Business News

Wednesday, 20 January 2016

Petronas’ new biz model


National oil company to make hard decisions to improve efficiency and reduce cost

PETALING JAYA: To tackle the fallout from the falling oil price that is now below US$30 per barrel, Petroliam Nasional Bhd (Petronas) is looking at a new business model to improve efficiency and reduce cost.

In a note to staff released late Monday evening, Petronas president and chief executive Datuk Wan Zulkiflee Wan Ariffin said the top management has made a strategic decision to begin a review of its business operating model for better efficiency in response to external environment.

“This review will result in a change to our existing organisation structure, the details of which I hope to be able to share with you in March. At this time, we have yet to determine how the review and structure change will affect our workforce,” he said in a note assuring the staff that all possible options would be looked at to ensure there was the right balance between the welfare of the employees and the best interest of the business.

Petronas hadstarted its cost cutting measures since the last quarter of 2014 when it became apparent that the price of oil will be on a long term decline. Last year it cut 30% in its capital expenditure (capex) and 20% off its operating expenditure (opex).

There are no figures as to what this amounted to but Petronas generally spends more than RM60bil per year for its capex.

Wan Zulkiflee said Petronas would be cutting up to RM50bil in capex and opex over the next four years and would defer some of its projects as it goes through yet another round of cost cutting.

The national oil company currently has some 51,000 employees and had previously said it remained committed to its capex of RM350bil over the next five years.

It has not been easy for Wan Zulkiflee who took up the top position in April last year replacing Tan Sri Shamsul Azhar Abbas as he has had to deal with a period of fast-falling oil prices. For instance earlier this month, Wan Zulkiflee told the press that crude prices could average US$$30 a barrel this year, just two months after the company was assuming an average price of US$48 a barrel.

In the memo, Wan Zulkiflee mentioned that it was time for some difficult and drastic decisions to be seriously considered. He has alluded that this included shedding manpower, which the company has already started with the cutting down on those who were on contract and not in criticial positions.

On the change in Petronas’ business operating model, the memo said that it had yet to determine how the review and structure change would affect its workforce.

Petronas which used to be the Government’s biggest source of revenue, has seen falling oil prices reduce its dividend payments to the Government over the last few years.

When it announced its third quarter results last Nov, Wan Zulkiflee had mentioned that Petronas would be cutting its commitments to government coffers to RM16bil next year, down 38% from RM26bil in 2015.

The lower oil prices has also forced the government to revise its Budget 2016 which was based on Brent Crude at US$48 per barrel. The revised Budget is to be announced next week.

Towards this end, the Minister in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar clarified yesterday that next week’s recalibration of the Budget 2016 would incorporate measures that involve a higher optimisation of spending in view of the reduced revenue.

“We cannot simply use the term ‘austerity measures’, but what we are looking for is to optimise or stretch our spending. We are not cutting spending simply for the sake of cutting spending,” Abdul Wahid said.

“With lower expected oil revenue, we have to optimise our spending by focusing on projects with high economic impact,” he said during his keynote speech at Standard Chartered Bank Malaysia Bhd’s Global Research Briefing 2016 yesterday.

Wahid said only 14% of the Government’s revenue for 2016 was from oil-related revenue compared to 19.3% in 2015.

“The Government would continue to work on its fiscal consolidation measures to diversify government’s revenue,” he said.

Wahid said the Government would also be announcing the country’s targeted gross domestic product (GDP) growth for 2016 next week.

The Government has earlier targeted Malaysia’s economy to grow between 4%-5% for 2016.

“Overall, Malaysia’s is in a better position to ride through the global uncertainties,” he said, adding that the ringgit is currently trading below its fundamentals.

Petronas’ cost-cutting measures are nothing new considering oil majors around the globe have been slashing jobs and staying away from major investments as the price of crude continuously test new lows.

Companies like British Petroleum said it would cut 4,000 jobs, while Shell has announced 6,500 layoffs.

The global rout in oil prices is worsening especially with Iran’s oil sanctions being lifted on Sunday.

Market surveys have suggested that Iran could scale up production to 400,000 barrels per day by the end of 2016.

Tags / Keywords: Oil & Gas , Petronas , Wan , Zul , capex , opex

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