Background of the Company
Ranked among the FORTUNE Global 500® largest corporations in the world, Petroliam Nasional Berhad, most commonly known as PETRONAS, is a Malaysian state-owned oil and gas company which ventures into a wide range of petroleum activities. Established in the year 1974, PETRONAS was incorporated alongside the enforcement of the Petroleum Development Act 1974 (Malaysian Explorer, 2012). Today, being owned entirely by the Malaysian government under the Ministry of Finance, PETRONAS is entrusted with the responsibility to manage the entire nation’s hydrocarbon resources (Rig Zone, 2013) and to ensure the sustainability and orderliness of the country’s oil and gas industry is prolonged.
Type of Good Produced
PETRONAS is a company that produces oil and gas products. Petrol, which is one of the end products, is a complementary good. This is because petrol has to be used with a transport, and the most common ones are cars and motorcycles. However, since there are no close substitutes for petrol to be used in cars and motorcycle, therefore petrol is a relatively inelastic demand. This means that quantity demanded will change proportionately less as compared to the increase or decrease in the price of petrol.
 |
| Petrol as a complementary good to cars. |
Market Structure
Having the Malaysian government as its major shareholders, PETRONAS adapts an oligopoly market structure and has a fairly large amount of control over the market for petrol in our nation. Oligopoly is defined as a market structure that consists of a few firms that are controlling a market which, in this case is the petrol market, and has influence on prices and are interdependent on competitors (The Free Dictionary, 2012).
PETRONAS is considered to be an oligopoly because the company also fits the description which mentions that only a few firms would dominate the oligopoly market as it is one out of ten of the major oil companies that are operating in our home country, such as BP, Shell, and Caltex. The corporation is the first national oil and gas company to be founded in our country and is one of the world’s biggest liquefied natural gas (LNG) exporters, with a record of 26.0 million tonnes of processed and unprocessed oil were shipped from Malaysia in 2012 (Petroleum Economist, 2013). This gives the company a competitive edge to compete with other petroleum producing firms available in the country.
Being an oligopoly also gives an advantage to PETRONAS whereby it is able to prevent other firms who wish to enter the oil and gas industry as well. The first barrier to entry is that the corporation experiences economies of scope, whereby a vast range of products can be produced from the exploration and extraction of oil and they are most likely to encounter a lower average cost of production. PETRONAS does not only produce petrol but also produces crude oil, natural gases, diesel, motor gasoline and provide services such as project management, consultancy and service stations (Energy Business Reviews, 2010). This enables the company to use shared research and marketing to produce all the products and services, thus minimising on costs. Therefore, it makes it harder for new firms to enter into the industry because it would definitely be difficult to compete with PETRONAS in terms of efficiency.
Next, PETRONAS being such an established company also adopts aggressive tactics by doing massive advertising throughout the entire nation, making it harder for new firms to enter. PETRONAS is generally well-known for their advertisements on the mass media during seasonal holidays such as Hari Raya Aidilfitri and Chinese New Year and they are able to capture the audiences’ attention due to their heartfelt and warm message behind those commercials. This can be proven by the hundred thousands of views that PETRONAS’ videos get on YouTube. Seeing all these heavy advertising, other companies would think more than twice before venturing into the oil and gas sector.
The YouTube video above shows a commercial of Chinese New Year in 2013 by PETRONAS.
Company Operations
As of March 2005, PETRONAS Group was already comprised of 103 fully-owned subsidiaries, 19 partly-owned outfits and 57 associated companies (UK Essays, 2013). Today, this national heritage has good international rapport with 35 companies around the world including Iraq, Egypt, Australia and Canada. According to Petroleum Economist (2013), PETRONAS managed to achieve a 3-year average of return on investment by 23.6% which is higher than Shell and BP and still quite up to par with ExxonMobil’s which is around 25%. This shows that the company is doing really well seeing that ExxonMobil is the listed by Forbes as the fourth largest oil company in the world.
With that being said, it can be deduced that PETRONAS has been experiencing economies of scale, which means that as the scale of production of petroleum increases, the cost per unit of the output decreases.
