ECO415 ECONOMICS

PETRONAS BERHAD

OIL, GAS AND ENERGY INDUSTRY

PREPARED FOR: DR CHEAM CHAI LI

GROUP : D1CS2492A

PREPARED BY:

WAN SYAHIMI AFIQ BIN WAN AHLIM

CONTENT

TOPICS PAGES

1.0 INTRODUCTION

1.1 PETRONAS BERHAD

1.2 OIL, GAS AND ENERGY INDUSTRY

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2.0 MICROECONOMICS

2.1 DEMAND AND SUPPLY

2.2 COST OF PRODUCTION

2.3 MARKET STRUCTURE

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3.0 MACROECONOMICS

3.1 NATIONAL INCOME AND ECONOMIC GROWTH

3.2 EMPLOYMENT

3.3 BUDGET

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4.0 CONCLUSION 16

REFERENCE

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INTRODUCTION

Economic can be determine as the social science study concerned with the

efficient use of limited sources to achieve maximum satisfication of human

wants or necessities. Oil, gas and energy are one of the human necessity in

any side of the globe. In this context, we will study about the oil, gas and

energy industry in Malaysia which is focusing on PETRONAS BHD company.

We will discuss about the firm’s background, activities run by the firms in

microeconomic and and contributions of oil, gas and energy industry in

macroeconomic perspective.

1.1 PETRONAS BERHAD

Petronas is a significant name of Petroliam Nasional Berhad or Malaysia’s

National Petroleum Corporation which are wholly-owned by the Malaysia

government. It has been established since 1974. The activities of Petronas

includes exploration of oil, gas and energy, development of their product and

production of crude oil and natural gas in Malaysia and whole world. National

Petroleum is engaged in a wide spectrum of petroleum activities, including

upstream oil, gas and energy exploration and production, downstream oil

refining, gas processing and liquefaction, and gas pipeline network operation.

Through three decades of development, Petronas has grown into a

multinational integrated oil and gas company, owns three subsidiaries under

Petronas Trading Co., Ltd, Petronas Gas Ltd and Malaysia International

Shipping Co., Ltd. There have more than 100 subsidiaries in overseas and it

was ranked among Fortune Global 500’s largest corporations in the world.

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The income and profit of Petronas also ranked as 133th and 16th respectively

in the world.

1.2 OIL, GAS AND ENERGY INDUSTRY

Malaysia’s first foray into oil, gas and energy commenced over a century ago,

with the first oil well being drilled by Shell in Sarawak, East Malaysia in 1910.

The Petroleum Mining Act 1966 saw Exxon and Shell being given rights to

explore and produce rights in return for royalties and tax payments to the

government. However, under the New Economic Plan the Petroleum

Development Act (PDA 1974) came into being. With this Act, a wholly owned

government entity was formed with exclusive rights to all the oil an gas

resources in Malaysia, and thus PETRONAS was born.

The oil, gas and energy industry is central to Malaysia’s economic growth,

contributing to one-fifth of the national Gross Domestic Product over the past

decade. There are over 3,500 oil, gas and energy businesses in Malaysia

comprising international oil companies, independents, services and

manufacturing companies that support the needs of the industry value chain

both domestically and regionally. Many major global machinery and

equipment manufacturers have set up bases in Malaysia to complement

home-grown machinery and equipment companies, while other Malaysian oil

and gas companies are focused on key strategic segments such as marine,

drilling, engineering, fabrication, offshore installation and operations and

maintenance (O&M).

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2.0 MICROECONOMICS

2.1 Demand and Supply

The business’s type of Petronas is mainly about oil, gas and energy.

Examples of oil and gas product that have been produced by this firm are

RON95, RON97 and diesel. All these types of production are been used by a

lot of consumers in Malaysia and whole world especially in order to make sure

the transportation activities going through steadily. But, how strong the

willingness and ability of consumers to buy Petronas’ products? And did the

production of Petronas meet the demand? So, on this section, we will discuss

about the demand and supply for Petronas.

