Petronas president Tan Sri Hassan Marican, in a separate interview with Azam Aris and Surin Murugiah from The Edge Financial Daily after announcing its financial results for the year ended March 31, 2007, provides an insight into the company’s operations and future plans. Here are excerpts of the interview:

FD: Another record profit year for Petronas. How would you see Petronas in five years’ time? Is size a very important competitive component in the industry?

Hassan: Size is part of the equation. The contribution from our international operations continues to grow. It registered a 19% growth between last year and this year. But more importantly, is the growth our international production of oil and gas which is at 34%. This is important as production in Malaysia is depleting as oil has been produced here for more than 100 years. The domestic reservoirs are maturing.

So besides expanding overseas in exploration and production activities, we are also focusing on maximising the utilisation of technology to increase the recovery rate from the reservoirs (or what is termed as “oil initially in place”). Our recovery rate averages about 35% which is not dissimilar of the industry average but we have set ourselves to increase it to about 45% so that we can get more oil from the reservoirs. We are embarking on initiative, which we called enhance oil recovery, that is very much dependent on technology, cost and the price of oil. If we can do this, then we can prolong the life of the reservoir and our hydrocarbon resources. We can then arrest the depletion rate that we are experiencing today. This is one of the challenges.

Internationally, for example, we are embarking on the Turkmenistan gas development, continue to develop our reserves in Sudan in order to sustain production level from overseas operations. This is what we want to do but we are operating in a very challenging environment where globally, cost has been escalating well ahead of price increase of crude oil. For example, drilling rigs cost 200% more than it used to be. Additionally there is the severe shortage of human capital situation.

There are many projects, not only ours, that have been reviewed, some deferred, some cancelled because rising costs made it less economical. Everybody in the industry is facing these challenges.

FD: Within this scenario, how would you see the company growing? More organically or via acquisitions?

Hassan: We will grow both ways organically and through acquisitions. Organically we will continue to add value by expanding some of the facilities, revamping and undergoing debottlenecking exercises like what we do with the refineries, and through acquisition if and when the right opportunities arise and it fits into our strategy we will do it.

FD: In what sectors and geographical areas?

Hassan: The growth area, especially in the upstream, will be in Southeast Asia, North Africa and Central Asia where now we are not only present in Turkmenistan but also in Uzbekistan. We will also look at expanding refining capacity both in Malaysia and internationally. We would want to look at investing in a refinery in Indonesia because there is a shortage of refining capacity and given the fact that we want to be more active in the downstream in Indonesia. It could be an investment in an old refinery which we will then expand… this is one option which we are looking at. Downstream we want to increase our share in the lubricant market, which is a high value business, notably in Vietnam where the market is huge and expanding.

FD: Petronas has taken strategic stakes in Russian company Rosneft and Cairn India. How would Petronas further capitalise its presence in both countries?

Hassan: Let’s take India first. For many years, we have been trying to get into the oil and gas sector at the asset level. We have not been successful but the opportunity came when we invested 10% in Cairn India Ltd. Cairn has reserves and developing them in Rajasthan which come on stream in 2009 about 150,000 bpd. From here, Petronas can expand its presence in India by working together with Cairn or later on our own.

It’s a similar route we are taking in Russia. We have been monitoring the development in Russia, which we want to be in. The opportunity came during Rosneft initial public offering when we were invited to participate. We invested US$1.1 billion for a small stake of 1.4% but still make us the largest foreign shareholder in the company. We want to build the relationship with Rosneft and then get to participate in operations at the asset level.

Russia is a big country with huge reserves for both oil and gas, a lot of them still untapped. So, the potential is there. Rosneft gives us the entry point and I believe it will be a win-win partnership. But it takes time to develop the relationship.

FD: Is there a possibility that one day Petronas’ international business will be bigger than its domestic business?

Hassan: It is possible. Our upstream production, for example, could eventually be 50:50 for both domestic and international. We hope to achieve this ratio by 2010.

FD: There will be a few deep-sea blocks coming on stream in the next few years. Production wise, how do we accommodate these new reserves. Will Malaysia be increasing its daily production rate?

Hassan: We will maintain the current production rate. Kikeh will start producing 50,000 barrels per day (bpd) and later go up to 120,000 bpd and Gumusut beginning to produce oil towards end 2010 but at the same time we see rapid depletion in existing old acerage in peninsula and Sarawak. So, national production will be maintained around 650,000 bpd for oil. It is also part of our policy to extend the life of reserves.

FD: Can the gas subsidy to the power sector continue? Is there a solution to this?

Hassan: We have to ask the question, can the subsidy be sustainable in the long run? For example, when we talk about gas, it is a depleting resource. In a subsidy environment, there is no real focus on the efficient use of the resource, conservation of the resource and the impact on the entire economic chain.

What happens then? We will definitely come to a crunch, in any subsidy environment where the subsidised item is no longer going to be there. Then what?

Take the power sector aside. Look at the commercial sector where there is an increase of 39% in subsidy. This increase is the result of consumers switching from another fuel to gas because it is cheaper. So, the question then is where has the benefit been passed down to?

These are questions to which we need to find answers to. Which consumers have actually benefited? These are more structural issues and questions that have to be addressed. In addition, 23% of the gas we consume are imported gas. As we move forward, as the domestic resource declines and consumption is maintained at this level or increased, we have to import more. The question of importing more is firstly, you have to pay market price so the subsidy level will go higher. But more importantly, host countries are now restricting exports of their gas because they need it for their own domestic requirement. So where do we get the gas from?

The differential is very wide. Because of the cheaper gas, consumers are switching from diesel or liquefied petroleum gas. In fact 90% of the volume growth in the commercial sector is due to switching. They are going for the cheapest but subsidised fuel.

Diesel is sold to the fisheries sector at RM1 per litre, which is higher than what the manufacturing sector pays. Are we missing our target? Subsidies are meant to target the lower income and those who need it. Can we afford to continue this? The money used for subsidy is better utilised for development.

FD: How long would the tight supply — manpower, maintenance facilities, supporting services — experienced by the industry throughout the chain and the escalating cost, continue?

Hassan: Human capital is going to be the most critical, challenging and probably will take the longest time before we see some relief. Last year, we took 1,100 engineers of different disciplines, and we are converting them into petroleum engineers and geo-scientists. This is to accelerate the process of getting the right people into the system. But the process takes at least two years, but then the person is still raw. You need another five to seven years of experience before being a really qualified person in petroleum and reservoir engineering. So, you are looking between seven and 10 years.

But in the industry today, the average age globally (of oil and gas workers) is 52 years old. Given the time frame that we need, seven to 10 years to produce a trained engineer, we will still face the problem of shortage. At Petronas, the average age of our staff is 36.

But poaching has become a problem. Even during the low-price environment in the 1990s, we had been recruiting and training our people but the reward for doing this is that our staff with seven to 10 years were poached by competitors in the Middle East, UK and Australia.

FD: Progress of Eastern Region

Hassan: We have completed the Master Plan. There is a lot of confusion here. Our role is to draw up the Master Plan. The assumption everywhere is we are going to dump in money, develop the eastern states. Our assignment, our task that the government requested us to do is draw up the Master Plan to cover for the Ninth, Tenth and Eleventh Malaysia Plan period. We have done that. We have completed and presented that. As far as the oil and gas sector, we will continue to base it on our own Master Plan.

Find More Other News : Company, Exploration, Mine Trade & Market, Mining Top News, Oil & Gas