National Petroleum

Names and events happened in this publication has been disguised and any similarity found is mere coincidence. Information found in this publication must be treated as HIGHL Y CONFIDENTIAL and shall be for the purpose of fulfillment of this MBA program.

No references and reproduction of any parts of this publication shall be made without prior knowledge and approval from the author. Views expressed in this publication are solely those of the author's opinion and not to be construed as the views of PETRONAS, nor PETRONAS in any way responsible for the content thereof.

ACKNOWLEDGEMENT

I t is both my pleasure and obligation to acknowledge generous people who have provided me with the guidance and inspired me to make this happen. Special thanks to the lecturers who have thought me during the night classes and member of my family for their continuos support. Without their support and courage, completing this MBA program would have been difficult, if not impossible.

I wish to express my gratitude to the following people for their kind assistance in this MBA p rogram and the case dissertation. Although much of my appreciation has been expressed, I wish to express my sincere thanks to Tuan Hj.

Yaakob Ibrahim, the MBA coordinator for making this a reality to me.

I want to acknowledge my special appreciation to Associate Professor Dr. Zainal Abidin Mohamed, who is my project case supervisor, for his continuos support in completing this case dissertation. It is truly impossible to express my feeling of gratitude in mere words.

My friends and fellow colleagues in the MBA program, thank you for being a good teammates and shared my problems throughout this study. Your assistance, ideas an

Abstract

PETRONAS vision was "To be A Leading Oil and Gas Multinational Company of Choice" and it stated the globalization effort in 1994. PETRONAS global operation had extended to Africa countries, Confederate Independence of Soviet Union (CIS), Middle East and Asia Pacific countries. Some of the Africa countries included Sudan, South Africa (downstream Engen), Libya and Algeria. The investments in CIS were Turkmenistan and Kazarkstan. The investment in Middle East countries included Iran, Syria and Iraq. In the Asia Pacific, the oversea portfolios extended to Vietnam, Mynmar, China and Australia (both Upstream and downstream).

The oversea upstream activities were undertaken by its subsidiary PETRONAS Carigali Sdn Bhd (PCSB) through its oversea subsidiary companies.

When PETRONAS started its globalization efforts, the environmental factors were very much favorable. However, in 1 997 and 1998 there were adverse changed in these environmental factors and had affected PETRONAS globalization efforts.

Some of these factors were the regional and world

economic turmoil, regional financial and currency devaluation, slower economic growth, low demand of oil and gas, lower oil and gas price and lower prospectivity and commerciality of the oil and gas projects.

This case study evaluated PETRONAS strategic position and the impact on the international portfolios and made recommendation relating to these strategic issues. This case study analyzed the environmental factors influencing the company future direction through the used of the SWOT analysis and determined the strategic thrust to comprehend the SWOT analysis. This study assessed analytically, through the used of SPACE, the future company direction and evaluated the oversea portfolios to determine the portfolios growth opportunities and provide the decision as to whether these portfolios should be retained, partnered or divested.

Abstrak

Visi PETRONAS adalah "Menjadi Syarikat Minyak dan Gas Antarabangsa Yang Terulung dan Terpilih" dan ia telah memulakan usaha globalisasi pada tahun 1994. Usahanya ke arah globalisasi telah menjangkau ke negara-negara di Afrika, Confederate Independence of Soviet Union (CIS), Asia Tengah dan Asia Pasifik. Negara-negara di Afrika adalah termasuk Sudan, Afrika Selatan (operasi hiliran Engen), Libya and Algeria. merangkumi negara-negara seperti Turkmenistan and Kazarkstan.

Pelaburan di CIS

Manakala pelaburan di Asia Tengah menjangkau ke negara-negara Iran, Syria and Irak. Oi Asia Pasifik, pelaburan antarabangsanya termasuk Vietnam, Mynmar, China dan Australia (huluan dan hiliran)

Operasi huluan dikendalikan oleh anak syarikatnya iaitu PETRONAS Carigali Sdn Bhd (PCSB) melalui anak-anak syarikatnya yang lain.

