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Kelvin TanAssoc. Director

Performance Management and Delivery Unit (PEMANDU)Prime Minister’s Department, Malaysia

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Discussion Outline

• Overview of Petroleum in Malaysia

• Petroleum and the broad economy

• Managing Petroleum from a Policy Perspective

• Lessons learned

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Malaysia’s Oil and Gas Industry Today

• 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.

Central to Malaysian Economy

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Strategy for Sustainable Development of the Energy Sector – Taking Malaysian Industry to the Next Level

GROWDIVERSIFY

SUSTAIN

1. Enhanced oil recovery

2. Develop small fields

3. Increase exploration activities

Make Malaysia # 1 Asian hub for oil

field services

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

Build alternative energy

capabilities

4. Create a regional oil storage and

trading hub

5. Unlock latent gas demand through

LNG import

13.Increasing petrochemical output

Grow in downstream

Continue domestic Oil & Gas

production

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

EPPs

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Petroleum Clusters in Malaysia – Multiple Opportunities for Local Industry

Kuala Lumpur▪ HQ’s of

major OFSE▪ Engineering

Companies

Pengerang/Pasir Gudang▪ Petrochemical hub▪ Fabrication of offshore/ onshore

structures▪ Installation companies

Lumut▪ Fabrication of offshore/ onshore

structures

Kerteh/Kemaman▪ Offshore supply base for

Peninsular Malaysia▪ Petrochemical hub

Labuan▪ Offshore supply base

for East Malaysia

Gebeng▪ Petrochemical

PD and Melaka▪ Refineries and Lubricant

Blending▪ Regasification (Sg Udang)

South West Johor (Tg Bin/ Tg Pelepas)▪ OFSE manufacturing hub

Sipitang▪ Industrial Park▪ SAMUR

Sarawak▪ Fabrication▪ Oilfield services▪ Refinery ▪ Petrochemical

Tanjung Agas▪ Marine Services – ship

repair, structure repair

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Malaysia Benefits from a Long Petroleum History

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

Early Years (Pre-independence):

1910 – 1st Oil - Miri, Sarawak

1917 – world’s longest underwater pipeline developed (14,500ft)

1917 – 1st Malaysian refinery (Lutong, Sarawak)

Present Day

• ~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.

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Generically: Petroleum Affects the Economy at Multiple Touch-points

• Development of downstream industries e.g. petrochemicals, fertiliser, etc.

• Taxes, royalties, dividends and other levies on petroleum production

• Taxes on ancillary industries / employees

• Petroleum company profits reinvested in-country

• Local company profits which cascade throughout the economy

• Direct industry jobs / enterprises

• Indirect (supporting industry) jobs

• Ancillary activity due to rising consumption

Benefit

Challenge

• Profits remain in-country only on condition that newviable investment opportunities exist

Government TakeDevelopment

of downstream industries

Local ContentProfits Remaining In-

country

• Rate of development of downstream industry is limited by demand for industry products, resultant economies of scale etc.

Petroleum Production

• 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

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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)

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Licensing a Vendor in the Malaysian Petroleum Industry

Local Company

Local Company

Joint Venture

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Agency vs JV: Pros and Cons

Agency Joint Venture

Pro

• Fast to set up• Local partner ‘added value’ is

relationships and local knowledge• Local partner requires limited access to

finance etc.

Pro

• Deeper local capability development• Local partner and foreign principal are

more tightly bound together

Con

• Local partner may have limited incentive to move up the value chain

• Agencies may shift suddenly on a project-by-project basis

Con

• Deeper JV partnerships may also require capital injection from local partner

• ‘Matching process’ may take longer

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Internationally: Petroleum Industry Size Creates Policy Challenges

Source: Exporting the ‘‘Norwegian Model’’: The effect ofadministrative design on oil sector performance Thurber, Hults, Heller

Example from the Literature

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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.

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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