GDB 2073 – THE MALAYSIAN ECONOMY

MAY 2017

The Oil & Gas Industry : A Soon-To-End Blessing For The Country?

Goh Hoong Jue 23130

Lim Thau Hong 23155

MEMBERS
Narrhveein a/l Rajasegaran 23154

Tay Tze Hao 23145

LECTURER Mr. Azhan Hasan

SUBMITTED 17th August 2017

 TABLE OF CONTENTS

Content Page Number

Abstract 1

Introduction 2

Factors Contributing to Decline 3–7

• Supply and demand issues

8 – 14
• Rent-seeking practices

• Stricter product regulations 15 – 16

Conclusion 17 – 18

References 19 – 21

Appendix 22 – 26

2
 ABSTRACT

The decline in the oil and gas industry in Malaysia can be attributed to three factors;
issues in supply and demand, rent-seeking practices and stricter product regulations.
Malaysia currently lacks control of the supply market due to the rise of oligopolistic oil
and gas companies, which are currently invested in the unconventional production of
shale gas, which greatly ups the supply and drives the price of conventional oil down.
As PETRONAS suffers losses in revenue and cuts down on research and exploration,
competitors invest in research to boost their revenues. Furthermore, with the rise of
the renewable energy industry, energy demand is no longer proportional to oil
demand. The floating of fuel prices in Malaysia also contributes to the decline, with
frequent price changes affecting consumer behaviour and thus creating demand
uncertainties.

As for rent-seeking practices, the Malaysian government, as the nation’s main

employer, has been too dependent on oil revenues in the past. With the decline in the
oil and gas industry, the government’s revenue has shrunk, and now faces difficulty to
sustain national expenses; the public-sector cannot be downsized too fast. With the
introduction of the Goods and Services Tax (GST) to revitalise government revenues,
consumer goods have seen price hikes and oil subsidies have been intermittently
revoked. The oil and gas industry faces consequences due to these practices.

The global community today is becoming more aware when it comes to sustainable
practices for a sustainable future. Thus, when it comes to the downstream production,
petroleum products face tighter environmental regulations in terms of product quality
and the production process itself, which increases costs to meet the legal
requirements. This is an impediment for the recovery of the oil and gas industry,
particularly PETRONAS, as the company has already made strategic decisions to
reduce their research and development capital in enhanced oil recovery, which was
aimed to grow corporate revenue. To further aggravate the increased costs, the
regulations are applied uniformly across all of PETRONAS’ operations, including their
overseas investments.

Keywords: Supply, demand, rent-seeking, regulations

1
 INTRODUCTION

2015 was a surprising year for the oil and gas industry in Malaysia. With advancements
in hydraulic fracturing made by the United States, inaccessible oil reserves suddenly
became an economically viable possibility, leading to the sharp boost in production of
shale gas not only in the United States, but also in Canada (McCain, 2015). With
excessive supply being produced and since oil prices are determined by its value as
a commodity, global oil prices took a downturn, with oil prices dropping from the
average price of $100 per barrel to a measly average of $40 per barrel. This has
undeniably affected the Malaysian economic performance as major revenue sources
came from the taxation of the oil and gas industry through its breadwinning company,
PETRONAS.

The subsequent year saw drastic changes that occurred; PETRONAS made corporate
decisions to reduce capital investment in the light of decreasing revenues, the
Malaysian government began to cut oil subsidies and other tax benefits, and prices of
consumer goods saw a hike. Despite this, in July 2017, in conjunction with the launch
of the Oil and Gas Asia Exhibition, Malaysia’s Prime Minister, Datuk Seri Najib Tun
Razak, gave an optimistic speech that Malaysia’s oil and gas industry could
experience a recovery as 2017 progresses, with promising projected annual growths
(Carvalho, 2017).

However, is that truly the case? Will Malaysia’s oil and gas industry recover, or is it
already in its sunset phase? This report comprehensively discusses factors that have
contributed to the decline of the oil and gas industry and provides the flip-side
arguments that may indicate an industrial revival. Among the factors discussed would
be the supply and demand issues, past rent-seeking practices that undermine the
future of the industry and the stricter product regulations amidst a rising awareness of
sustainable practices in the global community.

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 FACTORS CONTRIBUTING TO DECLINE

The oil and gas industry in Malaysia, which has undeniably faced a decline in the past
two years, may continue to remain as such due to several factors; they are discussed
impartially in the following report.