Determinant of Demand of PETRONAS

Basically, Petronas’s product seen as an necessary goods. But, people will

only consume when vehicles is out of fuel. People also will not buy more

petrol just because Petronas is cheap as there have no sense if they are not

going to use it. Besides, oil, gas and energy price of Petronas is controlled by

the Malaysia government, thus the price will not be affected randomly by the

quantity demanded in short period of time. Nonetheless, Petronas is not the

only one petroleum company in Malaysia, therefore, demand of Petronas will

be affected by its competitor which people prefer to. They are Petron, Shell,

Caltex, BHP and etc. In addition to this, population, expectations of the future

and the price of complementary goods will also affect the demand of

Petronas.

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Population, in term of demand for Petronas, population is the number of

people living in the certain area. If in a certain area the number of population

is high like Kuala Lumpur so the demand for Petronas are also high compare

than demand in the Machang which the number of population is small. We

can see the number of Petronas’ gas station in Machang is less than the

number Petronas’s gas station in Kuala Lumpur, so the demand for gas and

oil are less because the population in Machang are small.

Expectations about the oil price fluctuation in future, it will affect the

demand of Petronas seriously. For example, Prime Minister Datuk Seri Najib

Razak announced that RON 95 petrol will increase RM0.20 to RM2.10 per

litre and diesel will rise to RM2.00 in September 04, 2013. After the news,

most of the people swarm into Petronas to “enjoy” the last cheap petrol in the

previous of that night. So, the demand of Petronas increases rapidly in that

night.

According to complementary goods, Petronas’ products is the

complementary goods to vehicle. When the price of vehicle decrease,

hence the quantity demanded for vehicle will increase. In this case, demand

of Petronas will going up with the price drop of transportation. For example,

Perodua will launch promotion to decrease the price of its car during every

June of the year. As a result, consumers are able and willing to buy vehicle

under Perodua. When the quantity of vehicle is increase, the demand of

Petronas will also be rose automatically.

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Elasticity of Demand and Determinant of Elasticity of Demand for

PETRONAS

Why when the prices of Petronas went up, demand of Petronas still remain

unchanged below a fixed level? It is because Petronas’ products is

necessary goods and there are not so many good substitutes for Petronas

that consumers could buy. This issue is closely related to a microeconomics

concept, which is elasticity of demand. Elasticity is the measurement of

sensitivity between price and quantity demanded. For price elasticity of

demand, Petronas just like daily life essentials for consumers, even if

government increase the price, they will still consume a lot of Petronas’

products on schedule. Thus, Petronas is relatively inelastic. As the price of

the Petronas increase, the quantity demanded for it will not decrease very

much.

However, there have also some factors that determine the elasticity of

demand. They are nature of goods, availability of substitutes, alternative use,

possibility of postponing consumption, proportion of income spent, price-level,

force of habit, durability of commodities and time period. Among the factors of

time period, it will affect the price elasticity of demand for Petronas. For

example, after rising of petrol price, the immediate effect on demand was

small because people still need petrol for their cars in short period. In the long

period, people will plan and find another way to reduce the consumption of

petrol. An example would be, people will change their car into more fuel-

efficient car or heating systems that used in gas heater. As a result, the price

elasticity of demand for Petronas will become relatively elastic in the long run.

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Determinant of Supply for PETRONAS

For the factor of supply for Petronas, firstly is the products that have been

produced by Petronas that need to be supply to the consumers other term is

the number of buyers. For example, in areas with large populations such as

Kuala Lumpur certainly have a number of vehicles more than in rural areas

such as Machang. As we can see, the PETRONAS pump station in Kuala

Lumpur is more than in Machang. So, the supply for oil, gas and energy in

Kuala Lumpur is higher than Machang.