The graph above shows the downward sloping part of the U-shaped LRAC curve, indicating decreasing total average cost in the long run, thus economies of scale.
There are several reasons to back this statement up:
1. 1..Firstly, the company managed to lower its costs due to division of labour and job specialisation. For example, the existence of the many subsidiary companies that are focused in achieving deeper, specific goals such as PETRONAS Dagangan Berhad and PETRONAS Gas Berhad. PETRONAS Dagangan Berhad (PDB) acts as a retailer and marketer of downstream oil and gas products. The company invests in research and development (R&D) to ensure the continuity of PDB to offer a wide range of high quality petroleum products (PETRONAS, 2013). On the other hand, PETRONAS Gas Berhad (PGB) specialises in gas processing and gas transmission (PETRONAS Gas, 2013). Having different branch of companies under the company’s group allows more detailed jobs to be done. Employees need to be equipped with extensive knowledge and professional qualifications to ensure effectiveness and efficiency in everything. Therefore, costs can be at a minimal level bringing the company to economies to scale.
 |
| Photo of oil platform in Terengganu, Malaysia |
2. 2. Secondly, PETRONAS can afford to employ advanced technologies such as extremely technical machines like oil drills to extract petroleum from the bottom of the ocean. This enables the firm to increase its efficiency whereby the output of petrol is increased with the given amount of technologies involved in producing it. Tan Sri Dato’ Shamsul Azhar Abbas, the current chief executive officer and president of PETRONAS made a testament to The Star Online (2013) that the company managed to produce approximately 480,000 barrels of crude productions per day using the Enhance Oil Recovery (EOR) technology from all 14 oil fields in Malaysia. This would be quite impossible to achieve if it was not for the usage of advance equipment and technology. Therefore, the large amount of output from the exploration and extraction of petroleum enables the firm to reduce total average cost, thus leading the company into economies of scale and increasing return to scale.
Government Intervention – Fuel Subsidies
Although PETRONAS is an oligopoly, the prices of the petrol are fully regulated by the government. Contributing to almost 40% of the total government’s revenue (Index Mundi, 2013), petrol is a heavily subsidised commodity by the Malaysian government in addition to zero tax incidence, thus lessening consumers' burden. However, a study done by the International Monetary Fund has shown that the effects of fuel subsidies were not well targeted as they benefited high income earners (Hamid and Rashid, 2012) and also causes over-consumption. Also recently, the Malaysian government came to a conclusion that they could not go on with increasing government debts and diminishing current account surplus (Channel NewsAsia, 2013). Therefore, it results in a decision to reduce the fuel subsidies by RM0.20 for RON 95 petrol, which was from RM0.83 to RM0.63, causing an increase in its price from RM1.90 to RM2.10 per litre (MSN News, 2013).
Due to the decrease in financial support by the government, PETRONAS is bound to experience an increase in total capital expenditure (The Edge Malaysia, 2013). Recently, the corporation made a huge decision to board on a liquid natural gas project in Canada which requires around CAD$36 billion to build, according to our Prime Minister, Dato’ Sri Najib Razak (The Economic Times, 2013). This would definitely have an impact on the company as costs to bear will be much higher now.
The graph above indicates the effects of reduction of fuel subsidies, causing a decrease in consumption of petrol by consumers.
Declining Supply, Increasing Demand
With the rising demand for fuel as consumers continue to increase consumption, the supply for natural petroleum resources in Malaysia continues to plummet downwards (Our Energy Future, 2013). This can be proven by comparing the number of oil production outputs now and then. 20 years ago, the highest oil production to be registered was 650,000 barrels per day (Our Energy Future, 2013). Today, even with better technologies, PETRONAS could only manage to obtain an output of 480,000 barrels of oil per day, as mentioned before. According to the IEA, what’s left to our natural resources are only worth 33 years of natural gas reserves and 19 years of oil reserves (The International Institute for Sustainable Environment, 2012).
This has definitely caused PETRONAS to consider drastic measures to be taken immediately. Tan Sri Shamsul Azhar Abbas mentioned that PETRONAS has already begun to conceptualise Malaysia’s first regasification terminal (RGT) in Melaka to receive LNG imports. This would, in turn, allow our country to have an open access system, whereby domestic users can secure their own LNG supply and use PETRONAS’ facility at a charged price to regasify gas (Our Energy Future, 2013).