Supply & Demand Issues

When one talks about supply and demand in economics, one might argue the
significance of one element over another; both elements are very much interrelated
when one is explaining and describing about the market and economic trend,
regardless of the scale of economic structure, i.e. microeconomics or
macroeconomics. Similarly, the supply and demand theory is an indisputable concept
that governs the rise and fall of oil and gas industries in Malaysia, given that Malaysia
is driven by an open economy that allows both local and global trade factors to affect
the fluctuation of its economy.

The fundamentals of this theory will be the argument of this main point, where the lack
of Malaysian control over the supply market and inability to cope with uncertainties on
the demand side will be the turning point of Malaysian’s view on their economy,
sparking the need for Malaysia to reconsider their strategical economic planning for
years ahead, since the effect of over-reliance on oil prices by Malaysian economy is
already mentioned beforehand and possibilities of shifting away from oil and gas
industries is no longer an empty talk.

The effect of supply and demand chain of oil and gas industries’ ecosystem will be
discussed in two parts, where the influence of global and local oil supply will be
discussed first and the significance of demand market’s uncertainties will be discussed
later.

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Lack of Control in Supply chain

Even though fossil fuels are well known as one of the most rapidly depleting finite
resources on Earth, current oil and gas supplies along with their reserves are still
having a very huge say in the global economic landscape for decades to come. In fact,
the depletion of oil and gas resources in Malaysia is not the biggest concern for the
feared downfall of the industries. Rather, it is the emergence of oligopolistic players in
the industries that might be harmful to small oil producer company, like Malaysia’s
PETRONAS. According to (Matthews, 2016), a new analysis has shown that United
States of America (USA), is unprecedentedly leading in the volume of oil reserves,
having around 264 billion barrels of oil, higher than Russia’s 256 billion barrels of oil
and the de-facto leader of OPEC, Saudi Arabia’s 212 billion barrels of reserve oil.

The analysis accounted for unconventional oil reserves, which is the most significant
part of the analysis in this context. Advanced countries with substantial amount of
capital and knowledge are having the upper hand in exploring and extracting
unconventional oil reserves as compared to developing nation such as Malaysia. For
instance, the USA, which has more than 50% of its oil reserve being unconventional
shale oil will have an immense advantage over the influence on supply market when
the proven oil reserves run out on other nations (Forbes, 2017). The overwhelming
amount of capital possessed aids the country by researching and developing
techniques for enhanced oil recovery (EOR), which is the most crucial part in
extracting unconventional oil at higher efficiency.

The high expenditure required for EOR techniques research and development (R&D)
and relatively higher operational cost (Office of Fossil Energy, 2017) are leaving most
oil and gas companies to take a step back on discovering ways to extract
unconventional oil. Since improved recovery of oil with high cost does not guarantee
enough return to generate profit, inconsistency of periodic oil price is deciding whether
EOR is a profitable method to operate the extraction process, which is disruptive from
operation point of view. Therefore, the competition for extraction of unconventional oil
when proven oil reserve runs out will turn into an oligopoly competition, in which
countries with huge capital will dominate the technology required to perform EOR of
unconventional oil source.

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This affects Malaysia as a relatively small oil producer which has very minor influence
in the oil price. PETRONAS, despite being a Global 500 company, had recorded a
decrease of 36.9% in revenues and some 70.2% decline in profits in year 2016
(Forbes, 2017) as compared to 2015’s revenues and profits. The revenues over the
years can be illustrated below in Figure 1.

Figure 1: Declining revenue for PETRONAS (Petroliam Nasional Bhd., 2016)

Such decline occurred after PETRONAS had cut its capital expenditure and operating
expenditure from RM 35 billion in 2015 to RM 20 billion in 2016, implying that the
company is deeply affected and still trying to get a hold from plummeting oil price.
Among the expenditures cut from the company, EOR research projects are one of
them, accounted as capital expenditure and this indicates that PETRONAS is less
willing to venture into such high risk upstream activities when the rejuvenation of oil
price is nowhere to be seen. One can clearly see how volatility of oil price affect the
commitment of a smaller oil and gas company on developing new EOR techniques
whereas nations with substantial amount of capital and knowledge will have the option
to do so with less concern as compared to budget-tight companies. However,
Malaysia’s current oil reserve is expected to last for one more decade and the urgency
to develop efficient EOR techniques have become more apparent if Malaysia’s
economic reliance on oil prices is not relieved soon. The dilemma of choosing between
developing EOR techniques for unconventional oil extraction or cutting expenditure
during these difficult times is affecting the nation’s economy, since there is an over-
reliance on the oil and gas industries.