In Petronas bussiness activities, advancement in technology plays a big

role in production and supply. In theory, better technology leads to higher

production. Petronas fuel production was rising since year 2002 due to the

new development of offshore. New development of offshore fuel enables

more fuel to be excavated. This has caused the production of fuel in Malaysia

to reach at peak of 755.35 thousand barrels per day in 2004. Exploring in the

ultra deepwater requires the industry to continue to employ more

sophisticated drilling technology so that the various inherent risks are taken

care of such as minimum spilling; safety of the health and environment; and

preventing the risk of dry drilling after having employed all the efforts, time

and technology on exploration. In a nutshell, as the advancement in

technology increase, the supply of Petronas increase.

Besides, cost of production and expensive technology also one of the

deteminant of Petronas supply. As deepwater exploration is more complicated

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and dangerous than onshore fields, operation cost and production cost lifting

of oil to the surface tends to be higher. Financing for the equipment and

technology may not be easily come forth by financiers due to uncertainty and

riskiness of the project viability while economic return will only be realized in

the long-term. The removal of rig after drilling proves just as costly as

construction. The overall drilling expenditure is expected to increase with

more offshore drilling undertaken by international oil companies, national and

government worldwide. Therefore, as the cost of prodution increase, supply

for oil, gas and energy of PETRONAS decrease.

Elasticity of Supply and Deteminant of Elasticity of Supply

For Petronas, the elasticity of supply clearly influenced by it’s technique of

production. Since the technique of production of Petronas is very complex,

so the elasticity of supply is relatively inelastic. Petronas cannot increase the

supply as anytime they like. This is because fuels are depleting and non-

renewable resources, even if market prices are much higher (regardless of

government intervention), the supply is unable to increase correspondingly as

oil field requires many years to develop. 

On the other hand, Petronas’ product like gasoline is different with another

goods, simply, it is hard to found a subtitute for this goods. In the short

run, the change of the gasoline price will give small effect on supply because

quantity supplied of gasoline is difficult to be improve. Therefore, price

elasticity of supply for Petronas is relatively inelastic.

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2.2 COST OF PRODUCTION

In economics, fixed costs and variable costs are two separate components of

total cost. Examining the two separately can be useful to demonstrate how

much of a company's costs are tied to its level of production, and how much

are not. Petronas is no exception. This company need heavy equipment, large

sites and skilled labor, all of which result in both fixed and variable costs.

Fixed Cost

Fixed costs for a business are costs that do not change based on the level of

production. For example, if a business has a long-term rent contract on its

office, that would be a fixed cost, because it doesn't matter how much the

business produces. It still needs to make its contractual payments. By

definition, fixed costs cannot change in the short-run.

Petronas have to pay a variety of fixed costs. For example, the costs of

regulatory compliance will not vary much with the level of production. This

company may have workers with long-term contracts, such as company

officers or consulting geologists who help them find oil. If Petronas buys some

of its equipment or land, that will also be a fixed cost, because the cost will be

constant no matter how much oil the land or equipment produces.

Variable Cost

A variable cost is one that varies with the level of production. Petronas have

control over their variable costs because they can cut down or increase

production to change them. Examples of variable costs include the cost of

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materials that go into the Petronas' products, or the cost of hourly labor

needed for production. However, workers who have long-term salary

contracts might not count as variable cost if their salary is fixed in the contract.

Depending on what aspects of oil production and sales that Petronas chooses

for its operations, its variable costs will change. For example, Petronas

involved with drilling might have equipment with short-term rental contracts

and workers who are paid by the hour. Using these resources depends on

how much oil the company attempts to drill. Furthermore, producing more oil

increases the company's potential liability in the case of a spill or other

accident, necessitating more expenditures on emergency management and

legal teams.

2.3 MARKET STRUCTURE

Now, we are going to take a glance at the market structure of Petronas.

