Sunday, October 25, 2009

Stop Bleeding Petronas Dry

This statement was released before the budget was announced on Friday by Datuk Seri Najib Abdul Razak. Unfortunately, there's no measures mentioned in the budget to prudently manage our oil wealth.

The Government must not bleed Petronas dry or kill the goose that lays the golden eggs

The Government has over the past decade funded the drastic increase in budget expenditure and its corresponding deficit with the phenomenal increase in oil and gas revenues from Petronas, as a result of the sharp increase in global petroleum prices which increased from a low of US$16 per barrel and hit the peak of US$150 in July 2008.

The contribution by Petronas to Federal Government has hence increased from RM19 billion in 2004 to RM43.9 billion in 2006 to an expected RM67.8 billion in 2009. In percentage terms, oil and gas revenue constituted 20.1% of Federal Government revenue in 2004, and this reliance increased to an estimated 43.5% in 2008. This contribution comprises of dividends, taxes, royalties and export duties payable to the Federal Government.

In fact, for 2009 in dividends alone, Petronas increased its dividends by 25% or RM6 billion to RM30 billion from 2008 despite a 14 per cent decline in net profit to RM52.5 billion due to lower crude oil prices and higher operating costs.

On top of this, royalties are also paid to the state governments, with the exception of Kelantan, which amounted to RM2.3 billion in 2004 and increased annually to RM6.2 billion in 2009.

The resulting impact is that there is a drastic reduction in retained profits by Petronas for its reinvestments. Reinvestments by Petronas is imperative as the Malaysian oil reserves are expected to only last for another 20 years or so. Without the necessary reinvestments, whether to discover new oil fields in Malaysia or to secure oil production rights in other oil producing countries, Petronas which is currently ranked 80th largest corporation in the world by Fortune 500, will be with inevitable decline.

However, due to the increasing contributions to the increasing appetite of the Federal Government, the amount of retained profits for reinvestment has declined significantly over the past few years. The percentage of retained profits for future investments has declined from 42.5% in 2005 to 31.2% in 2007 to on 21.1% in 2009 (see Table 1). This trend is extremely alarming as most of the oil majors in the world such as ExxonMobil, Royal Dutch Shell, Texaco and ConocoPhillips retain more than 50% of their annual earnings for future investments.

Table 1: Petronas Profit Utilisation 2005-2009 (in billions)
(Click for table a larger image)

The reckless increase in the Government's operating expenditure from RM80 billion in 2004 to RM161 billion in 2009, and the resulting need to sustain and maintain our big government has resulted in the inevitable temptation to dip into the Petronas coffers. What is worse is when the monies are abused and used for wasteful expenditures as highlighted in the annual Auditor-General's reprot. The outcome in the longer term be killing Malaysia's goose that lays the golden eggs.

We call upon the Prime Minister to announce in the 2010 budget measures and legislation to ensure that our golden goose gets the necessary protection and will not be recklessly abused.

1.We should set a medium term goal of Petronas retaining at least 50% of its profits for future reinvestments.

2.In addition, even the revenue contribution to the Federal Government must be managed and controlled to ensure that the windfall revenue are invested in economically productive and necessary sectors such as human capital, renewable energy and green technology.

3.In better economic times when the growth rate is above 3% per annum, at least 20% of these contributions should be “saved” in a National Stimulus Fund for use during economically challenging times.
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