it dabbles in gambling with its core financial strength. That’s what I got during my time with other O&G services industry [companies], that is, Sapura. In order to be commercial and position yourself correctly, to ensure that you have the best cost to serve, how you finance a job, how you present your credentials, all of these need to be packaged in a very entrepreneurial way. If I were to think about Petronas today, as it moves into this solution provider’s space, it would need to absorb some of those attributes.
For PwC, the one outstanding feature that I would probably say is that ability to deal with talent shifts and evolutions of skill sets. Advisory companies and consultancies need to almost always read the curve, and they have to equip their people with the responses and analytical advisory capabilities to read market terms. It is difficult because typically, within an advisory and consultancy, you would have people who join and, while they are working, get a qualification and move on. So, the talent base always has to shift. They have a very different philosophy than Petronas on how to manage this talent ingress and egress. They have a core, they have people brought in for specialisation, they are not ashamed to admit when they don’t have it internally. They have to leverage or [strike an] alliance with someone.
More and more, as you see how the energy industry has to respond, you probably need some of those attributes, to be able to deal with aspects of a gig economy. You may not have an entirely permanent workforce. For data analytics and digital, you may have to flex some parts of your team ... Plus, this whole ability to cross-serve but ultimately give a solution for people. Yes, I did get those attributes while I was briefly outside.
What kind of Petronas did you inherit?
I returned to Petronas in October 2018. When you look at it, Petronas was always known for having very conservative financial policies. Let’s talk about it, maybe through two or three attributes — the financials, the human capital and the challenges that were given to me. We got into this period in 2018-2019 that was already showing signs that the energy industry was facing a hell of a lot of headwinds. Refining margins were on the wane, we had a natural gas market which faced a glut, the days of very high margin was probably a thing of the past. The shale producers in the US were now acting as the new swing provider for the world. This was very much a market that was going to be buyer-driven.
Financially, when we entered this period, Petronas had the foresight to always maintain a degree of buffers. We were very rigorous in testing our ability to weather challenges, plans and budget cycles, always with multiple scenarios of what ifs, what could happen. The degree of volatility we saw, over the last 18 to 24 months, was really off the charts. So, I probably inherited a group of people from the human capital perspective, for which I am always grateful, and for which any CEO coming into this role should be grateful. Petronas is made up of a workforce that doesn’t back down from a crisis. So, we have faced industry cycles before, but none as pronounced or as profound as this one, because this has really forced Petronas, along with other members of the energy fraternity, to really question the way we do things.
Does our portfolio make sense in this kind of market? Can we last if we continue to operate this way? Do I have enough dry powder to help me grow, because I need to plant the seeds for my step-outs now, but in the meantime, I have to make sure what I own and what I run still remains cash-positive and is self-funding. So, it has forced, seriously, a huge reset. The term used was the great reset of the industry. This is unavoidable; as much as I inherited something very strong, going into this period, I have to look into it and see what makes sense and what doesn’t. So, that’s what I have going into this very difficult period. Future-proofing it, at least weathering the next three years, and making sure the foundations for an energy transition are well-planted and our people are equipped for it.
What has kept you awake at night?
It is really beyond just low oil prices, beyond just a glut, beyond just demand dissipating because of the pandemic. Supply chains have been deconstructed, they are no longer going to behave the way they have before. Also, when you look at the context of countries, they use this opportunity to look at their energy policy and ask whether it makes sense. Security, reliability, accessibility, I’m facing this along with everyone within the O&G industry at a time power (cost) for solar and wind generation has dropped in the magnitude of 50% for solar and about 30% for wind. It will soon become competitive for us, if not already so, in some jurisdictions because of incentives.
Second is the longer-term repositioning I have to tackle. But from the position of immediacy, we still have to make sure our plants run at 99% reliability, we have to make sure when they switch on the lights, they come on, we have to make sure our fuel stations remain (running). So, all of these are essential services; during the pandemic, we were allowed to continue. The calls I get at night, the ones that worry me are about safety and continuity of supply.
We do get calls when clusters break. We have to work around them and it is no longer business as usual. We have to start thinking when we bring people in for maintenance at plants or when there are plant turnarounds, we have to comply with statute; DOSH (Department of Occupational Safety and Health Malaysia) requires this to be done. We have to start thinking about how we deploy these people, how we interface with our local team, how we maintain that clean bubble. This is not the way that we planned things in the past. Today, we ask: Do we need that many people onsite? Digital, analytics, our ability to deploy technologies that help us do predictive visits and repairs, now all that comes into play.
