Energy Supply by Types 1978 – 2015
Source: Malaysia Energy Commission
Oil and Gas Our country has been blessed with oil and gas reserves beneath our land. This natural resource helps to fuel the country not only as an energy source but also economically. The oil and gas industry has made up about one-fifth of our national GDP [1] for the past two decades and it is a major source of income for the government.
Nevertheless, natural resources can be a blessing or curse for a country. The Economist coined the term “Dutch Disease” in 1977 to describe what the economy of the Netherlands underwent after discovering natural gas reserves in 1959 [2]. The phenomenon of a decline in the economy as a result of the discovery of natural resources happens to countries that have grown to be overly-dependent on that particular sector to the detriment of other areas. These countries develop complacency syndromes because of the quick and easy money generated from extracting and exporting the wealth “fallen from the sky”.
The first oil well drilled in Malaysia was discovered by the Shell Company in Miri in 1910 (before Malaysia was formed). The 30m high oil well is called “The Grand Old Lady” and still stands tall today as a monument [3]. Whether Malaysia’s discovery of oil has caused “Dutch Disease” in our country is debatable. But I do think that even if we have not contracted a full-blown fever, we have definitely caught the flu, and it is increasingly serious. There is a need to improve the way we manage our “black gold”.
Petronas
The petroleum industry in Malaysia is governed by the Petroleum Development Act (PDA) 1974. Section 2(1) of the act grants Petronas “the entire ownership in, and the exclusive rights, powers, liberties and privileges of exploring, exploiting, winning and obtaining petroleum whether onshore or offshore in Malaysia”, and according to Section 4, Petronas in return “shall make to the Government of the Federation and the Government of any relevant State such cash payment as may be agreed upon between the parties concerned”.
According to the Petronas Annual Report 2016 [4], the total Petronas contribution to Federal and State Governments since its inception in 1974 until 2016 was RM971 billion. Over this period, although provided by the act, the relevant State governments only managed to get a small portion of this amount as a large bulk had gone to the federal government. In addition, because gas prices were regulated from May 1997 until the end of 2016, Petronas had to forgo revenue to the tune of RM241.4 billion5 to subsidise the power and non-power sectors in Peninsular Malaysia.
All in all, Petronas has contributed more than RM1 trillion to the Federal government since its inception in 1974. It is an astronomical figure – in numbers, RM1 trillion is written as RM1,000,000,000,000!
Is Petronas being milked too much? Isn’t it supposed to be milked anyway?
When we think about people benefiting from the country’s oil money, we should consider not only the current needs of the population but also how to allocate it in order to achieve intergenerational equity.
The amount of natural resources in our country is finite, and they belong to both the existing and yet-to-be-born populations of the country. We shouldn’t abuse these resources in such a way that it deprives our future generations of its benefits. In short, we must be fair to all generations.
At our current total proven reserves, Malaysia will run out of oil in approximately 15 years and gas in 40 years [5]. The oil and gas industry may even lose its attractiveness before our reserves run dry with the introduction of more disruptive technologies and substitutes for energy. In any case, the ultimate question for us is this: Are we ready for a time when we can no longer depend on oil and gas?
In addition to diversifying our economy, which requires a comprehensive plan that is beyond my ability to suggest alone, a straightforward step that we should take is to reduce our budgetary dependency on Petronas’ dividend payout and invest the oil money in the future.
Here are the three things that we should invest our oil monies on.
1. Enabling Petronas to Stay Competitive in the Game
Petronas will not cease operations the moment our reserves run dry. It will continue to be in operation as a GLC and contribute dividends to its shareholders, the people of Malaysia. It will remain a goose that lays golden eggs if we take care of it and allow it to live. The long-term survival of Petronas depends on how much it invests in its operations today.
Firstly, Petronas needs to invest sufficiently in its exploration and production, both in Malaysia and abroad, in order to discover more oil and gas reserves. It needs to maintain its reserve replacement ratio, which is the reserve added to the company relative to the amount produced, vis-à-vis other international oil companies. It is crucial to do that to ensure that Petronas can continue to operate, regardless of the status of oil and gas reserves in Malaysia.