Market structure is best defined as the organisational and other

characteristics of a market. We focus on those characteristics which affect the

nature of competition and pricing, but it is important not to place too much

emphasis simply on the market share of the existing firms in the industry. In

this section, we will this discuss about type of market structure of Petronas

and it’s characteristics.

Type of Market Structure

To be precise, PETRONAS is operating in the market structure named

Oligopoly. Industries in this market structure prevent the entry of new firms

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by barriers and only a few firms compete among each other (Parkin,

2014). For identification, there is only limited number of fuel companies,

there’s existence of barriers to entry, the nature of fuel is undifferentiated and

the demand curve for fuels is inelastic.

Limited number of firms

In Malaysia, the major firms supplying and producing fuels are only limited to

Shell, Caltex, BHP, Esso and Mobil and anothers few company. All the fuel

companies available in Malaysia's fuel industry currently are only this few.

Nature of goods is undifferentiated

All these fuels companies in Malaysia sell undifferentiated goods. This is as

seen in every petrol station that the fuels that they sell are only limited to

RON95, RON97, diesel and natural gas.

Barriers to entry

In the petroleum industry, one of the barriers to entry is applying and obtaining

the license. In Malaysia, all the petroleum resources are owned by Petronas.

In brief, there’s no access to the natural resources for anyone to start-up a

petrol company, unless with approval of Petronas. It is definitely difficult to

obtain the license as government of Malaysia tries to limit the number of petrol

companies for easy governance.

Another barrier is the inability to compete with existing firms. As we all know,

most petrol companies in Malaysia have been operating for a long time.

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Established and experienced firms have prior knowledge in management,

production and marketing as compared to new firms. They operate in the

manner where there are always economies of scale and operating costs is the

lowest and by utilizing the most efficient techniques, most reliable suppliers

and also best rate in finance. To be able to start-up and compete, a huge

amount of capital will incur. These two barriers prevent new firms from

entering the industry.

3.0 MICROECONOMICS

3.1 NATIONAL INCOME AND ECONOMIC GROWTH

Total income received by all citizen neglecting where there are in the

economy based on the goods and services produced in a certain period of

time. Simply, total value of final goods and services produced by the nationals

of the country for a particular period of time,usually a year. Oil, gas and

energy industry are the one part of the National Income. The oil, gas and

energy industry is central to Malaysia’s economic growth, contributing to one-

fifth of the Gross National Product over the past decade.

Since its incorporation, Petronas has grown to be an integrated international

oil and gas company with business interests in 35 countries. As of the end of

March 2005, the Petronas Group comprised 103 wholly owned subsidiaries,

19 partly owned outfits and 57 associated companies. Together, these

companies make the Petronas Group, which is involved in various oil and gas

based activities. The Financial Times has identified PETRONAS as one of the

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"new seven sisters", the most influential and mainly state-owned national oil

and gas companies from countries outside the OECD.

The group is engaged in a wide spectrum of petroleum activities,

including upstream exploration and production of oil and gas

to downstream oil refining; marketing and distribution of petroleum products;

trading; gas processing and liquefaction; gas transmission pipeline network

operations; marketing of liquefied natural gas; petrochemical manufacturing

and marketing; shipping; automotive engineering; and property investment.

PETRONAS provides a substantial source of income for the Malaysian

government, with 45% of the government's budget dependent on

PETRONAS' dividend, moreover in 2011 government actual balance has 5

percent deficit of Gross Domestic Product. On 26 February 2015, Petronas

cut its 2015 capital expenditures budget after reporting a $2 billion fourth

quarter loss, the company’s first loss since it began reporting quarterly results

five years ago

Uses of national income is to measure economic growth,our project is oil and

gas industries .Petronas Berhad are the one of the industries. A country is

said to experience a statisfactory rate of economic growth if there is an

increases in the real GDP over the year.Gross Domestic Product. To measure

growth rate we use the following formula:

Growth Rate=Real GDPcurrent year−RealGDP previous yearRealGDP previous year

×100%

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GDP $815.6 billion (PPP 2015 est.)

