Petronas Tired of its Role as Malaysia’s Piggy Bank

The Economic Times

KUALA LUMPUR: State-owned oil company Petronas is tired of being Malaysia’s cash trough. Its growing pique at the government flared into public view in early June at the World Gas Conference.

Chief executive Shamsul Azhar Abbas took to the stage and declared that the government’s policy of subsidising fuel was plain wrong. A murmur ran through the crowd – his boss, Prime Minister Najib Razak, was sitting in the front row.

Moments later, Najib went to the podium himself to remind everybody that the subsidies – for which Petronas foots the bill – have “social-economic objectives.”

The subtext of that rejoinder: Malaysians pay among the lowest electricity rates and petrol-pump prices in Asia. While the government has vowed to “rationalize” that, it’s highly unlikely to happen before elections expected in a few months.

The polite but pointed disagreement was the latest sign of assertiveness from an oil company that prime ministers have treated as a piggy bank for pet projects since it was established in 1974.

Interviews with current and former officials and an examination of Petronas and government documents show that strains have been building behind the scenes over how much money the company hands over to the government in the form of fuel subsidies, dividends and taxes.

Financial data reviewed by Reuters show the government has increasingly relied on Petronas’s payments – a “dividend” to its sole shareholder – to plug fiscal deficits that have begun to alarm ratings agencies and analysts.

The data also show these payments grew over the past several years as oil prices soared, along with government spending. But Malaysia’s official accounts do not show how the money is being spent – and the government has steadfastly refused to disclose any details about that.

“WE NEED CASH” Petronas is Malaysia’s largest single taxpayer and biggest source of revenue, covering as much as 45 per cent of the government’s budget. Unlike other oil-rich nations such as Saudi Arabia, Norway or Brazil, Malaysia runs chronic, large budget deficits that have expanded even as oil revenues increased. Last year’s fiscal gap, at 5 per cent of gross domestic product, trailed only India’s for the dubious distinction of biggest in emerging Asia, and it may widen this year.

Subsidies account for a big chunk of the deficit. They have other downsides as well, Shamsul noted in his speech to the gas conference. “Subsidies distort transparency, reduce competition and deter new investments,” he said, adding that Petronas paid between 18 billion and 20 billion ringgit ($5.75-6.35 billion) a year to subsidize gas consumption.

Malaysia isn’t facing a fiscal crisis. Foreign investors eagerly buy Malaysian government bonds, confident the country’s reserves of oil, gas and foreign currency are deep enough to ensure the debt will be repaid.

That faith will be tested over the next few months. Falling oil and gas prices will likely constrain Petronas’s 2012 profits, and a worsening euro-zone crisis may hurt the country’s exports. Smaller Petronas payouts and slowing economic growth would pinch government finances.

Shamsul argues now is an opportune time to pursue foreign acquisitions on the cheap as Malaysia’s domestic energy supplies deplete. On Thursday, the company announced it was acquiring its Canadian joint-venture partner, Progress Energy Resources Corp, for $4.7 billion. More may be in the offing.

“Mind you, for that to happen, we need cash,” Shamsul said in his speech.

The trouble is, the government needs the cash, too.

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