From the context of the long term, of course, I am worried that we don’t manage our liquidity properly, because as you have rightly pointed out, any entity, listed or otherwise, if it has shareholders, would want returns. Now, if I give returns to the point where my ability to grow and be a provider of sustainable returns becomes compromised, I would be giving away too much today at the cost of the future. In doing that, you must inform and educate your shareholders, and that’s a dynamic tension that you know many CEOs before me had had to deal with. We have to educate. Patterns which are unsustainable can never be good for any entity, be it privately or government-owned. If you keep taking out and forget the reinvestment requirements, something is going to go wrong with your business. It doesn’t take a slide rule to figure that one out, really.
It’s a Covid-19 economy out there. Can you describe the intensity of what you are facing now?
It’s a horror show waiting to unfold and I can’t wait for 2020 to be over. We had a period of time when WTI crude price was negative. Our Brent went down to US$12 to US$13 the day after that. There were periods of time earlier in the year when I had to sell natural gas and if I went for the spot market, it was below US$2 per MMBtu. Now, this was definitely far, far [off] any feasibility studies that were originally tasked to undertake any assessment of investments. At its worst, we had over 80% of the global workforce under lockdown. As we speak today, the number is north of 70 million cases.
Everybody within the oil-producing fraternity saw over 20% of demand just evaporate. We are still clawing back, and at the end of the day, the usual 100 million barrels per day demand has probably eroded to the 92 million to 94 million mark this year. We are expecting a recovery in 2021, but not immediately to 100 million barrels per day. So when we look at where we are and whether we are going to climb out of the depths of Covid-19, there is a great deal of uncertainty, and a great deal of guesswork being done by energy players. The best we can do is to make sure in the markets we serve, we can serve as effectively and as reliably as possible, and make sure all of our investments remain cash-positive. As far as possible, there will be some [investments], of course, given this hit, which will be a drain on working capital. But we must make sure, as far as possible, that we have this laser focus in ensuring cash flow from operations is preserved.
Given this kind of oversupply of energy during this period, for the long-term contracts that Petronas has signed, do your clients request to revise the terms?
It so happened that I was on a roadshow at the beginning of the pandemic to raise funds through the bond market, and this was inevitably one of the earliest questions that were levelled at us. [For] over 11,400 cargoes (of LNG), we have never missed a delivery. We serve the core markets of Japan, South Korea and Taiwan, and we are probably one of the most reliable partners they have — and we want to continue to be seen that way and remain a partner to the needs of these countries. I will be lying if I tell you that [customers did not ask for term revisions] … Our contracts were already innovative enough to enable us to accord the flexibility.
So we could push it out, defer some cargoes, accord some flexibility in assigning them in smaller parcels that would make up volumes later on. That’s how we had to respond. If you went on the path of force majeure — you take it or you leave it — I think you would lose customers. That’s why I started off by saying 11,400 cargoes; this is the type of customers you don’t lose, these are people who have stayed through thick and thin, and you want to make sure those relationships are preserved. We have always reiterated our commitment to serve these markets, particularly these gas customers, and we will continue to do so. They are very core to us. We delay some shipments, we manage, we push out smaller parcels, we can do a number of combinations but still work within the contract.
So what’s basically the general mitigation strategy that you are embarking on during this sort of market?
We want to talk about mitigation, we want to talk about ensuring cost to serve is contained, delivering while there still are margins. There are parts of the business [where it is] extremely challenging to do that. We also make sure [we have enough] working capital, that’s why there was already an immediate work stream triggered at the beginning of the pandemic, a work stream that I had to commandeer and report to Tan Sri Wan Zul at the time and I had to take over — it was one that was called liquidity plus, where we made sure that collection patterns, managing exposure to suppliers, tracking project deliveries were all done on a weekly basis.
We also had a pandemic response team that had to plan deployment when there were instances of people being affected or epicentres in where we operated. We also made sure that out of all these, we took lessons learnt and rolled out a digital solution, and meetings online had to be almost set up instantaneously.
We had to make sure in these circumstances continuity, reliability — which I mentioned earlier — plus the ability to fund were never at risk. Everybody turned around and said: ‘Look, it is going to be difficult to commit to a capital outlay.’ We also took a look at the kind of capex that we needed to defer in order to preserve cash. There was a target of 31% — we are on our way to meeting it. This may have implications, but opex also, the non-essentials deferred, the nice-to-haves, we are on a trajectory to cut 12%. So all of these things were declared to make ourselves stay afloat at least for this year. But going forward, I think [for] the cost over revenue proportion of our KPIs [key performance indicators], the weightage is becoming more and more. We want to make sure that when we spend and deploy, there is always a corresponding revenue, and cover it. The current ratios as well as the cash ratios, the metrics that people always track, these have become our consistent features in board conversations right now, because we need to tell them that we are managing the situation on a three-month basis. As we balance demands such as capex deployment as well as dividends, these have become far more recurring elements of board conversations now.