$296.2 billion (Nominal 2015 est.)[1]

GDP growth 5.0% (2015)[2]

GDP per capita $26,300.20 (PPP, 2015 est.)

$9,776.206 (nominal, 2015 est.)[1]

GDP by sector (2014)[3]

Agriculture: 7.1%

Industry: 36.8%

Services: 56.2%

Inflation (CPI) 3.0% (November 2015)[4]

Population below poverty line 1% (2015)[5]

Gini coefficient 43.1 (2009 est.)

Labour force 14.04 million (2014)[6]

Labour force by occupation (2012)

Agriculture: 11.1%

Industry: 36%

Services: 53.5%

Unemployment 3.1% (2014)

We can conclude that the growth rate by petronas slightly increases year by

the year according to the statistics.

3.2 EMPLOYMENT

The Oil, Gas and Energy (OGE) National Key Economic Area (NKEA) is

human capital, requiring a workforce of 52,300 by 2020. The OGE NKEA Lab

in 2010 identified 12 Entry Point Projects (EPPs) as well as two business

opportunity thrusts. Combined, they are projected to deliver RM131.4 billion in

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Gross National Income (GNI) and create an additional 52,300 jobs in the OGE

sectors. A significant proportion of these jobs will be highly-skilled, with an

estimated 21,000 (40 per cent) for qualified professionals such as engineers

and geologists.

While technological advancement has helped companies unlock value but

created a challenge in aligning the talent pool with specific market

requirements. Outflow of skilled professionals to other countries and a

shortage of talent in Malaysia. To ensure talent availability over the long term,

Malaysia Petroleum Resources Corporation (MPRC) oil and gas companies

and universities are working collaboratively to build up individual capability

development.

3.3 BUDGET

PETRONAS provides a substantial source of income for the Malaysian

government, with 45% of the government's budget dependent on

PETRONAS' dividend, moreover in 2011 government actual balance has 5

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percent deficit of Gross Domestic Product. The oil and gas sector supplied

about 29% of government revenue in 2014. As an oil and gas exporter,

Malaysia has previously profited from higher world energy prices, although the

rising cost of domestic gasoline and diesel fuel, combined with sustained

budget deficits, has forced Kuala Lumpur to begin to address fiscal shortfalls,

through initial reductions in energy and sugar subsidies and the

announcement of the 2015 implementation of a 6% goods and services tax.

Falling global oil prices in the second half of 2014 have strained government

finances, shrunk Malaysia’s current account surplus and put downward

pressure on the ringgit. The government is trying to lessen its dependence on

state oil producer Petronas. Malaysia is the largest net exporter of petroleum

and natural gas products in south-east Asia, and its finances have not been

immune to the effects of the collapse in prices. The government estimates

that oil & gas revenue will account for just 14.6% of total revenue in 2016,

down from 30 per cent just two years earlier. Dividends from the state-owned

oil company, Petronas, are forecast to fall to MYR13bn (USD3.1bn) in 2017

from RM16 Bilion in 2016 and RM29 Bilion in 2014.

4.0 CONCLUSION

In the nutshell, we can conclude that the oil and gas industries is one of the

major sector in Malaysia that contribute to the increase in the National Income

in order to provide a better life. The output of this sector also ease people in

doing job daily. For the example the fuel uses for the transport is very

important. Malaysia is a developing countries, we must believe that the oil and

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gas industries is the most important sector to realized the target of achieving

developed country during 2020. As this firm is an oligopoly market structure it

can obtain supernormal profit which as we know contributing to the

government income.

This sector also can increase income per capita of the Malaysian by hiring

more local labour to work in this industries and create expertise among

Malaysian by providing more practical industries training. Hence it can

increase individual disposable income to provide a comfortable and

comprehensive standard of living of Malaysian. It hence can also achieving

one of the macroeconomic objective which is full employment.

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