Monthly Archives: December 2013

PETRONAS’ Venture in Canada

YB Rafizi Ramli- arguably Malaysia’s whistle-blower icon has recently come up with a fantastic analysis on the recent venture by his former employer- Petronas in Canadian shale gas business. He claimed that Petronas’ investment worth RM16 billion is at risk because of the exorbitant acquisition of Progress Energy (77% more than the market price) at the time when other oil and gas companies suffered billions of dollars in losses from shale gas projects.

To summarize, YB Rafizi said ‘never in our history has so much money been committed to a single venture as risky as this’.

I respectfully disagree with him.

First, it is a normal practice to acquire valuable assets at such a premium price. China National Offshore Oil Corporation (CNOOC) paid close to RM50 billion for Nexen Inc stakes, representing a 61% premium. Exxon Mobil agreed to buy Celtic Exploration Ltd at a 45% premium. 5 years ago, Maybank has been criticised for acquiring Bank International Indonesia (BII) at four times the asset value of BII. Now its profit consistently grows at 15% per year.

Second, Canada is the most active market for oil & gas merger and acquisitions. Already more than RM170 billion worth of transactions has been made in 2013 accounting 20% of upstream segment. It means all the major players are craving for a slice of the deal in this country. Therefore, any offer being made must be very attractive to fend off other competitors.

Third, this is a deal that Petronas can’t afford to lose. As the world leader in LNG technology and one of the largest shippers of the fuel globally, Petronas needs to increase its reserve. With the acquisition of Progress Energy, Petronas’ gas reserve could last for 70 years. The asset will be passed on to future generations, thus making the deal justified for 77% more than the market price.

After all, where can you find such a huge reserve? China may have it. But it is located at undeveloped locations where the operational cost is high. Some rich-oil middle-east countries are not really a good choice, thanks to political uncertainties. In America, the market is saturated.

Admittedly, a few big oil companies were forced to write off billions of ringgit from their investments into shale gas extractions. But all of these losses were made in the US market where the gas price is too low because of oversupply.

Unlike these players, much of that gas in Petronas’ venture won’t end up in Canadian homes at all. The idea is to ship Canada gas via tanker to meet Northeast Asia’s soaring gas demand, particularly as Japan shifts away from nuclear power plants after the Fukushima accident. That fact underlines the rationale for the Petronas’ interest: Canadian gas is increasingly coveted as a fuel for Asian energy needs. This is where you can get $3 gas and sell it at $18 to North Asia countries.

Petronas has roped in Japan Petroleum Exploration (Japex) and PetroleumBRUNEI as partners and buyers in the Canadian venture. It has already secured two long-term buyers for its gas. As such, how then, it is a risky investment?

Finally, the decision made by Petronas to grow reserves through acquisition is already minimising the risk. While it is cheaper to discover a new area for oil and gas, it is a big gamble. Petronas may have to pay more. But they have the fruit ready on the trees.

Considering all the reasons listed above, I personally don’t think there is a hidden hand that has forced Petronas to enter into this venture.

Unless YB Rafizi thinks the government has cronies in Canada. Who knows? Maybe the whistle-blower can shed the light on this matter.

MatRodi

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IPP, PETRONAS AND MONOPOLY

IPP

Admittedly we can’t talk about electricity without discussing about IPP.

Why IPPs have become the convenient whipping boy for the Opposition to stir public sentiment for few decades?

Basically it is due to the lack of transparency in the first generation IPPs back in the 1990 where the ‘take or pay’ deal enjoyed by the IPPs seems unfair to the government. We must understand that when Malaysia experienced a national power crisis, it requires a quick and expensive solution which can only made possible by private sector venture. Because it involves multi-billons capital and the risks it undertook were thought to be phenomenally high, the deal ‘take or pay’ was included.

It is strange to see at some of the  these IPPs which are now seen as “locusts” were the “white knights” which had come to aid the Government to plant-up quickly, using private sector funding. If not for the IPPs, the peninsula might have experienced more severe and persistent power outages in the 1990s and 2000s as TNB did not deliver value and quality electricity to consumers.

Actually the ‘take or pay’ deal was only given to YTL Power. And YTL’s license will expire in 2015. It means, in two years’ time, there will be no more ‘take or pay’ deal to any IPP’s in Malaysia.

Why IPPs are given subsidies when the people are not? Actually the cheaper gas by Petronas to IPPs and TNB are meant to benefit the people in the form of low tariff rates.  It is not like IPPs or TNB can sell and trade the subsidized gas for their own profit.

In fact if there is no subsidy given to them, the people will have to pay the market price for electricity. This is what happening right now. The government has decided to gradually remove the subsidy (cheaper gas) thus resulting the increase of electricity tariff.

Some may say all the IPP licenses were given to cronies of the government. But cronies or not, the frequency and minutes of interruptions would have driven away many investors if the IPP solution was not initiated in 1990. The involvement of IPPs in the power generation business had introduced efficiencies besides contributing significantly towards stabilising the nation’s reserve margin.

Not only that, thousands of job have been created and today we proudly see some of the IPPs have ventured international market to do business in energy sector.

PETRONAS

How about Petronas? Shouldn’t Petronas’ profit be used to subsidise the energy sector?

Petronas is already has to forgo revenues amounting up to RM12 Billion annually because of the discounted gas price given to TNB and IPPs. It would be better if this revenue channeled to further develop high-value downstream activities.