Pada ketika PETRONAS memulakan

usaha globalisasi, faktor-faktor sekeliling adalah begitu mengalakan. Walau bagaimanapun, dalam tahun 1997 dan 1998, terdapat perubahan ketara pada faktor-faktor sekeliling ini sehingga mencengkam usaha globalisasi PETRONAS. Antara faktor-faktor yang mengalami perubahan ketara adalah kejatuhan ecomomi serantau dan dunia. sistem kewangan yang lemah, susut nilai matawang serantau, pertumbuhan ekonomi yang lembab, penurunan kadar permintaan minyak dan gas, kejatuhan harga minyak dan gas dan tahap prospek dan keupayaan niaga projek yang rendah.

Kes in; menganalisa strategi PETRONAS dan implikasi keatas potfolio antarabangsanya dan seterusnya memberi cadangan untuk menyelesaikan isu-isu tersebut. faktor-faktor

BCG GROWTH SHARE MATRIX

FIGURE 1 : PETRONAS EVOLUTION

FIGURE 2 : ORGANIZATION STRUCTURE OF PETRONAS .

FIGURE 3 : PETRONAS CARIGALI ORGANIZATION STRUCTURE . FIGURE 4 : PETRONAS TURNOVER

FIGURE 5 : PETRONAS PROFIT AFTER TAX FIGURE 6 : PETRONAS TOTAL ASSET

FIGURE 7 : SPACE MATRIX ANALYSIS

FIGURE 8 : PETRONAS BCG - GROWTH SHARE MATRIX

FIGURE 1 0 : WORK PROGRAM AND SCHEDULE

FIGURE9 : PETRONAS OVERSEA PORTFOLIO ANALYSIS

FIGURE 1 1 : PETRONAS REENGINEERING : NEW BUSINESS DEVELOPMENT DIVISION

LIST OF APPENDICES

APPENDIX 2 : COUNTRY PERFORMANCE: SYRIA .............................

APPENDIX 3 : COUNTRY PERFORMANCE: SUDAN ...........................

APPENDIX 4 : COUNTRY PERFORMANCE: IRAN ..

APPENDIX 1 : COUNTRY PERFORMANCE : VIETNAM

.APPENDIX 5 : COUNTRY PERFORMANCE : TURKMENISTAN APPENDIX 6 : COUNTRY PERFORMANCE : ALGERIA

APPENDIX7 : PETRONAS ORGANIZATIONAL ENVIRONMENTAL FACTOR 80

APPENDIX9 : PORTFOLIO ANALYSIS : VIETNAM .. ............................

APPENDIX 10 : PORTFOLIO ANALYSIS : SYRIA .. ...............................

APPENDIX 1 1 : PORTFOLIO ANALYSIS: SUDAN

APPENDIX 8 : PETRONAS EXTERNAL ENVIRONMENTAL FACTOR

APPENDIX 1 2 : PORTFOLIO ANALYSIS : IRAN

APPENDIX 13 : PORTFOLIO ANALYSIS : TURKMENISTAN

.APPENDIX 1 4 : PORTFOLIO ANALYSIS : ALGERIA ..............................

PETRONAS GLOBALISATION AND THE DILEMMA

Tan Sri Hassan Marican, president of PETRONAS, the national oil company of Malaysia, was on his way back after a week long business meeting with his new partners in Sudan, China National Petroleum Corporation (CNPC), State Petroleum and Sudapet, the Sudan National oil company.

Accompanying him on his privately hired jet plane, were other vice presidents, they were Dato' Mohamad Idris Mansor, senior vice president of Exploration and Production Business Unit and Mr. Muri Mohammad, the vice president of Gas Business Unit.

They were having serious discussions on the prospectivity of the new joint venture and the resources invested in Sudan. There were about 23 8 PETRONAS employees working in Sudan, and PETRONAS has invested US$1 30 million to date.

At one juncture, Tan Sri Hassan posed a question to Dato' Idris, "Dato' Idris, PETRONAS has interest in many different countries around the world, with a total investment of US$6 billion. So far, we have been receiving revenues from Sirri projects in Iran, Dai Hung and Ruby projects in Vietnam. Dai Hung has been a disastrous venture to us, millions of dollars were lost due to lower oil reserves than expected.

We may have to relinquish the field and return back to the Vietnamese Government. I wonder how are our other project stands? With the adverse changed in the environmental factors and current uncertainties in the global economy, how are our oversea portfolios doing and do we need to strategies our future direction?".