Secondly, Petronas is currently facing an asset integrity issue because some of its pipelines are 35 years old while its plants and refineries are between 20 and 25 years old. Capital investment in new assets is important to guarantee its production is not impeded in the future.
2: Developing Renewable Energy Industry
In 2016, Chatham House published research that warned international oil companies such as BP, Shell, Chevron and ExxonMobil that they would not survive if they carried on with their current business models [6].
By the end of 2016, the World Economic Forum published the “Renewable Infrastructure Investment Handbook: A Guide for Institutional Investors”[7], which showed for the first time in history that solar and wind energy are cheaper than fossil fuel without subsidies. Over the past few years, the renewable energy sector has seen encouraging efficiency gains and diminishing costs, resulting in a dramatic fall in the levelised cost of energy (LCOE)*. For example, solar energy has seen its costs plummet from around USD600 per MWh ten years ago to USD300 per MWh five years later, and now, for utility-scale photovoltaic, USD100 or below. Wind’s LCOE is even cheaper at around USD50 per MWh. Compare that to the global LCOE for coal, which has been hovering around USD100 per MWh for over a decade.
Levelised Cost of Energy (World Average) by Energy Type
Source: World Economic Forum, Renewable Infrastructure Investment Handbook, p.6, 2016.
The World Economic Forum’s handbook also reported that more than 30 countries have already reached grid parity** with these forms of renewable energy without subsidies; and around two thirds of the world should reach grid parity in the next couple of years. In short, the renewable energy business is no longer just about saving the world and fighting climate change – it is a profitable one.
Petronas should transform itself from a petroleum company into an energy company. While maintaining its competitiveness in the fossil fuels arena, Petronas needs to increase investment in building its renewable energy muscles. Alternatively, separate from Petronas, the government must allocate some of the income from fossil fuels to incentivise the growth of the renewable energy industry in Malaysia.
How to accomplish 1& 2?
Overall, to ensure the long-term competitiveness of Petronas and the energy industry in Malaysia, oil profits need to be invested in i. New oil fields and infrastructure and ii. Renewable energy. To do that, Section 4 of the PDA needs to be amended to impose a cap on Petronas’ dividend payout, i.e. setting a maximum percentage of profit that Petronas is obliged to pay the government every year.
3. Establishing a Meaningful Oil Fund
The third way to ensure intergenerational equality is to put oil revenue into an oil fund which will make investments designed to provide income for the country. I would like to introduce an oil fund model used by Norway, a country that has oil and gas reserves that are about the same size as Malaysia. Norway’s 5.1 billion barrel proven oil reserves is the 24th largest in the world while Malaysia’s 3.6billion barrel proven oil reserves is the 30th largest in the world [8]. As for gas, Norway’s 1.922 trillion cubic metre proven gas reserves ranks 18th largest in the world while Malaysia’s reserves of 1.183 trillion cubic metres is ranked 24th [9].
Norway and Malaysia have taken different routes in how it deals with the money generated from oil and gas. In 1990, the Norwegian government established the Government Pension Fund Global to manage and invest all government income derived from petroleum. Less than 30 years later, it is now the largest fund in the world, standing at about USD900 billion [10] (which is about RM4 trillion at the current exchange rate) at the time of writing – that is more than three years of Malaysia’s current total GDP!
There is a fiscal rule on how much the government can withdraw from the fund each year, which is linked to the expected real returns of the fund [11]. In fact, the Norwegian government rarely withdraws significant amount of money from the fund to the government budget. When it decided to withdraw three percent of the fund to include it in Norway’s 2017 budget, it actually became news [12]! In Malaysia, the opposite is probably true. We are happily spending our oil money every year and it only becomes news when we don’t!
Do we have an oil fund? Yes. Petronas contributes a relatively small amount of money to the National Trust Fund on a voluntary basis every year. Can you guess the size of the fund now? It is about USD3 billion [13], which is 300 times smaller than Norway’s Government Pension Fund Global.
Of course, the Norwegian model has its flaws and challenges. Despite this, it should prompt us to think about the need to establish a more meaningful oil fund that will benefit our future generations.
