Kelvin Tan Assoc. Director Performance Management and Delivery Unit (PEMANDU) Prime Minister s Department, Malaysia 1
Discussion Outline Overview of Petroleum in Malaysia Petroleum and the broad economy Managing Petroleum from a Policy Perspective Lessons learned 2
Malaysia s Oil and Gas Industry Today Central to Malaysian Economy Oil & Gas contributes approximately 20% of Malaysia s GDP A large portion of the 20% are contributed by E&P activity, and a small portion by services or manufacturing Production has declined and are mostly from matured brown field development New developments are getting more difficult i.e. deeper water, HPHT, high H2S and CO2, etc. 3
Strategy for Sustainable Development of the Energy Sector Taking Malaysian Industry to the Next Level EPPs SUSTAIN Continue domestic Oil & Gas production 1. Enhanced oil recovery 2. Develop small fields 3. Increase exploration activities GROW Grow in downstream 4. Create a regional oil storage and trading hub 5. Unlock latent gas demand through LNG import 13.Increasing petrochemical output Make Malaysia # 1 Asian hub for oil field services 6. Encourage investment in oil and gas industry (DDI + FDI) 7. Local companies successful in going overseas 8. Attract MNCs to bring global operations to Malaysia DIVERSIFY Build alternative energy capabilities 9. Reduce energy bill through energy efficiency 10. Build up solar power capacity 11. Ensure best practice nuclear deployment 12. Drive industrial growth in Sarawak with big hydro 4
Petroleum Clusters in Malaysia Multiple Opportunities for Local Industry Lumut Fabrication of offshore/ onshore structures Kerteh/Kemaman Offshore supply base for Peninsular Malaysia Petrochemical hub Sarawak Fabrication Oilfield services Refinery Petrochemical Tanjung Agas Marine Services ship repair, structure repair Kuala Lumpur HQ s of major OFSE Engineering Companies PD and Melaka Refineries and Lubricant Blending Regasification (Sg Udang) Gebeng Petrochemical South West Johor (Tg Bin/ Tg Pelepas) OFSE manufacturing hub Pengerang/Pasir Gudang Petrochemical hub Fabrication of offshore/ onshore structures Installation companies Sipitang Industrial Park SAMUR Labuan Offshore supply base for East Malaysia 5
Malaysia Benefits from a Long Petroleum History Present Day Early Years (Pre-independence): 1910 1 st Oil - Miri, Sarawak 1917 world s longest underwater pipeline developed (14,500ft) 1917 1 st Malaysian refinery (Lutong, Sarawak) Post Independence 1957 Independence 1974 Petroleum Development Act (Formation of PETRONAS NOC) - Federal government and states relinquish control of upstream petroleum resources to NOC - Production sharing contract environment ~600kb/d liquids production ~1000kboe/d gas production Mature petroleum province Multiple refinery, petchem plants Strong push for extracting added value from resources: - Enhanced oil recovery - Marginal fields - Regional oil storage strategy - Oilfield services hub strategy - Expand domestic fabrication - Encourage international JVs - Expand petrochemical ind. 6
Generically: Petroleum Affects the Economy at Multiple Touch-points Petroleum Production Government Take Local Content Profits Remaining Incountry Development of downstream industries Benefit Taxes, royalties, dividends and other levies on petroleum production Taxes on ancillary industries / employees Direct industry jobs / enterprises Indirect (supporting industry) jobs Ancillary activity due to rising consumption Petroleum company profits reinvested incountry Local company profits which cascade throughout the economy Development of downstream industries e.g. petrochemicals, fertiliser, etc. Challenge Designing an appropriate government take to incentivise industry and ensure a win-win for the host country Host country citizens may not have the capabilities needed to get the highest value jobs Profits remain incountry only on condition that new viable investment opportunities exist Rate of development of downstream industry is limited by demand for industry products, resultant economies of scale etc. 7
The Malaysian Approach to the Petroleum Policy Environment PETRONAS is the asset owner for all upstream petroleum acreage IOCs operating in Malaysia do so under the framework of production sharing contracts Local content is driven by the need for vendors to the upstream industry to be licensed by PETRONAS (irrespective of who is the operator of the field) 8
Licensing a Vendor in the Malaysian Petroleum Industry Local Company Local Company Joint Venture 9
Agency vs JV: Pros and Cons Agency Pro Fast to set up Local partner added value is relationships and local knowledge Local partner requires limited access to finance etc. Con Local partner may have limited incentive to move up the value chain Agencies may shift suddenly on a project-by-project basis Joint Venture Pro Deeper local capability development Local partner and foreign principal are more tightly bound together Con Deeper JV partnerships may also require capital injection from local partner Matching process may take longer 10
Internationally: Petroleum Industry Size Creates Policy Challenges Example from the Literature Source: Exporting the Norwegian Model : The effect ofadministrative design on oil sector performance Thurber, Hults, Heller 11
Lessons Learned Choose an industry governance model which suits the institutional capabilities and legal framework of the country. If capital is a constraint, choose a local content development model which favours the development of capabilities among individuals. A local content development roadmap is a good idea. It should take into account maturity of the industry and individuals to ensure realisation of the benefits. 12
Thank You For more information on Malaysia s National Transformation Program, please visit our website http://www.pemandu.gov.my Kelvin Tan kelvin.tan@pemandu.gov.my 13