BIG FISH IN A LITTLE POND

Few weeks ago, Petron Corporation announced a major plan to expand and upgrade their refineries in the Philippines and Malaysia. The biggest refinery in the Philippines will be de-bottlenecked from 180,000 to 270,000 bpd at a cost of USD 0.5 billion. The refinery last major upgrade was in 2014 where another fluid catalytic crackers (FCC) and a delayed coker unit (3rd in ASEAN after Dumai and Melaka) were installed which made it capable of producing more gasoline & petrochemical products and consume cheaper heavier sour crude oil.

Petron acquired ExxonMobil’s Port Dickson (PD) simple refinery in 2011 along with 560 retail stations and seven fuel distribution terminals. As part of the major plan above, the PD refinery will be de-bottlenecked to 150,000 from 88,000 bpd and upgrade its capability to produce  higher margins petroleum and petrochemicals products. The total expansion cost is estimated about USD 1.5 billion.

Operating Petron’s PD refinery has various challenges. To begin with, it could only consume low sulphur crude oil which is costlier than sour crude. It also lacks the secondary units to upgrade the crude oil residue to higher margins fuel. To exacerbate the situation further, they are constrained with inability to receive full AFRA vessel parcel size due to limited feedstock tankage. It also runs at lower throughput. Unlike other domestic refiners, it couldn't enjoy the Export Duty Savings (EDS) even though they are consuming domestic crude oil. 

Despite facing all the challenges above, Petron financial performance is impressive considering their higher operating and feedstock procurement costs. Yet, they are giving their competitors a good run of their money while continuously growing their retail outlets.

Contrarily, PETRONAS has been announcing exit strategies for most, if not all of their regional businesses in LPG, retail and petrochemicals segments. Its LPG business in Vietnam including import terminals in Hai Phong (north) and Dong Nai (south) was sold (or partly sold) to Totalgaz Vietnam Ltd. Its retail stations in Thailand and Indonesia were not spared either. Their only regional petrochemical plants outside Malaysia, Phu My Plastics and Chemical Company (PMPC) in Vietnam (PVC plant) was sold to Asahi Glass Company and Mitsubishi Corporation. Last week, it announced its divestment of their Philippines LPG business in Visayas and Mindanao, the last of its regional LPG presence in South East Asia. Their so called portfolio review exercise started around 5 years ago. Except for India LPG venture with IOC, there seems to be no follow up strategy for their international ventures.

Decades ago, PETRONAS was one of the the main exporters of LPG from its Tanjung Sulong Export Terminal (TSET) and later joined by Bintulu in a region that is short of LPG. Subsequently, around mid 1990s, it started the LPG business in the Philippines and Vietnam with the building of pressurized (small) terminals and bottling plants. However, the Philippines and Vietnam business never really grow despite growing LPG markets in ASEAN. About a decade later, a joint venture was formed with IOC, with refrigerated (big) terminal in Haldia and later in Ennore.  Recent years, Bintulu has stopped exporting LPG and supply from TSET has been inconsistent. 

This is an exemplary case of missing opportunity in capturing initial advantage to ensure sustainable business growth. What could have been done was to take advantage of significant freight difference between refrigerated and pressurized vessels to create opportunities. With a refrigerated terminal, Vietnam could have been the platform to venture into the whole of Indochina and Luzon (bigger and better growth market). Ironically, Totalgaz Vietnam Ltd continue to flourish despite not having any regional supply source. 

On the other hand, Lotte Chemical Titan Holding Berhad which run the only liquid crackers in Malaysia will be going for public listing to fund the building of its Indonesian affiliate’s liquid crackers and expansion of its existing polymer plants as well as its Johor’s existing petrochemical plants. In Indonesia, it will be the second crackers after PT. Chandra Asri Petrochemical crackers which is Indonesia’s premier petrochemical producer. Unlike RAPID, both companies have been operating their crackers without a refinery since early 1990s. 

Both Petron and Lotte Chemical Titan are making great stride expanding their regional footprints in taking advantage of the growing ASEAN region. International trading companies such as PUMA Energy (majority owned by the Dutch Trafigura and the Angolan  national oil company) and Vitol (leading oil trading company in the world) are also gradually increasing their investment in countries such as Malaysia, Indonesia and Myanmar. However, PETRONAS seem to be content to be a big fish in a little pond, living with imagination that their system is as big as oil majors. For some years, their focus have been on their RAPID project which has been deferred to 2019 from 2016 (can it be considered as rapid anymore?). 

Are they too obsessed with cost cutting initiatives to give a miss to any potentially good regional growth opportunities and erasing their regional footprints? Or have they not realized that managing cost is also part of managing business? What about business growth? Perhaps, top management of PETRONAS should have a pay cut by 10 to 20% to reduce the manpower cost as being done by some oil companies and banks. Increase of accountability should be at all levels including at the top management. More explicitly, the Executive Vice President (EVP) positions should be eliminated and the number of Vice Presidents (VPs) should be reduced. It will make the organization flatter and leaner. As such, decision making would be much faster. 

Business is not great after all, isn’t it?

PETRONAS was once great under its globally respected President/CEO and his small cadre  of competent VPs (without any EVP positions then) even when Brent crude oil price was at the current level or below. What happened to the Global Champion mantra that used to be envisioned by PETRONAS then? Isn't it an opportunity loss if they could’t fully leverage on PETRONAS products other than lubricants regionally (if not globally) after winning 3 consecutive F1 Constructors’ and Drivers’ World Champion?

Perhaps PETRONAS could learn from BP Plc’s resilience. As a consequence of 2010 oil spill incident in the Gulf of Mexico, BP had agreed to a final settlement of more than USD 20 billions after a federal court found the company of gross negligence about two years ago. Yet, by end of 2016, they bought 527 retail stations in Australia from Woolworths Ltd. Or closer to home, they could also learn from Air Asia, CIMB or even Maybank in growing their regional footprints. 

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