5
Demand Chain Uncertainties

Traditionally, economic growth is always linked to increased energy demand. However

according to BP Global (2017), global GDP had doubled when global energy demand
had only increased by 30%, highlighting that even with emerging economies like China
and India, oil and gas industries will be benefitted partially only if they work closely
with China and India. This is because half of the increase in energy demand is
accounted by China and India, according to BP’s 2017 Energy Outlook. Moreover, half
of the energy demand used for economic growth is powered by non-fossil fuel sources
as renewable energy (RE) sources have increased in popularity, marking 7.1% growth
p.a. at 2016 and becoming the fastest growing source of energy globally.

Sadly, Malaysian economy does not benefit from this new trend of energy demand
since PETRONAS has shown little desire on venturing into renewable energy (RE) as
of now. According to PETRONAS’s CEO Datuk Wan Zulkiflee Wan Ariffin statement
on a panel discussion at 19th Asia Oil and Gas Conference, he dismissed the threat of
RE to the oil and gas industries’ market influence, viewing RE as a new business
opportunity for PETRONAS. However, current technology possessed by the company
is still far from propelling RE towards a profitable technology, as PETRONAS only has
small solar power assets in Pahang and researches had just started on installation of
solar panels on the rooftop of Suria KLCC Mall. Before that happens, Malaysia will not
be benefitted from the already-growing RE demand and still depending on the low
growth rate oil and gas energy demand.

Furthermore, the uncertainties in peak oil demand due to factors such as the pace of
technological changes that will make renewables and electric vehicles more cost-
competitive; the toughness of new regulations aimed at curbing greenhouse-gas
emissions and climate change and many more. These uncertainties on demand chain
are making oil and gas companies like PETRONAS to take a more conservative move
on developing EOR techniques, and since PETRONAS does not show any desire on
expanding into RE technologies any time soon, the current state of oil and gas
industries in Malaysia appears to be at a stagnated position, if not succumbing.
According to Lynn Cook (2017), due to heavy influence of uncertainties over oil
demand, oil and gas giants from all around the world had foreseen different
landscapes regarding peak oil demand issue.

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Peak oil demand is not in sight for Chevron and Exxon Mobil, while Royal Dutch Shell
and Statoil foresee a peak around 2030. BP, Total and International Energy Agency
has predicted peak demand to occur only at 2040s. This shows that no one has a clear
answer about trend of fluctuation in demand of oil, let alone the economic impact that
it might leads to. PETRONAS, as a relatively small oil and gas company is a market
follower who would have no say in energy demand market will suffer from this
uncertainties in demand on their strategic planning for future projects.

Also, with the implementation of float system on determining weekly fuel prices,
uncertainties in domestic demand on oil increases, in which fuel consumption tends to
decrease with price hike and vice versa. In fact, several petrol stations in Malaysia
was reportedly forced to shut down operations after June 2017 without any explanation
by the company involved, reflecting the struggles encountered by the industry due to
these uncertainties on demand market.

Conclusion

All in all, both supply and demand chains played a vital role in maintaining the balance
of oil and gas industries’ ecosystem, in which it seems like Malaysia is lacking in
maintaining the balance. With increase in global unconventional oil supply and costly
EOR techniques, it is hard for Malaysia as a small oil and gas exporter to have any
maneuver on the trend especially when there is no huge space for oil price to recover,
which result in huge decline in the profit margin of the business.

As analysts are concerned about when peak demand of oil will occur, uncertainties
around both global and domestic demand market does not work in favor of
PETRONAS to set up a clear direction for their upcoming businesses direction,
especially when the company is currently inactive in developing RE sources. The lack
of Malaysian control over supply market and inability to cope with uncertainties on the
demand chain will ultimately affect the profitability of the business, which is why
Malaysia should start moving away from the oil and gas industries as its main source
of revenue to minimize its economic impact on the country, considering the worst
possible scenario.

