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Out of Asia . . . oil firm that aims to conquer the West

The Times: Out of Asia . . . oil firm that aims to conquer the West

By Carl Mortished

July 03, 2004

A toehold in Wales is just the start for Petronas, a state company with global aims

YOU cannot see Milford Haven from the 82nd floor of the Petronas Towers in Kuala Lumpur. For Tan Sri Mohamed Hassan Marican, the chief executive of the Malaysian state oil company, whose office floats above the clouds, that must be a disappointment. As far as he is concerned, the horizon already extends as far as the Pembrokeshire coast.

Earlier this year Petronas acquired a toehold in Britain, joining BG Group and Petroplus, a Dutch company, in a project to erect a new piece of industrial kit on the site of an old refinery in the Welsh estuary.

Petronas is putting up almost a third of the cost of the regasification terminal, a facility that will take LNG — gas that has been liquefied by chilling it to minus 160 degrees centigrade — and restore it to its gaseous form for delivery into Britain’s gas pipeline grid. With its financial interest, the Malaysian company is getting half the initial capacity of the terminal — an opportunity to unload some 2.2 million tonnes per year of frozen gas from the cryogenic tanks of strange ships hailing from Africa, the Middle East and South-East Asia.

This is the energy of the moment — gas liquefaction is old technology but it has become cheaper and vital as gas supplies in the United States and Northern Europe begin to peter out. And as demand for LNG soars, Petronas emerges as a company of the moment. It operates the largest LNG plant in the world in Sarawak on the island of Borneo and owns the biggest fleet of LNG tankers. Still , the Petronas chief wants to expand his empire further. Hassan is looking west; he no longer regards Petronas as just an Asian company, supplying fuel to Japan, Korea and China. He wants to ship gas into the Atlantic, supplying Britain, Western Europe and the biggest energy market in the world, the US.

“We have been in the LNG business for the last 20 years and there has been tremendous growth,” Hassan says. “Now, it has reached a plateau in our traditional areas (in Asia). The opportunity has come up to be a player in the the Atlantic basin and an opportunity to invest in Britain.”

Coincidentally, the opportunity to move west emerges at an anniversary and a critical political and strategic juncture for Petronas. Next month the company celebrates its 30th anniversary, and this week it announced record net profits of more than $6 billion (£3.3 billion). That celebration is tempered by the recognition that Malaysia’s oil and gas dowry is finite. Last year gas reserves fell, and at current output levels Malaysia has 18 years of oil production left and 34 years of gas.

Malaysia is undergoing political change: a new Prime Minister, Abdullah Badawi, has taken over from the idiosyncratic Dr Mahathir Mohamad. The former leader became notorious in the West for his periodic fulminations against imagined enemies, such as Australians (“descendants of convicts”), Jews (“who rule the world by proxy”) and British Cabinet ministers (“homosexuals”). But Mahathir forged Malaysia’s blend of Islamic nationalism and multiculturalism, a bizarre political brew that appeased the ambitions of Muslim Malays without alienating Chinese and Indians, whose business skills lifted Malaysia from backwater to regional economic power.

At the apex of this economy sits Petronas. Just as Mahathir’s politically incorrect ministrations served Malaysia well (his refusal to abandon exchange controls helped Malaysia to survive the Asian financial crisis relatively unscathed), Petronas confounds those who insist that privatisation is the only model.

“They are ahead of the game,” says Gavin Law, an analyst at Wood Mackenzie, the energy consultancy. “Petronas is one of the few state oil companies that have shifted up a gear.”

Petronas has exploited two opportunities: technology transfer from its joint venture partners, such as Royal Dutch/Shell, and politics. Within the energy industry Petronas is sometimes referred to as the Islamic oil major, building an international exploration business that produced 344,000 barrels per day last year, representing more than a fifth of the company’s total output.

“They have played a religious and regional card,” says Law. While Mahathir urged his South-East Asian neighbours to stand together against Western imperialism, Petronas was forging business links with nations that Washington regards with apprehension, if not outright distaste. “If you look at the Petronas portfolio, it is focused on countries others cannot go to or places where they can play the Asian or Islamic connection.”

Examples include Burma, where Petronas has taken over the Yetagun gas project from Premier Oil, a British company that suffered a never-ending harangue from the Foreign Office over its investment in a pariah state. Likewise, Sudan, a “difficult” country racked by civil war but one that is rich in hydrocarbons. Petronas has established a major position in Sudan, while Talisman, a Canadian oil explorer, was forced to sell out, unable to cope with a tidal wave of accusations that it was feeding the conflict.

The Petronas chief is not keen on the Islamic tag: “If that was the case, we would be strong in the Middle East,” sayHassan says. But what keeps Petronas out of the Gulf is Opec’s national oil companies, such as Saudi Aramco, which jealously guard their oil reserves from interlopers. Instead, Petronas focused on Africa, initially riding on the coat-tails of Mahathir’s support for Nelson Mandela. Petronas is now a controlling shareholder in Engen, a big South African oil refiner with 1,400 petrol stations.

Unlike the Opec states of the Gulf, Petronas has been pragmatic, offering production-sharing agreements to Western oil majors, deals that have enabled Petronas to inherit valuable assets and technology, such as Malaysian LNG, the vast plant at Bintulu in Sarawak. Initially built by Shell, it is now run by Petronas and has expanded, shipping 23 million tonnes of frozen gas every year to Japan.

The unanswered question is whether Petronas will be allowed to continue its independent journey. The company is a cash cow that has been milked in the past. It bailed out Proton, the Malaysian car manufacturer, and rescued a failing financial company, Bank Bumiputra. Its balance sheet supported the construction of Petronas Towers, a property development that struggled to find tenants. But even with these distractions Petronas is kicking sand in the faces of rival state oil companies, such as the strike-bound Petroleos de Venezuela. Perhaps its best guarantee of independence is its chief executive, Hassan Marican. “He carries a huge amount of credibility,” Law says.

Hassan briefly entered the frame as a candidate to run the Iraqi National Oil Company, but his ambitions, he says, are strictly for Petronas: “To be efficient and to be recognised as comparable to the majors.” It sounds plausible.

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