There was a long sighed and Dato Idris later replied with cautious, "We have been able to grab the oversea projects because we made a thorough analysis and feasibility study. However, in the exploration and production business, the risk is very high.

Base on our limited data and information then, it was the best decision. However, I agreed that there is a need to reassess our projects and to decide whether to retain the projects or divest in some. We will reevaluate the  project feasibility and carry out the portfolio analyses to determine which are the portfolios that can be retained and those that need to be divested.

We will advise the board for the next course of action."

The tense and dilemma were immensed on Dato Mohd Idris Mansor. He needed to know what were the situations, what adverse environmental changed occurred and the surrounding forces governing these assets.

Was the political in the country, in which PETRONAS had invested,

permitted a good investment climate? What impact did the global economy have on the projects' prospectivity. What would the future scenarios be? Could the vision, mission and objective of the company be met?

Should PETRONAS continue to aggressively expand the international

operations, what should be done to the existing international portfolios and what should PETRONAS future direction be? His contract with PETRONAS valid for another three months. He knew that he needed to impress and make the Management Committee convince based on solid factual data and analyses, what are best for these international portfolios. He needed provide with proper recommendations and direction for PETRONAS to adopt.

to

His contract

extension could be in jeopardy if he failed to provide the right decision and direction.

2.0

COMPANY BACKGROUND

PETRONAS was a Malaysian national oil and gas company, which was incorporated on August 17, 1974 under the Malaysian Company Act 1965. The Malaysian Petroleum Development Act (PDA), 1974 was passed by the Parliament on October 1, 1974.

It placed petroleum

development under the portfolio of the Prime Minister. Under the PDA, PETRONAS was vested with the ownership of petroleum resources, and had exclusive rights, power, liberties and privileges of exploring and developing petroleum resources.

2

In return for the ownership and

rights, PETRONAS paid royalties to the Federal and State Governments. PETRONAS was given the right to carry out�processing, refining of petroleum and manufacturing of petrochemicals. This act had given PETRONAS the sole right to regulate the petroleum resources in Malaysia and was entrusted to manage the resources for the benefit of the nation. Towards the end of 1976, the first production sharing contracts were signed with three different major oil companies i.e. Sabah Shell, Sarawak Shell and Esso.

During the initial years, PETRONAS roles mainly focus on

managing and regulating the exploration activities of their contractors to ensure the upstream activities were being well administered and properly managed.

Since PETRONAS emergent in 1974, it had developed itself from merely management of petroleum resources to project management and later established itself as the operator in the upstream activities before diversifying its activities and went international.

PETRONAS

evolution is shown in Figure 1. I n 1984, with the establishment of PETRONAS CARIGALI Sdn Bhd, it became the operating arm in the upstream activities. Later, several strategic studies were carried out by PETRONAS that led to diversification of its activities into oil refining, gas processing and utilization and petrochemical manufacturing and international marketing.

To

optimize the value and maximize synergy of the natural resources, it had integrated the upstream and downstream activities and transformed PETRONAS into an integrated oil and gas company.

In 1994, PETRONAS

started to diversify its activities

oversea through its operating arm

PETRONAS Carigali Sdn Bhd. In 1998, it had expanded the global activities into 15 different countries in the upstream and downstream.

PETRONAS global operation had extended to Africa

countries, Confederate Independence of Soviet Union (CIS), Middle East and Asia Pacific countries.

Some of the Africa countries included Sudan, South Africa (downstream Engen),

Libya and Algeria. The investments in CIS were Turkmenistan and Kazakhstan. The investment in Middle East countries included Iran, Syria and Iraq (still in negotiation). In the Asia Pacific,

3

the oversea portfolios included Vietnam, Myanmar, China and Australia (both Upstream and downstream).

In line with the globalization, PETRONAS had developed a new vision and

mission in accordance to its core activities and the company aspiration of becoming a global company of choice.

FIGURE 1: PETRONAS EVOLUTION

'" Project Manager /' .

Operator +

<

<

Project Manager I I '+ I Operator I I I I I I

'+

Integrated Oil Cpmpany

_Petroleum was PETRONAS core business right from finding hydrocarbon up to processing and refining, petrochemical industries, manufacturing and transportation. The organization structure of PETRONAS is shown in Figure 2.