7
Rent-seeking practices

Concept

The rent-seeking theory has always been a concept which is highly associated with
the oil-based resource curse. The concept of rent-seeking involves the activity to
increase one’s share of wealth without creating new wealth. This theory has been
frequently described with the classic example by Robert Shiller with the following story:

“There is a feudal lord who installs a chain across a river that flows through his land.
He then hires a collector to charge boats who would be passing through his side of
the river to get to other cities a fee (or rent) to lower the chain which blocks his part of
the river. This activity to charge a fee does not provide any value toward the passing
boats as there are no services provided by the feudal lord except for lowering down
the chains blocking the passage. This activity has only benefited the feudal lord and
no one else.”

Rent-seeking activities would result in reduced economic efficiency through poor

allocation of resources, reduced wealth-creation, loss of government revenue,
increased income inequality, and potentially a national decline. According to Robert T.
Deacon (2012), one of the major examples for the failure of a resource based nation
is due to rent-seeking activities are Venezuela and Nigeria while having many more
other countries suffering from the same fate.

In Venezuela, the government increased its public spending tremendously during the
oil price jump on 5th April 1979, at the price of USD$15.85 to USD$39.50 on
infrastructure and industrial policies. The increased spending has mainly benefited the
political elites and experience deficits despite favourable terms of trade obtained from
the second oil crisis. Throughout the decades of 70s to 90s per capita output
decreased 1.4% annually despite having favourable trades increasing 13.7% each
year. These activities of the government in Venezuela shows that the government
spend huge amounts of its budget on unproductive activities and therefore leading to
its decline.

8
The second example would be Nigeria. The country started experiencing its oil rush
since the 70s. By the year 2000, the share of income of the top 2% was equivalent to
the bottom 55% as compared to 17% in the year 1970. The fraction of the population
living on less than USD$1 per day increased from 26% to 70% in the same period.

In contrast, Malaysia has been said to be one of the resource rich countries which has
hindered itself from the downsides of rent-seeking activity by many economists.
However, with the recent downwards recently, it would be worth seeking out the some
of these rent-seeking behaviours in Malaysia due to oil & gas industry so that we could
start to correct those downfalls.

Malaysia’s Case

According to MIDA (2017), approximately 20% of Malaysia’s GDP is derived from oil
and gas sector. About 22% in the year of 2015, 14% in the year 2016, and 41% in the
year 2009 (Bloomberg Markets) of our government’s revenue are being derived from
oil-related revenue. According to this information, the contribution of the oil and gas
sector is highly volatile as its varies according to the world oil price market decreasing
amidst the oil price crash in recent years. Even though its contribution has dropped,
the oil and gas sector has still been contributing a huge portion of the countries’
economy since the early 21st century, making us dependent towards the funds
contributed by the sector.

Political scientist Douglas Yates once quoted that the economic behaviour of a rentier
state embodies a break in the work-reward causation;

“Rewards of income and wealth for the rentier do not come as the result of work but
rather are the result of chance or situation.”

With the huge contribution of funds from oil and gas, Beblawi and Luciani (1987) said
that one of the signs of a rentier state is the presence of the government as the largest
employer of the state. This causes a bureaucracy which is largely bloated, inefficient
and dependent on huge amounts of oil and gas funds. Luciani theorises the reason
for this phenomenon is due to its immediate results which could yield political results.

9
This could be seen from the sheer size of the public sector in Malaysia; by employing
a huge number of unemployed citizens, it theoretically yields a low employment rate
on paper. Malaysia has been the largest single employer of the nation by employing
as many as 1.6 million civil servants. This signifies that Malaysia has a ratio of 1:19.37
for each government servant to the population of the nation. This ratio is unusually
high as compared to the other regional countries, as shown in Table 1 below:

Table 1: Ratio of civil servants to the population (Malaysian Digest, 2017)

Country Ratio of civil servants to population (1 : n)

Malaysia 19.37

Singapore 74

Indonesia 110

Korea 50

China 108

Japan 28

Russia 84

United Kingdom 118

It is also similar when it comes to the case of oil revenues flowing into the government.
As it could be seen from the Table 2 and Figure 2 on page 11, Malaysia’s state-owned
oil company, PETRONAS has been contributing towards the revenue of the
government at 35% for the year 2007 and at its highest percentage of 45% in the year
2009 (excluding petroleum taxes from other companies). Since 2009, the contribution
by PETRONAS has been dwindling, falling in the range of RM 56 – 75 billion.

