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Tutor

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Petronas

Institution

Analysis of petrol company Petronas in Malaysia Firm background Petronas is an acronym for Petroliam Nasional Berhad oil and Gas Company. It was formed by the government of Malaysia in the year 1974. It is a solely owned and run by the state. Petronas company according to Noreng (1997) is vested with the responsibility of developing and adding value to oil and gas resources. Petronas has grown since it was incorporated to be a global oil and gas company. It has business interests and operations in 31 countries (Abidin 1999). According to Fred (2005), by the end of June 2011, Petronas comprised of 105 subsidiaries that are wholly owned, 18 partly owned outfits and many associated oil and gas companies. Petronas Group is involved in a vast variety of petroleum activities. Philips (2004) explains that this includes the upstream exploration and production of oil and gas products. Its activities also extend to downstream refining of oil, oil marketing and the eventual distribution of the products. The other activities that form a core of its operation include processing of gas. This involves liquefaction of the gas, transmission over the pipeline system and the eventual marketing of the liquefied natural gas. It is also actively involved in manufacturing and marketing that involve shipping, property investment and automotive engineering. In 1998, the oil and gas company financed the building of Petronas Twin Towers. The towers, at one time the worlds tallest towers, were later used to house the company main headquarters (Nasr 1997).

1.

Financial report

Petronas Company, during the financial year that ended in March 2010, produced a record revenue performance. It recorded the ever highest revenue of $67,202 million in the fiscal year 2010. This was an increase of 30% over 2009 (Ahmed 2005). The increased revenue was driven by average realized prices and the high sales volume during the year. Petronas revenues from national and international operations increased by 17.07% and 35.3% respectively in the year 2010. The increase demonstrates its global growing operational presence (Petronas 1994). The profit before tax for the fiscal year 2010 increased by 39.78% to $30,333 million. Despite the company operating in a harsh environment that is characterized by uneven cost of operating and price escalations, the company was able to contain successfully the operating costs (Arief 1995). The net profit according to Fred (2005) amounted to $21,652 million in the 2010 financial year 2010. This was an increase of 39.4% over the year 2009. Petronas oil and Gas Company had a sound balance sheet where the assets totaled $105,034 million during the fiscal year 2010. This accounted to a 24.4% asset increase over the year 2009. During the 2010 fiscal year, the debt burden for the long term decreased to $8,314 million as compared to $9,304 million in 2009 and $9,775 million in the 2007 financial year. The robust revenue growth of Petronas oil and Gas Company has allowed it to pursue other intriguing opportunities for investment in the coming years (Manning 2000). 2. Marketing strategies This is a process through which organizations and companies use in concentrating their limited resources. The main objective of market strategy is to increase sales and in the process achieve a competitive advantage. This will involve the basic short term and long term activities in the marketing

field. Petronas oil and Gas Company has improved its marketing operations in the energy value chain, locally and internationally. The main marketing strategy for Petronas oil and Gas Company is based on the market dominance. Through market dominance, the company became the leader in all the oil and gas related activities in Malaysia. The marketing operations where Petronas became the market leader entailed oil and gas operations, exploration, production and oil refining. The company also engages in petrochemical manufacturing and marketing, shipping and property investment. The company also has diversified into petrochemicals industry in view of remaining competitive in the market. Petronas oil and Gas Company has its operations in at least 35 countries globally. This is achieved through five main business divisions that include; namely gas business, oil business, exploration and production of gas and oil, maritime, logistics and petrochemicals. For instance, the Petronas generated 25% of its total revenues during the 2010 fiscal year from the exploration of oil and gas and production related operations (Petkova 1997). 3. What's specific of corporate governance in Petronas?

Corporate governance in Petronas is the process through which the company is directed and controlled. The corporate governance dictates the company decision making and defines on who holds the power in a given company. A strong corporate governance system is the one that keeps track of the company's progress and make changes in corporate structure appropriately. Petronas corporate governance involves the companys management, the regulatory and the market mechanisms. Petronas company management is highly effective and competent. It has a close tie with the government particularly the office of the Prime Ministers Office. The Chairman and Board of

Directors in Petronas report directly to the Prime Minister. The Board of directors is composed of Director General, the General Secretary from Finance ministry and coordination unit. The Management Committee of Petronas reports to the Board. Petronas is composed of four business divisions. They are namely; oil business, exploration and production, petrochemical business, and gas business. The operations of the company are by function and all the departments directly report to their vice presidents. Within this corporate governance system, the chairman and Prime Minister usually have considerable power and influence. Petronas company independent of the any influence from other government entities (Yang 2011). 4. What did governance structure implement to Petronas

Petronas oil and Gas Company believe that sound corporate governance is crucial in achieving the objectives of the organization. It also ensured that the organizations growth, sustainability and competitiveness are achieved. The governance structure at Petronas implemented the best practices due to the companys strong global orientation. The board of Petronas ensured that the standards of transparency and governance are enhanced. This was in order to strengthen the companys organizational effectiveness and produce a high performance oriented culture. These governance structures are for the company to compete successfully in the challenging industrial environment. The Board is assigned to maintain high governance standards which include ethical conduct and transparency based on international standards. Since its introduction in 2010, the corporate governance launched governance programmes to enhance the strict application of the laid down governance standards throughout the Petronas group.