All in all, to ensure intergenerational equity in enjoying the “black gold”, our generation needs to make an inconvenient and painful decision to reduce our budgetary reliance on oil money. Instead of spending all of it, we need to:
i. Allow Petronas to retain more of its earnings to help it stay competitive in the energy industry in the long-term;
ii. Invest the oil monies into developing renewable energies industries; and
iii. Start a meaningful oil fund to save for the future generation.
The future of Malaysia’s energy security and affordability depends a lot on the competitive edge we create for the energy sector today. It is time for Malaysia to move beyond oil and gas; we can’t afford to be complacent anymore or a full-blown “Dutch Disease” awaits us in time to come. We should start working seriously – both in terms of businesses and relevant laws – towards securing a future where energy is still available and affordable enough to continue to drive the engine of growth of the country.
This article is extracted from a chapter of my book, "Reimagining Malaysia."
Note:
* Levelised cost of energy (LCOE) is the net present value of the unit-cost of electricity over the lifetime of a generating asset.
** Grid Parity is when an alternative energy source can generate power at a LCOE that is equal or less than the price of electricity from grid.
References:
[1] http://etp.pemandu.gov.my/Oil,_Gas_and_Energy-@-Oil,_Gas_and_Energy.aspx
[2] C.W, Kiev. What Dutch disease is, and why it’s bad. The Economist. 5 Nov 2014 [cited 31 Aug 2017]. Available from https://www.economist.com/blogs/economist-explains/2014/11/economist-explains-2
[3] Miri-from where it all began. The Star Online. 20 May 2005 [31 Aug 2017]. Available from http://www.thestar.com.my/news/nation/2005/05/20/miri--from-where-it-all-began/
[4] Petronas. Annual Report 2016: Building strength through adversity. KL. 2016 [cited 31 Aug 2017]. Available from http://www.petronas.com.my/investor-relations/Documents/annual-report/PETRONASAnnualReport2016.pdf
[5] Malaysian Gas Association. Malaysia: Natural Gas Industry Review 2016 Edition. 2016 [cited 2017]. Available from http://www.malaysiangas.com/portal/document/publication/1486029018_Gas_Indust.pdf
[6] Chatham House. International Oil Companies: The Death of the Old Business Model. 2016 [cited 22 Nov 2017]. Available from https://www.chathamhouse.org/publication/international-oil-companies-death-old-business-model
[7] World Economic Forum. Renewable Infrastructure Investment Handbook: A Guide for Institutional Investors. Dec 2016 [cited 31 Aug 2017]. Available from http://www3.weforum.org/docs/WEF_Renewable_Infrastructure_Investment_Handbook.pdf
[8] Central Intelligence Agency US. The World Fact Book. Crude oil – proved reserve. [cited 31 Aug 2017]. Available from https://www.cia.gov/library/publications/the-world-factbook/rankorder/2244rank.html
[9] Central Intelligence Agency US. The World Fact Book. Natural gas – proved reserves. [cited 31 Aug 2017]. Available from https://www.cia.gov/library/publications/the-world-factbook/rankorder/2253rank.html
[10] Government Pension Fund Global, Norway. [cited 31 Aug 2017]. Available from https://www.nbim.no/
[11] Ministry of Finance. Norwegian Government. The Norwegian Fiscal Policy Framework. [cited 30 Dec 2017]. Available from https://www.regjeringen.no/en/topics/the-economy/economic-policy/economic-policy/id418083/
[12] Tsvetana Paraskova. Norway set to use record oil fund money in 2017 budget. 4 Oct 2016 [cited 31 Aug 2017]. Available from http://oilprice.com/Latest-Energy-News/World-News/Norway-Set-to-Use-Record-Oil-Fund-Money-In-2017-Budget.html
[13] Natural Resource Governance Institute. 2017 Resource Governance Index. 2017 [cited 31 Aug 2017]. Available from http://api.resourcegovernanceindex.org/system/documents/documents/000/000/046/original/2017_Resource_Governance_Index.pdf?1498599435