10
 Table 2: Revenue contribution to the government (PETRONAS, 2017)

Contribution of PETRONAS to the federal and

Year
state Government (RM billion)

2016 36.9
2015 52.7
2014 75.3
2013 73.4
2012 80.0
2011 65.7
2010 57.6
2009 74.0
2008 61.6
2007 48.3

Contributions fell sharply in the year 2015 onwards due to the oil price shock. Within
the same period of high petroleum contributions by PETRONAS from the year 2007
to 2014, there has been steady increase in term of the emoluments provided by the
government, as shown in Figures 3 to 4 below.

Figure 3: Rising emoluments from 2006 to 2010 (Economic Planning Unit, 2010)

11
 Figure 4: Rising emoluments from 2011 to 2015 (Economic Planning Unit, 2016)

The percentage of emoluments in 2016 was as high as 32.7%. The fall of government
revenue in the year 2015 also signifies the dependency of Malaysia’s government on
oil revenue as the fall in oil prices outweighs the growth of other forms of revenue for
the government. In the period of 2007 to 2014, the percentage of emoluments in terms
of government operating expenditure has been increasing from the year of 2006 to
2016 from 26.5 to 32.7% even though the budget for operating expenses has already
increased. In theory, the percentage of emoluments provided should be decreasing
along with increasing budget due to the scale of economy if operations are properly
streamlined. This increasing percentage suggests a bloated amount of government
servants which are being employed to achieve the immediate political results and
obtain the votes of the voters.

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Repercussions of rent-seeking practices

Unfortunately, as the price of oil dropped in the year of 2015 to USD $30 per barrel,
revenue contributions from the oil and gas sector have decreased tremendously. In
this scenario, the emoluments provided had never decreased as the job market has
been too dependent on the employment by the government. The fall in oil revenue has
been replaced by other forms of income by the government largely by the introduction
of Goods and Services Tax and the gradual removal of various subsidies. The fact
that the government has been the primary source of employment as an increasing
trend during the oil crisis could also mean that the funds brought in by oil revenues
has made the government and citizens to be too dependent on those revenues as a
source of income instead of taking the opportunity to utilize it on other forms of long-
term development expenditure. As the prices of oil continues to dwindle since the year
2015, there is no signs of decreasing emolument rates. The increasing number of
emoluments towards the public sector would further increase the stress of the
government to seek other forms of revenue towards from the private sector to sustain
the expense. Another downside towards this effect is that it would be hard for the
government to decrease the size of its public sector as the government is now the
largest employer of the country and downsizing its workforce would substantially
increase the rate of unemployment in Malaysia which would increase the effect of
other forms of social unrest.

In other words, the dependency of Malaysia’s government on oil revenues has

provided a short relief in terms of economic growth in the 2000s. As prices of oil
dropped, the inefficiency in terms of the allocation of its government revenue has been
bringing an impact towards the lives life of Malaysians. This is because this inefficient
allocation such as inflated public employment which yields minimal impact to increase
our economy activity would bring high recurring operating expenses. If not handled
well, this would incur huge amounts of debts towards the nation to sustain those
expenses. If such activities are made further on with the decline of the oil supply in
Malaysia, the effects of rent-seeking activities would become more obvious would lead
to the end of the oil blessing and the beginning of the oil curse.

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Potential resolutions to past rent-seeking behaviour

One of the ways which could be used to reduce the impact of previous rent-seeking
activity would be to stop the expansion of the public sector. Instead, the government
should start to identify departments which are underperforming or do not yield
substantial results towards the development of the country. After identifying, the
government can relocate them into new initiatives which could yield more results such
as government liaised companies rather than increasing public sector employment or
downsize those departments in stages to reduce the effect of unemployment.

Another method would be to seek consultation to start streamlining operational

activities and seek out inefficiencies in terms of operations. A big emphasis should be
put onto identifying corruption activities in these operations and acting towards it. The
usage of big data analysis could be used to make the step of identifying these flaws
more efficiently as big data allows us to take into consideration more factors compared
to the human mind.

Another way would be to allocate more budget into the private sector or to privatize
certain government agencies to yield in better results. This can also help to shift the
expenses from being the government’s operating expenses into the companies’ own
expenses and push the agency to be more productive to yield better results.

The fourth recommendation would be to outsource more government development

initiatives instead of having an in-house agency. This is because in-house agency
would incur long term operational cost and would cause a deficit when the market of
the initiative is not favourable. This would increase the government’s flexibility to
initiate development activities according to the global market while reducing long term
expenses. A third-party contractor would also be more likely to perform well compared
to having it in-house as they would have the fear of contract termination due to
underperformance.