Conclusion
Hydrocarbon resources are as precious as diamonds. All in all, PETRONAS is doing a pretty good job in utilising this national treasure to boost the country's economy.
List of references
Channel News Asia (2013) Malaysia Says Fuel Subsidy Cuts Will Have Little Impact on Inflation. http://www.channelnewsasia.com/news/asiapacific/malaysia-says-fuel/800868.html [Accessed 24 October 2013].
Energy Business Reviews (2010) Petroliam Nasional Berhad (PETRONAS): Products/Services. Available from: http://www.energy-business-review.com/companies/petroliam_nasional_berhad_petronas/products [Accessed 24 October 2013].
Hamid, K. A. and Z. A. Rashid (2012) Economic Impacts of Subsidy
Rationalization Malaysia. Available from: http://www.eria.org/Chapter%209-Economic%20Impacts%20of%20Subsidy%20Rationalization%20in%20Malaysia.pdf [Accessed 24 October 2013].
Index Mundi (2013) Malaysia Economy Profile 2013. Available from: http://www.indexmundi.com/malaysia/economy_profile.html [Accessed 22 October 2013].
Malaysian Explorer (2012) Petronas. Available from: http://www.malaysian-explorer.com/petronas.html [Accessed 23 October 2013].
MSN News (2013) Government Didn’t Raise Petrol Price, Says Deputy Minister. http://news.malaysia.msn.com/malaysia-news/government-didn%E2%80%99t-raise-petrol-price-says-deputy-minister [Accessed 24 October 2013].
Our Energy Future (2013) Malaysia and PETRONAS – A Shared Future [online], pp. 3-4. [Accessed 22 October 2013].
PETRONAS (2013) About Us. Available from: http://www.petronas.com.my/about-us/Pages/default.aspx [Accessed 21 October 2013].
PETRONAS Gas (2013) About Us. Available from: http://www.petronasgas.com/Pages/AboutPGB.aspx [Accessed 23 October 2013].
PETRONAS (2013) MyMesra: Overview. http://www.mymesra.com.my/?ch=mm_2011&pg=content&ac=22&tpl=2011_article [Accessed 24 October 2013].
Petroleum Economist (2013) Petronas: The Modal of a Modern National Oil Company. Available from: http://www.petroleum-economist.com/Article/3247199/Petronas-The-model-of-a-modern-national-oil-company.html [Accessed 23 October 2013].
RIGZONE (2013) Malaysian Oil, Gas Service Firms Focus Overseas. Available from: http://dayagroup.com.my/wp-content/uploads/2013/08/Rigzone.com_250713.pdf [Accessed 23 October 2013].
The Edge Malaysia (2013) Petronas Gas Has Bright Prospects. Available from: http://www.theedgemalaysia.com/in-the-edge-financial-daily-today/259385-the-edge-billion-ringgit-club-2013-petronas-gas-has-bright-prospects.html [Accessed 24 October 2013].
The International Institute for Sustainable Development (2013) A Citizens’ Guide to Energy Subsidies in Malaysia. Available from: http://www.iisd.org/gsi/sites/default/files/ffs_malaysia_czguide.pdf [Accessed 24 October 2013].
The Free Dictionary (2013) Oligopoly. Available from: http://www.thefreedictionary.com/oligopoly [Accessed 22 October 2013].
The Star Online (2013) Petronas Looking to Implement EOR Technology at 14 Maturing Oilfields. Available from: http://www.thestar.com.my/Business/Business-News/2013/09/25/PETRONAS-LOOKING-TO-IMPLEMENT-EOR-TECHNOLOGY.aspx [Accessed 24 October 2013].
The Star Online (2013) Petronas Plans Production of 750mil Barrels from 14 Oil Fields. Available from: http://www.thestar.com.my/Business/Business-News/2013/09/26/Target-set-for-EOR-initiatives-Petronas-plans-production-of-750mil1bil-barrels-from-14-oil-fields.aspx [Accessed 23 October 2013]
No comments:
Post a Comment