Exploration and Production activities encompassed

4

exploration, development and production of petroleum refining

resources. Refining activity focussed on

the crude oil. Marketing was responsible in marketing, trading and retailing of petroleum

products. Gas business was responsible in gas processing and transmission, gas liquefaction and gas utilization such as gas district cooling. The Petrochemical business was responsible for the petrochemical manufacturing and marketing the product.

Maritime and logistic business

included marine transportation, port management and terminaling and finally the logistic activities.

FIGURE 2

ORGANISATIONAL STRUCTURE OF

PETRONAS . .................... ...............

BOARD AUDIT r.()MMITT��

................. .......M ANAGEMENT r.()MMITT��

MARKETING BUSINESS CORPORATE PLANNING & DEVELOPMENT nlVI�lnN

EDUCATION DIVISION

FINANCE DIVISION

5

PETROCHEMICAL BUSINESS

HUMAN RESOURCE DIVISION

TECHNOLOGY MANAGEMENT nlVI�lnN

3.0

PETRONAS's VISION, MISSION AND OBJECTIVES

Mission and vision statement is very important to illustrate the organization reason for existence and the direction towards achieving the objectives and goals in the short and long term. PETRONAS had long developed the mission and vision statement. However, in 1995, after its globalization effort, PETRONAS changed its vision statement to incorporate the vision of being a multinational company of choice.

Below are discussion on the three elements of PETRONAS

fundamental principle of its existence and the values system that it adored.

3 .1

VISION

PETRONAS vision was "To be A Leading Oil and Gas Multinational Company of Choice".

This defined that oil and gas as the core business and emphasized on significance of integrated upstream and downstream activities in adding values to the primary resource. In line with the industry trend in the downstream and the relevancy in the value chain, PETRONAS wanted to increase weighting towards gas and petrochemical. It expressed desired to leverage on the core businesses and out-sourced the non-strategic activities and units. PETRONAS has developed strategies where it emphasized on certain business segments, focused on certain geographical locations and leveraged its competitiveness in a certain market segment.

In 1994, PETRONAS started its globalization effort to become a global multinational company.

Thus a significant proportion of its operations were outside Malaysia and

across several countries. Like other multinational company, PETRONAS had to deal and manage with multinationals and multicultural not only in Malaysia but other countries that it was operating. The vision stated that it wanted to be a world class organization, as  such in 1996, the management has undertook business process reengineering to make PETRONAS more competitive internationally.

The vision also stressed on being a company of choice and keenly preferred by all stakeholders, consumers and partners.

3.2

MISSION

The PETRONAS mission statement was developed to explain the reasons for its existence, strengthen the vision and articulate the corporate direction in achieving the vision. PETRONAS described its mission statements as follows;

"WE ARE A BUSINESS ENTITY" "PETROLEUM IS OUR CORE BUSINESS" "OUR PRIMARY RESPONSIBILITY IS TO DEVELOP AND ADD VALUE TO THIS NATIONAL RESOURCE" "OUR OBJECTIVE IS TO CONTRIBUTE TO THE WELL-BEING OF THE PEOPLE AND THE NATION"

The mission statement stated that petroleum, which constitute of oil and gas, as being the core business. Petroleum as a natural resource, had to be explored, developed, produced, processed and transformed to consumer products, e.g. gasoline, ethane as feedstock to petrochemical plant and gas for power plant. In this way, PETRONAS could maximized the value chain of this natural resource through synchronizing the upstream activities with the downstream activities.

The upstream activities involved exploring and

producing the petroleum whereas the downstream activities involved processing and transformation of the natural resource into other utilities and feedstock to the petrochemical plants. The mission also mentioned that the objective was to contribute  toward the well being of the people and the nation. PETRONAS believed that since it was entrusted with the responsibility to develop the natural resources and given the exclusive rights under the PDA, it has the responsibility to protect the well being of the people and the nation whom, it believed, owned the wealth of the natural resources of the country.

3.3

OBJECTIVES

Taking the vision and mission

as

the foundation of the company direction, PETRONAS

Exploration and Production (E&P) business unit has developed their specific objectives in order to achieve the Corporate's vision and mission.

