Malaysia’s oil journey

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Striking huge amounts of commercially viable oil has often not meant automatic riches for a country. Many nations have fallen by the wayside to the resource curse where the abundance of oil and gas (O&G) resources has never translated into long-term economic prosperity.

Malaysia’s handling of those precious and finite resource has, however, been an example of how to do things right as its industry has become one of the more prominent ones across the globe and has spawned a thriving upstream and downstream business involving hundreds of local companies and creating tens of thousands of jobs locally.

But success for Malaysia was not overnight. Careful planning from the onset coupled with effective legislature has led to the efficient management of the country’s O&G resources.

Perhaps one of the most significant milestones in the growth of the industry was the passing of the Petroleum Development Act of 1974 (PDA).

Prior to the PDA, oil majors such as Shell and Exxon had the rights to explore and extract O&G in Malaysia under a concession programme. In return, the Malaysian Government received royalties and tax payments.

To ensure the country and its people benefit the most from these resources, the Government realised that having a bigger say in its O&G resources was the way forward.

Backed by the PDA, Petroliam Nasional Bhd (Petronas) was established to manage all of Malaysia’s O&G resources and since then, the Government and Petronas have worked together to develop the country’s O&G industry.

The success of its endeavours has been apparent. Petronas is the only Malaysian Fortune 500 company and one of the largest gas producers in the world.

Under the Act, Petronas is the responsible authority for licensing third-party contractors to participate in the exploration and production of petroleum in the country.

This has led to the birth of production sharing contract (PSC), the format Petronas has chosen to follow in the exploration and production of O&G with the oil majors instead of awarding concessions projects.

The PSC is a joint venture between Petronas and oil majors, where both share the profits and costs in the exploration and production of O&G.

To date there are over 100 awarded contract areas, operated by 26 operators such as Petronas Carigali, Shell, ExxonMobil, Murphy Oil and Repsol.

Supply of services

It’s with the PSC that Petronas has been able to play a role in the country’s (O&G) business and grow over the decades since its incorporation.

Monies received have allowed the national oil company to create offshoots in the industry, spawning local businesses that have benefited from the multiplier effect of Petronas’ capital expenditure (capex) for the Malaysian O&G industry.

The national company also oversaw the licensing of services and equipment providers operating in the industry, from the peddling of nuts and bolts to the higher-end services such as fabrication, chartering and engineering.

Towards this end, Petronas’ growth has been matched by the overall O&G industry, having more than 4,000 registered service providers comprising international oil companies, independents, services and manufacturing companies that support the needs of the O&G value chain.

That number is five times larger than that of Norway, which has only around 700 O&G services and equipment (OGSE) players.

The development of the O&G value chain supports the country’s aspiration to become a regional O&G hub by 2020.

Until the eighties, Malaysia’s OGSE sector initially started out as agents or the middleman.

To develop national champions, the government and Petronas worked together to facilitate the growth of the OGSE sector.

During the period between 1987 and 1997, Malaysia enjoyed annual economic growth rates of around 8% to 9% and stunning broad-based economic development. It was a golden era for the economy which was important in escaping the resources curse.

To capitalise on this economic boom, efforts were designed to cater to the growing O&G industry but also to develop sectors such as manufacturing, construction, services and agriculture.

As growth broadened, Petronas’ role was focused on the development of local players, even to the extent of supporting them overseas.

The success Petronas achieved during the 1980s and 1990s allowed it to emerge as one of the largest gas producers and exporters of O&G.

To ensure the country’s future energy supply and cater to growing domestic energy demand, Petronas embarked on international business expansion in the 1990s.

That strategy has put Malaysian companies in the international arena through the encouragement of Petronas to have local OGSE companies partake in various international ventures.

Today, Malaysian OGSE companies not only compete in the conventional upstream O&G activities, they have honed the capabilities and acquired the necessary technologies to venture into more complex and challenging works such as deep water, high carbon dioxide, marginal fields and enhanced oil recovery (EOR).

The ambitious programme to take on marginal fields and EOR projects for example, will not only extend the economic life and maximise long-term value of the country’s maturing and smaller fields, it will also increase the competitiveness of local O&G service providers by honing niche capabilities and technologies.

To develop marginal oil fields, international players were required to work with local partners for the latter to learn new and innovative approaches to economically and efficiently extract O&G from these fields.

Petronas has introduced the risk service contracts (RSC) for development of marginal oil fields.

Petronas’ capex over the decade has resulted not only in enriching the companies but also in creating global companies, such as Sapura Energy Bhd, Scomi Group Bhd and Uzma Group Bhd.

Nonetheless, despite the deliberate strategy to add value in local O&G industry, the main challenges at that time was investment, technology and talent.

To overcome those obstacles, Petronas introduced a slew of initiatives including creating a sizeable work scope that made projects more palatable and affordable, as well as an incubation programme called Vendor Development Programme (VDP).

The programme, which was introduced in 1993, was designed to boost local participation in the industry, especially by the small and medium enterprises (SMEs) to become more competitive and to encourage the development of locally manufactured technologies.

The goals were to develop SMEs to be more competitive and progress from basic jobs to complex ones and eventually graduate to undertake jobs in the open market locally and regionally.

Under the programme, Petronas guided and set up requirements needed for the SMEs to skill-up their capabilities to meet the industry requirements.

Since its inception, 99 companies have been appointed as Petronas VDP vendors.