Our rebuttal to Petronas

Dr Dzulkefly Ahmad,

10 June 2013

The government and Petronas’s responses to our call for audit of Petronas’ businesses and tendering processes in Malaysia have been evasive at best and pathetic at worst.

Evasive because they tried to deemphasize the real reason of our call for the audit of by putting blames on constraints in disclosing information about their international ventures. Pathetic because the way they responded gave an impression that it was not well-thought of.

It has failed to give any good excuse why an audit is not needed; it has also failed to convince that Petronas upholds high level of integrity and transparency.

Our new minister in Prime Minister’s Department, Paul Low has obviously not read well the 2013 Resource Governance Index (RGI) which is readily available on Revenue Watch Institute (RWI) website when he attributed Malaysia's ranking drop from 22nd spot in 2010 to 34th this year to Petronas' overseas agreements disclosures.

It is either that he has not understood the context of the report, or that he is trying to evade and deflect the entire issue by blaming governance or the lack of it in foreign countries Petronas has invested.

In either case it is both embarrassing and disappointing, especially because the newly-minted minister has been helming Transparency International Malaysia in the past and is now expected to enhance integrity of a ‘perceived’ corruption-embattled administration.

The RGI is a country-by-country report card; it measures the quality of governance in the oil, gas and mining sector of 58 countries. It does not measure the quality of governance of a national oil company (NOC) of one country in another country. Via the Petroleum Development Act (PDA) 1974, Petronas is  the de-facto owner, custodian, and regulator of upstream oil and gas in Malaysia; hence when one talks about governance and integrity of upstream oil and gas industry in Malaysia, it goes without saying that it is all about the governance and integrity of Petronas.

In the context of RGI ranking, discussion about Petronas is essentially about its role within Malaysia; very little to do with its operations outside the country.

It is also extremely regrettable that even Shamsul Azhar Abas, the President of Petronas, is unable to grasp the level of transparency required for a national oil company (NOC) with authority and monopoly such as Petronas, when all he aspires is to have the same disclosure standards as Exxon-Mobil or Shell. It has to be more than that.
Reasons?

Well, Petronas being the sole custodian of this immense wealth is morally answerable to all its stakeholders, essentially every single citizen of Malaysia. It has various added responsibilities as a public listed company, which Exxon-Mobil and Shell do not have to bear.

It has the obligation to ensure that it operates businesses in the most efficient way, with lowest total cost of ownership (not merely lowest initial capital expenditure of CAPEX) and  highest yield amid  fair and transparent contract distributions as well, as to enable  grooming of local oil and gas service and technology providers to become global champions.

There is no doubt that Petronas has been performing financially well, which entitles itself annually as a Fortune 500 company. Isn’t that expected of a company that holds the sole monopoly of the most lucrative natural resources the country possesses?

Any company that is bestowed with such monopoly should do at least reasonably well, if not always eminently outstanding. But how well is well? Couldn’t it do better if it has better governance, is more transparent and more efficient? How efficient and transparent is Petronas when benchmarked against peers such as Norway’s Statoil, or Brazil’s Petrobras?

The  real performance can only be evaluated   if the discerning sections of the public are allowed  to dissect deeper, and obtain secondary-level information such as the unit production cost (UPC), unit development cost (UDC), total initial cost of each contract, total cost of variation orders, crude and refined  products trading procedures among other things.

Oftentimes, the ups and downs of these indicators can be directly attributed to strength or weaknesses in executing works due to competency and performance of selected contractors and subcontractors.

As an example, Petronas must disclose why does its subsidiary Carigali has to pay for the non-performing time of the Kencana-Mermaid 1 (KM1) drilling rig owned by SapuraKencana when most of the faults were clearly attributed to the inefficiency of the contractor. It has to allow external auditors to examine basis for awarding contract to Kencana-Mermaid, basis of rates agreed in the contracts and the loopholes made available in the contract, whether intentionally or not, in order to facilitate subsequent variation orders.

Similarly, Petronas must also disclose how much variation orders it or its Production Sharing Contractors (PSCs) have paid to SapuraKencana via its subsidiary TLO for the various marine installation contracts which have been almost a near-monopoly for the last few years. It has to tell all Malaysians who are its stakeholder, what is the evaluation criteria used in the various tender evaluation exercises that has allowed SapuraKencana to keep on winning contracts despite of high variation orders and below average performance.

It has to disclose the contract terms and conditions for external auditors to ascertain the weaknesses and loopholes that have caused hundreds of millions in variation orders. Petronas must explain why it has failed its fiduciary duty as the sole custodian and de-facto regulator of upstream oil and gas to nurture other local companies to compete with SapuraKencana in these areas so that the people and the country can get the highest value for the money we have entrusted to Petronas.

We stress that every directly negotiated and sole-sourced contract awarded by Petronas must be audited. Open tenders must not be spared as well. Evaluation criteria and contracts’ terms and conditions must be opened for scrutiny.

Lopsided contracts must either be amended or annulled and retendered. We propose that the audit is conducted by the National Audit Department, supported by independent and qualified technical support team. The final report shall be made available for deliberation and debate in the parliament.