5.

Identify at least one recent major challenge experienced by Petronas.

Petronas many oil fields in Malaysia are depleting and assets aging. Petronas oil Company, as a result, is faced with the challenge of maintaining the oil production level constant. Oil production in Malaysia, for instance, in the first quarter of the fiscal year 2010 was lower at 509,900 barrels a day. This is in contrast to 527,400 barrels during the same period of the previous fiscal year (Yang 2011). Fred (2005) suggests that Shamsul Azhar, the chief executive officer and president of Petronas, in a press statement argued that there was no excitement in Petronas when world oil prices surged beyond the control of the company. The main challenge for the forward move is still production and Petronas has neglected its growth strategy. The company management has embarked on programs to ensure heavy investment in the capital expenditure over the years to ensure future growth and also replace the aging assets. The management concurs that if the company does not grow, then the company becomes irrelevant. To counter the challenges faced by Petronas, the management is conducting studies in some countries such as; Indonesia, Australia, Myanmar, and China on the possibilities of mergers with other companies and the eventual acquisition of unconventional oil fields outside Malaysia (Arief 1995). 6. How did the governance structures enable firms to respond?

The corporate governance structures help a company in effective management and solving the challenges and issues that arise in the work environment. Governance structure entails the collective leadership system which includes executives of the company and the main shareholders. The better governance structures in Petronas helped the company improve on their overall performance. Without the governance structures, Petronas could not be able to recognize efficiently any challenge
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facing the company production. Working together as a concrete team, the group of executives successfully foresaw the market changes. The governance structures enabled the firm to respond through ease of access to capital. According to (Valencia 2011), when the corporate governance of a company is better, the company is strategically positioned to access outside capital in funding expansion projects. Petronas has the state of Malaysia as its substantial shareholder. Through the shareholders, the company connects investors into the business and in the process the support the company monetarily. Better Standards were introduced to Petronas due to the better governance structures. The standards in Petronas Company affected the quality of products and improved on marketing. The combined efforts of appropriate governance structures of the company and the management allowed the company in accurate decision making and creating standards in the highly competitive market. Conclusion Petronas oil and gas company posses several key strengths that make it unique unlike other similar companies in the market. Sarantakos (1998) suggests that Petronas is a company that has smooth flow of activities in its structure. It is also well run and managed with leadership that exhibits an appreciable administration and financial accountability. Petronas has integrated into the global scene by developing upstream and downstream operations in various countries. For instance, it has a key presence in the Middle East, Africa, Australia and Europe. The vast integration into the global market and overseas enterprises generate a significant percentage profits.

References Ahmad, A 2005, Presentation before Asian Energy Forum, Institute of Energy Economics Japan. Arief, S 1995, A Report on the Malaysian Petroleum Industry. East Balmein, Australia. Abidin, A 1999, Overview of the Prospects for the Asia Market: Viewpoint of the National Oil Companies. Singapore, Asia. Baharuddin, S 1994, Malaysian Development Experience. National Institute of Public Administration, Kuala Lumpur. Fred, R 2005, Petronas: A National Oil Company with an International Vision, viewed 7th September 2012, <http://www.bakerinstitute.org/programs/energy-forum/publications/energystudies/docs/NOCs/Papers/NOC_Petronas_TronerVDM.pdf.> Manning, R 2000, The Asian Energy Factor: Myths and Dilemmas of Energy, Security and the Pacific Future. New York: Palgrave. Moorthy,V 1981, The Malaysian National Oil Corporation: Is it a Government Instrumentality? The International Comparative Law Quarterly. Nasr, S 1997, Islam in Malaysian Foreign Policy. London, Routledge. Noreng, O 1997, Oil and Islam: Social and Economic Issues. New York, Wiley. Petronas. S 1994, Dekad Perkembangan Petronas, Kuala Lumpur. Petkova, E 2002, Closing the gap: information, participation, and justice indecision-making for the environment, Washington DC, World Resources Institute.
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Phillips, N 2004. Discourse and institutions. Academy of Management Review, 29, 635-652. Sarantakos, S 1998, A Report on the Malaysian Petroleum Industry, 2nd edn, Macmillan Education Australia, South Melbourne, Vic. Valencia, M 1997 Sharing Resources of the South China Sea, The Hague, Nijhoff. Yang, X 2011, Malaysia's oil firm faces challenges to keep production level, viewed 7th September 2012, < http://www.asean-cn.org/Item/2065.aspx>.