14
Stricter Product Regulations

External Stress for Environmental Regulations

From the global point of view, the market lately seems to have entered a new period
in two dimensions which the oil prices appear to have become more volatile, resulting
an upward movement that was lacking earlier. The most obvious change has been the
decline in surplus capacity in the industry. The enormous amount of surplus capacity
at all levels has been so persistent that many have grown up with it and consequently
have come to think of it as normal. In fact, a divergence takes place, both from what
are desired by market players and from what should occur under competitive
conditions.

Besides that, current, stringent product regulations resulting from the increase in the
stringency of environmental standards cause the lack of surge capacity in the oil and
gas industry. The reduction of pollutants due to environmental concerns such as sulfur,
lead based gasoline, carbon monoxide etc. allowed in fuels are required for additional,
more varied gasoline formulations all over the world. Based on a study made by BPO
USA, an oil and gas company, many other O&G companies face the international
stress of maintaining strict environmental product regulations, to the point it has been
considered as a risk factor. Figure 5 below summarizes the stress resulting from the
environmental regulations.

Figure 5: Regulatory risks (BDO United States, 2016)

15
This is a clear pressure point of conformity that is expected from PETRONAS, just as
it hits its performance decline due to slumping oil prices. As keeping up with
regulations is a costly but necessary venture, this may impediment the rise of the oil
and gas industry in Malaysia as it struggles to reduce operating expenditure to
compensate for lower sales pricing. Furthermore, more stringent regulations create a
more fragmented market, causing localized supply problems. Storage capacity, which
is already limited, are sometimes emptied to make room for supplies formulated for
the coming season, resulting in inventory dumping and price decline. Also, market
imbalances and shortages become more difficult to address because supplies that
might previously have been imported cannot be used due to environmental
regulations.

Besides environmental regulations, there are many other regulatory risks that can be
found, such as summarized in Figure 6 below. For example, new requirements of
tightness in infrastructure such as tankers and pipelines equals greater difficulties in
delivering products to offset imbalances; it is an example of crude oil transit
regulations. As for other regulations such as the climate change, Malaysia also has to
conform to it as Malaysia has ratified the Paris Agreement in 2015 to actively combat
climate change and reduce carbon footprint. Strict product regulations such as these
impose extra burden on the shoulders of PETRONAS, who are prioritizing an
economic comeback amidst low oil prices.

Figure 6: Regulatory risks (BDO United States, 2016)

16
 CONCLUSION

Challenges and evidences of oil market depletion in Malaysia’s context

There are many fiscal challenges posed by the depletion of oil and gas reserves and
Malaysia’s overreliance on it as a major source of income for the country. To simplify
the whole context, the causes can be posed as the following simple questions to
elucidate:

• What is the impact of the oil and gas (O&G) sector in the Malaysia economy?
• How good is the performance of Malaysia’s O&G sector?
• Being non-renewable resources, how long will it be before Malaysia’s oil and
natural gas reserves run out?
• What are the preparations must be done for and mitigate the situation when
O&G reserves run out?

The oil and gas sector is said to be a main contributor of the Malaysian economy since
PETRONAS’ realization in 1974. Over the years, the petroleum and natural gas mining
industry contributed about RM103.6 billion, or 10.2%, to the national GDP in 2014
(Office of Chief Statistician Malaysia, 2016). However, in the recent years, the
government has realized that the industry is no longer a sustainable source of income,
and must implement fiscal discipline.

From despair comes a new hope; save for the oil-less day

Restructuring of internal policies as a rebound from economic depletion

The heavy reliance of Malaysian government revenue on the O&G sector which hover
about 20% mark over the coming years makes an urgent case to be solved and
immediate restructuring of country revenue source must be done before reaching a
dead end. A suitable adjustment towards the oil depletion should be created such as
saving some of the oil and gas into a heritage fund and finding alternative income for
the country at the same time.

17
First, the fact that personal income tax contributes just 13% to the revenue of the
government must be doubled or more to reach about 25% on par with the most
developed countries which means that in the next 12 years, an additional RM30bil
must be collected through personal income taxation. In the next 12 years also, the
coverage of tax base must include inheritance tax and capital gains tax. Citizens must
pull their weight to prepare for the end of oil. Besides that, the authorities’
administration must lead by example such as cutting out corruption, low productivity,
inefficiency, wastage etc. across the boards. This action is predicted to reduce the
annual government expenditure by RM25 billion effectively.