Anyway, for a given period of time, having spoken to people such as those in upstreams, RM16 billion to RM18 billion [is needed] just to keep the lights on. We are not going to turn around and defer anything that is required by statute; if we are committed to the production sharing contracts (PSCs) to fund our share of cash calls, we continue with that. What we do is probably defer non-essential things like, if I am embarking on a front-end engineering exercise, I can phase it so that the actual bulk [is] trickling in through an EPC contract that comes later. I can continue with the studies and design, but the hard ordering along the lead items, I rethink it. And with regard to what we can also think around, deploying nice-to-have capex, giving some people dry powder to hold on to just in case I have incidental, non-organic buys, we take that back. In certain cases, there are deferments, but we will not compromise on safety.
In general, does the rationalisation of assets and operations include reshaping Petronas’ portfolios overseas?
This is the hard question but it is a necessary question to broach. When I came into the role, we had a portfolio which was strong but as we had to weather this storm, you have to take a number of lenses in assessing these portfolios. We cannot deny that there is, at every turn, the conversation or discussion around sustainability. I am not hearing this only from bankers. When talking to customers, they want to understand, in producing for them, what the emissions are like. When I’m talking to buyers, they are asking if you are doing more electrifications, whether you are avoiding flaring and venting.
So, even in certain jurisdictions, there is going to be a lot more scrutiny around how we manage the immediate environment, how we operate sustainably and whether we are demonstrating governance. All three elements of ESG have been brought to the fore. Petronas has a footprint, including our lubricants, in close to 50 countries, but where we operate, this is now a non-negotiable discussion. They will ask. They will scrutinise.
While this happens, I have a portfolio that also needs to deliver within what the market can accept. Thankfully, there has been some recovery in the past weeks, probably driven by the vaccine news. We are approaching the US$50 mark. I have had to ask my executive leadership team to take a big fat pen, take a look at their portfolio and rank them, which one gets cut. Where do you do a cut-off, where cash from operations is still positive in a US$40-per-barrel future scenario? Once at the threshold, you need to find ways to improve and perhaps leave out the ones that don’t allow you to generate your barrel oil equivalent at a unit production cost that makes sense. If you have scrutinised our financial performance and annual reports, you will know that there is still a healthy chunk of our revenue and profitability that emanates from the domestic market.
Internationally, we probably have a bit of a mixed spectrum. The cost advantage is not as much as at home, which is why the capex will still point to a tilt that is heavily domestic because it makes sense to churn more money into something that is going to generate cash. But we will have to take a long hard look at our portfolio. But in certain jurisdictions, if it cannot be turned around under a future price of US$40 per barrel, I have to go back to the board.
There are other halfway measures. We could partner with people who can help us operate lower. So those solutions are not yet explored in full because we need to know how our assets perform after this real torrid period, but we have to make that decision very quickly, because what we don’t want is to continue to carry a portfolio that keeps dragging.
What are examples of assets that you are looking at?
I don’t want to allude to any assets specifically, but for unit production cost in Malaysia, I can comfortably say that we are still in the mid to high teens, depending on the degree of difficulty of the production. Mid to high teens gives us sufficient head room in today’s economy. Internationally, there are some [assets], where to get it to market as a producer, we also have to suffer tariffs and processing fees. So it is not just an ex-well head cost [but] the total cost where they make it prohibitive to get to market while you are cash-positive. I don’t want to specify now because I don’t want to cause alarm in certain constituents that we operate in but the business model, from a cash perspective, not any other lens, will mean that we can’t continue. We’re going to have to keep drawing down because at this price, we won’t be able to cover everything.
How soon are these decisions going to be made?
There’s pressure already at every level because capital is scarce. I would rather redeploy it to where I am going to get back cash; this is why domestic will get that healthier share. I think for the five-year horizon, we are looking at 55% to 56% still going into domestic, even at the current lenses. I’d like to say that we’ll be able to get sanction decisions by the board in the first quarter, but I think it is going to be an ongoing exercise. This is not going to be something that is done at one go. We will have to look at it as the market situation evolves.