Not only the revenue is falling, the gas supply from local offshore gas fields is depleting, hence, the need to import gas from Australia and Qatar. The imported gas has to be subsidised at about RM40 per mmbtu instead of the market rate of RM145 per mmbtu. It means Petronas can only sell the gas at one-third of the cost. It’s a loss-making business.

How long Petronas can sustain this? It is worth mentioning that Petronas is not the biggest and the largest oil company in the world.

MONOPOLY

Some readers questioned why TNB is the sole electric provider in this country. They argue in most developed countries there are few providers that compete with each other in giving the best rate to the consumer.

To be fair to their suggestion, it is not accurate to say TNB has monopolised the electric sector in Malaysia given the current practice. While TNB is the sole electricity distributor in this country, it is not the only electric producer.

Under the Malaysia Electric Supply Industry (MESI) transformation, TNB will have to compete with IPPs in terms of building a new plant and generating electricity. The competitive bidding (apart from ensuring transparency), allows the government to choose the most competitive rates and eventually pass on the savings to consumers.

For the record, the government has recently conducted its first competitive bidding process for the new power plant in Prai, which was won by TNB and the extension of PPAs for some of the first-generation IPPs.

Obviously IPPs brought competition to TNB in an industry that TNB had long monopolized.

ONE OFF VS GRADUAL INCREASE

Many wonder why the government hasn’t impose the price hike gradually? Why it should be one-off increase.

Politically, I don’t think any government in the world would want to portray themselves as an unpopular government by keep announcing price hike, even for a small increase. After all, one-off increase suits well with the Malaysians attitude that forgets easily.

Economically, one-off increase will give a faster result and substantial savings whereas the savings from the gradual increase might be insignificant.

MatRodi

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In Defense of TNB

Malaysians are together in complaining about electricity price hikes announced by the government. With due respect to their justified grouses, Malaysians must accept prices to increase over time. It is not possible for prices to remain fixed over long periods of time.

It is not because the government doesn’t care or renegade its election promises but simply because the price has increased. When energy subsidy was introduced long times ago, the price for one barrel of oil was only US$30. At that time, the subsidy was not too big. It is now US$100. To keep the same price would mean to increase the amount of subsidy to make up the difference.

Why can’t we borrow some money to offset the difference? Because borrowing money to pay for the increasing cost of subsidy is not the answer. Any good and responsible government must ensure servicing loans is sustainable. If not, we are going bankrupt.

Therefore the government is right to embark the subsidy rationalisation program. If we continue with the present level of subsidy (already more than RM70 billion per annum) and we cannot pay our debts, we will certainly not be able to arrest the slide. Remember about the fate of Greece whose borrowings exceeded its GDP thus making the country bankrupt.

To pay our debts we must cut back on spending, Electricity is one of the items that need to be restructured.

What’s wrong with the present model of energy subsidy? The blanket approach based on consumption where everyone is entitled to cheap electricity is very costly and benefits the riches and corporate more as they consumed more than rest.

If so, why doesn’t the Government only raise the tariff for the riches and corporate? The answer is, it’s had to differentiate supply for individual and corporate. It is difficult to regulate subsidies so that only certain deserving people or industries enjoy it. We see what happened when subsidized diesel for fishermen were smuggled to other countries due to lack of enforcement. Therefore the monitoring cost is very expensive if we follow this approach.

Most people said- TNB has made billions of profit every year. Can’t we take 1 or 2 billion to offset the increase? We can’t. We must understand that TNB as an energy company is a very capital intensive. This is not a business where you can only make profit for a few millions. It involves multi-billion projects. Profitability is important if they want to retain investor among international fund managers. Or are we suggesting TNB has to borrow just to ensure everyone enjoys one of the cheapest household electricity tariffs in the world?

In defense of TNB, when the power industry experienced gas shortages in 2011, TNB had to buy it from Singapore’s YTL Power Seraya and TNB had to take the costly option to use distillates for power generation that cost TNB RM5 billion in fuel cost alone.

Not only that, since many of TNB’s power plants are old and inefficient, it had allocated a capital expenditure (Capex) of RM7 billion to increase TNB’s diversification of its fuel mix for power generation.

Therefore, it is very perplexing to hear from one popular youth minister that said TNB is only thinking of profits. Actually they are not.

Apart from the proposal is made by the Suruhanjaya Tenaga and the 70% of the consumer is not going to be affected, ‘the increased tariffs will contribute nothing to TNB’s profits. Of the 4.99 sen increase, only 0.90 sen (18%) will go to TNB for capital and operational expenditure to do system improvement for the next four years. The rest goes to Petronas (3.92 sen or 79%) and coal 0.17 sen or 3.4%).’ TNB profit? Zero.

Actually TNB should be applauded for their efforts. Being a highly profitable GLC like Maybank, CIMB means more contribution to government’s coffer considering our income tax revenue is low and our society is highly subsidized.

Not only that, TNB is one of blue-chip counters in Bursa Malaysia. Thus, TNB’s performance can affect bursa performance in general. It is due to their hefty profits that make them a blue chip counter.

This is the part where people are not aware of. As a public listed company, TNB is operated under very transparent manner- you can read their annual report, strategic plans,etc on their website

To be fair to TNB, how many times we heard any major scandal involving this utility giant like some of the big player in Malaysia? If you really have the energy and time to be ‘popular’ in attacking GLC, please directed it to loss-making GLC’s since there is no genuine excuse for their losses.

Isn’t it better to have a highly profitable GLC like TNB than having loss-making GLC’s?

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