Alternative Industries

As for the volatile oil prices, Malaysia shouldn’t place bet on it. Malaysia had been
riding on the wealth from oil and gas industry as the main sources of Malaysia’s income
which was from the tax imposed on PETRONAS. When company’s third quartile net
profit dropped by 91% yearly last year, it went from RM 15.1 billion in 2014 to only RM
1.4 billion over the same period in 2015. This lead to a decrement of tax revenue for
the country at the same time. Therefore, an alternative income must be determined to
maintain its income such as shifting governmental focus to other industries that show
promising futures. For an example, the export-based industry, service-based industry,
or even bio-technology and halal products and services could be a potential alternative
to fill in the economic gap left by the oil and gas industry.

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Economy, Currency. Retrieved from Bloomberg Markets:
https://www.bloomberg.com/news/articles/2016-08-23/quicktake-q-a-oil-
steers-path-of-malaysian-economy-currency

Lynn Cook, E. C. (2017, May 26). Get Ready for Peak Oil Demand. Retrieved from
The Wall Street Journal: https://www.wsj.com/articles/get-ready-for-peak-oil-
demand-1495419061

Malaysian Digest. (2017, February 10). M'sia Has The Highest Civil Service
Workforce In The World, Is This A Misconception? . Retrieved from Malaysian
Digest: http://malaysiandigest.com/frontpage/282-main-tile/657488-malaysia-
s-bloated-civil-service-we-ask-stakeholders-how-to-justify-the-numbers.html

Matthews, C. (2016, July 5). America Now Leads the World In This Surprising
Category. Retrieved from Fortune Finance: http://fortune.com/2016/07/05/oil-
reserves-us/

McCain, B. (2015, February 9). The Facts Behind Oil's Price Collapse. Retrieved
from Forbes: https://www.forbes.com/sites/brucemccain/2015/02/09/the-facts-
behind-oils-price-collapse/#7aec1cf241e1

MIDA. (2017, August 14). Oil and Gas. Retrieved from Malaysian Investment
Development Authority: http://www.mida.gov.my/home/oil-and-gas/posts/

Office of Chief Statistician Malaysia. (2016, January 22). Department of Statistics

Malaysia. Retrieved from Petroleum and Natural Gas Statistics:
https://www.dosm.gov.my/v1/index.php?r=column/pdfPrev&id=Qno5cExBME
pGaUQwazhTNUl1Y2MzQT09

Office of Fossil Energy. (2017, August 17). Enhanced Oil Recovery. Retrieved from
Science & Innovation: https://energy.gov/fe/science-innovation/oil-gas-
research/enhanced-oil-recovery

Petroliam Nasional Bhd. (2016). Thriving in Tough Times : Annual Report 2015.
Kuala Lumpur: PETRONAS. Retrieved from
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relations/Documents/PETRONASAnnualReport2015.pdf

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PETRONAS. (2017). Annual Reports. Retrieved from PETRONAS:
http://www.petronas.com.my/investor-
relations/Pages/AnuualRepTimeline.aspx

Robert T. Deacon, A. R. (2012, September 26). Rent Seeking and the Resource
Curse. Retrieved from Department of Economics:
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df

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 APPENDIX – TOPIC REPORT

The oil and gas industries had been the giant pillar of Malaysian economy, ever since the
Petroleum Development Act came into being under the New Economic Plan at 1974 when the
Government saw the advantage of having more control over its hydrocarbon resources at the
1970s, and therefore Petroliam Nasional Bhd. (PETRONAS) was born. The rise of oil and gas
industries was the saving grace of Malaysian economy when the mining industries died out at
1980s. Over 30 years past and still the oil and gas industries steer the path of Malaysian
economy. According to Bloomberg (2016), the Malaysian ringgit tend to reflect the movement
of oil prices, in which higher oil price results in stronger ringgit per dollar and lower oil price
results in weaker ringgit per dollar.

Figure 1: The correlation between Ringgit and Oil Price, where Bloomberg describes ringgit
as the mirror of oil price.

