Saturday, November 7, 2009
PETRONAS' Corporate Governance
Pic 01: The twins that made Malaysia famous
Pic 02: The cash cow for gas station owners
Pic 03: Hassan Merican, Chartered Accountant, the CEO of Malaysia's largest and most globalised company
Pic 04: Ladies, a useful fact for you? Oil & gas industry has smartest,fit-test and good looking engineers than any industry. I know, because my younger brother in ONE! haha!
P1 (ACCA): OPEN BOOK TEST
- Strictly for exam practice in P1 (Professional Accountant). The case study is “sensationalise” to allow scope of corporate governance recommendations.
A DECADE after opening, the Petronas Twin Towers in Kuala Lumpur are no longer the world’s tallest. But Petroliam Nasional, the company that built them, continues to grow. It exports lots of liquefied natural gas (LNG) to booming Asian neighbours and owns the world’s largest fleet of LNG tankers. It is also expanding abroad: last year operations outside Malaysia brought in 42% of its M$264 billion ($77 billion) revenue, up from 35% in 2005. Foreign oil giants are keen to team up with it in risky places like Iraq. In short, Petronas is a successful example of a national oil company, the government-owned entities that collectively hold some three-quarters of the world’s proven reserves but are prone to waste and mismanagement. Yet it still faces a peculiar set of problems tied to its state-owned status.
Like oilmen everywhere, Hassan Marican, Petronas’s boss, is busy trying to pare costs in a global slump. From his perch on the 80th floor of Tower 1, he sees little sign of a sustained recovery in demand. He has asked contractors to cut costs by 30% after profits fell by 14% last year, the first drop in seven years. “Everyone knows how much we’re being squeezed,” he says.
But the squeeze comes not just from falling oil prices. Malaysia’s federal government is a needy owner: last year Petronas paid out 45% of its revenues in dividends, royalties and taxes. A yawning budget deficit this year will require further generosity. The firm also sells cheap gas to local industries and manages to keep petrol prices in Malaysia affordable.
Mr Hassan insists that this is not a drag on investment. Petronas plans capital expenditure of around US$12 billion this year, mostly on exploration and development—a similar level to last year. Investors seem happy to stump up. In August they snapped up US$4.5 billion in Petronas bonds, its first issuance since 2002. Moody’s, a rating agency, considers them more secure than Malaysia’s sovereign debt. However, there was an admittance from certain management quarters, that the there was an underestimation of gas reserves, misaligning the exploration investment which was biased toward oil extraction. The budget figure was allocating 70% of investment in oil and 30% on gas reserves, but as it turns out, this is an underestimation of gas reserves. It should have an additional US$3.6 billion exploration and development. A clear shortfalls in cash call, and Pertronas may have to make another debenture issue. This is unpopular as with the rising interest rates, prove expensive and squeezing the profits further. Media has criticise the management for misleading the public as evidence of weak internal controls especially on reporting to the public.
Mr Hassan says state ownership does Petronas no harm abroad, and its experience as a regulator is a selling point. He describes the firm as a “nationally owned international oil company”. Roughly a fifth of its 39,000 employees are non-Malaysians. As domestic output tapers off, this ratio is bound to rise. But Petronas cannot match the salaries dangled by rivals, since it sticks to Malaysian pay scales.
In part, that is a political decision. Petronas’s sole shareholder is the office of the prime minister, and the firm, says Mr Hassan, is “aligned to nation-building”. Critics say this leads to spending on prestige projects popular with politicians, like the towers, which were slow to fill up, and Putrajaya, Malaysia’s flashy new capital. But Mr Hassan points out that the towers are now fully rented. All investments, he says, are judged on their commercial merits.
Petronas’s board has not even one independent director to bear him out. Mr Hassan, already chief executive, became the acting chairman in 2004 after his predecessor died. His contract expires in February, 2010. That will give the prime minister, Najib Razak, an opportunity to make an appointment that proves that the firm really is run on a completely commercial basis. Dr Merichan a member of Parliament remarked, “I want risk awareness and cost consciousness embedded in Petronas culture, as we should tighten our belts and aggressively seek business expansion to alleviate assist Malaysian economy from the doldrums.”
(a) Define ‘transparency’ and evaluate its importance as an underlying principle in corporate governance and in relevant and reliable financial reporting. Your answer should refer to the case as appropriate. (10 marks)
(b) Evaluate the relative advantages and disadvantages of strategic risk management committee being non-executive rather than executive in nature. (7 marks)
(c) Explain the meaning of Dr. Merichan comment: “I want risk awareness and cost consciousness embedded in Petronas culture, as we should tighten our belts and aggressively seek business expansion to alleviate Malaysian economy from the doldrums.” (5 marks)
(d) Critically discuss FOUR principal roles of non-executive directors and explain the potential tensions between these roles that Petronas’ non-executive directors may experience in advising on the disclosure of the underestimation of the oil reserve. (12 marks)
(e) Draft a letter for Hassan to send to Malaysian government to include the following:
(i) why you believe robust internal controls to be important; and
(ii) proposals on how internal systems might be improved in the light of the underestimation of oil.
Note: four professional marks are available within the marks allocated to requirement (e) for the structure,content, style and layout of the letter.
PS: answers will be provided in the Revision Class.