The specific objectives are

discussed below.

  1. Increase the share or revenues from international operation by 3 0% in year 2005.

2. Creating value to the company at RM 58 billion by year 2005.

3.To acquire 1billion of oil equivalent b y year 2000.

Be a leading upstream gas company in South Asia.

S.Overall Total Corporate Return (TCR) of top quartile in International E&P industry.

In achieving the PETRONAS E&P objectives some of these strategies were integrated across businesses to synergies and create value chain to the company. In its effort to maximize value creation to the company, PETRONAS had acquired service company alliance to minimize cost of development and strategic partnerships with other companies in its oversea ventures to share the risk.

3.4

PETRONAS's VALVES SYSTEM

PETRONAS value system was developed to explain the values that the organization advocated and the expectation that the organization has on its employee.

There were

four values system adopted by PETRONAS.

"LOYALTY" "PROFESSIONALISM" "INTEGRITY"

"COHESIVENESS"

The word loyalty referred to the staff loyalty to the nation and corporation. A loyal staff maintained high corporate image and would not' make derogatory comments about the company and country. The staff would at all time provide constructive criticism within in-house forum, support and participate in ensuring the company's mission, roles, objectives in his or her activities either in-house, outside seminar, talks and social activities. Professionalism in PETRONAS terminology means committed, innovative and proactive an d always striving f or excellence.

The staff would maintain correctness and high dignity of behavior in delivering his duty and firm in decision making based on objective assessment of situations in conducting affairs of the company.

Integrity means honest and upright. It referred to staff trustworthiness in maintaining all confidentiality of company's affairs and business and put company's interest above personal interest and gains.

Cohesiveness means united in purpose and fellowship.

Able to work in a team and

contribute positively towards a common goal in conducting company's affairs and business with genuine concerns and respect to the people.

4.0

PETRONAS ORGANIZATIONAL ENVIRONMENT

Some of the factors that impact the development of an organization include the financial, marketing, operation and management factors.

Based on Fortune 500, August 98, in the

Petroleum Industry category, PETRONAS has been listed has number 1 in term of return on revenues and return on assets with 28.4 % and 1 3 .9% respectively. Its had investment in 53 wholly owned companies with 2 1 located overseas and 32 locally, 27 partly owned with one in oversea and 30 associated companies with 1 1 located oversea.

The mode of decision making was made centralized with specific business units had their own business committee chaired by the respective vise president. The organization decision-makings and guiding policies were made through Management Committee meeting and Board meeting. Members represented the Management Committee were mainly from the various heads of business units. The Board Members comprised of member from the senior management and Government representatives.

The Exploration and Production (E & P) business unit was responsible of the upstream activities. Petroleum Management Unit, which was part of the holding company, was responsible of managing the domestic petroleum operation and supervising the implementation of Production Sharing Contracts signed between PETRONAS and the contractors.

PETRONAS Carigali Sdn. Bhd. (PCSB) under the E&P business units was the subsidiary of PETRONAS and was the operating arm of PETRONAS in the upstream sector. It has domestic assets as well as international assets. The international assets were being managed by wholly owned international subsidiaries headed by the country managers.

The case discussed the

globalization challenges in PCSB.

4.1

PCSB ORGANIZATION STRUCTURE

The operating arm of PETRONAS in the upstream was PETRONAS Carigali Sdn Bhd. (PCSB) which has businesses locally and internationally.

Figure 3 shows the

organization of PCSB. The domestic operations were run by the regional offices located in Kertih for the Peninsular Malaysia, Miri for the Sarawak operation and Kota Kinabalu for the Sabah operation.

The main corporate office was located in PETRONAS Twin

Tower, KLCC and it managed and controlled the overall operation of the organization.

The Chief operating officer (COO) was responsible for the three regional operations and he made regular reports to the CEO. Three regional General Managers who managed and controlled the daily operation gave regular reports to COO.

Most of their operations

were offshore and they ensure the safety and objectives of the regional office were met. The main, objective of these regional offices was to deliver oil and gas production at a certain rate to meet the national target set by PETRONAS. In doing so the daily running of the machinery, production platforms, maintenance and safety of the operation were uphold.