The over reliance of Malaysian economy on oil and gas industries is prominent as shown in
Figure 1, and the problem comes when the oil and gas reserves in Malaysia is depleting, in
which the national oil and gas reserves was estimated to last until 2027 only (K.A. Rahim,
2012). Coupled with the reliance of Malaysian economy on oil price, the inevitable depletion
of oil and gas resources of the country would have a massive impact on the economic
landscape of Malaysia, and would foreseeably spell a disaster for the Malaysians if the
problem of over reliance on energy industries is not handled wisely. As Malaysians, we must
be aware of the issue and the impact of possible fall of oil and gas industries in Malaysia, as
well as exploring the new opportunities available for the country to minimize the reliance on
oil and gas sector.

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 APPENDIX – OUTLINE REPORT

Introduction

The topic chosen for the report would be about the decline of the oil and gas industry in
Malaysia in the recent years and possibly the future. For many years since the 1980s,
Malaysia can attribute its dynamic economic growth thanks to the oil and gas industry, which
has over the years raked in a significant amount of revenue to aid the developmental economic
phases of the nation. However, with the slump of oil prices since 2015, the industry in Malaysia
has faced significant impediments to sustain its profitability, with controversial moves made
by PETRONAS such as employee retrenchment and funding reductions in industry research
to minimize capital and operating expenditures (Forbes, 2017).

This report mainly covers the economic decline of the industry now and in the possible future,
and discusses upcoming industries that may become the country’s breadwinner. Regarding
the decline in oil and gas industry, the contributing factors are first highlighted, which would
mainly be the supply and demand issues, the rent-seeking problem in the country and the
stricter oil and gas product regulations. After discussing the factors of decline, a relevant
counter-argument is then proposed about the possibility of a sustainable oil and gas industry,
as a measure of impartiality to ensure a fair evaluation of the decline. Alternative industries
are then discussed at the end of the report to potentially assess Malaysia’s other underutilised
resources capable of supporting the national economy, such as the renewable energy
industry.

Report Methodology

To draft a mature economic report, research was first done for at least two weeks using
economic journals, reports and corporate websites such as PETRONAS and Forbes as the
main sources of unbiased information. The research phase, which will be continuous
throughout the project to include other sources such as newspapers, will aid in ensuring the
accuracy of information. The information researched would be mind-mapped to ensure a
smooth flow of relevant information.

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Summary of Essentials

Contributing factors to the decline:

1. Supply and demand issues

• Malaysia’s lack of control over the supply market. With other oligopolistic oil and gas
players emerging (such as the unconventional production of shale gas in the US which
drastically reduced global oil prices), Malaysia’s very own PETRONAS faces
significant competition to gain market share as an oil and gas supplier. Countries like
the US spend on research for enhanced oil recovery (EOR) as a way to exploit
unconventional oil reserves and gain global market share, while companies like
PETRONAS who had to cope with the drop of oil prices made choices to scrap deep-
water exploration and EOR projects; thus, losing out to the competition when it comes
to supply.
• Uncertainties of demand. Energy demand in the present is not proportional to the
demand of oil anymore, with the rise of the renewable energy industry. Technologically
advanced countries (which are the customers of oil and gas products) are facing an
increased energy demand, but are learning to compensate or even overtake the
demands with renewable energy, thus reducing their reliance on the oil and gas
industry. PETRONAS in Malaysia has shown little interest in the renewable energy
industry, and will lose out in the future. Another uncertainty would be the floating fuel
prices in the country. With the frequent changes in price of fuel in the nation recently
(due to government policies on subsidies), this greatly affects consumer behaviour;
when the petrol price is hiked up, there is a sudden, decreased usage of petrol, thus
affecting petrol sales and causing a surplus of production, incurring more expenses up
the supply chain.

2. Rent seeking practices

• The rent seeking theory is a common curse in a resource based industry. Activities
are prevalent throughout the country whereby wealth is reaped by individuals without
the creation of more wealth. An example of this would be the poor utilisation of
government revenues that come from PETRONAS for societal benefit.

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3. Stricter product regulations
• The lack of surge capacity in the oil industry has been exacerbated by the widespread
increase in the stringency of environmental standards.
• There have been reductions required in the amount of pollutants, such as sulfur,
allowed in fuels and requirements for additional, more-varied gasoline formulations,
depending on both the season and region.
• The result is an increasingly fragmented market with a greater potential for localized
supply problems.
• Storage capacity must sometimes be emptied to make room for supplies formulated
for the coming season, resulting in inventory dumping and price declines. But also,
market imbalances-shortages, really-have become much more difficult to address
because supplies that might previously have been shipped-in cannot now be used due
to environmental regulations.
• The tightness in infrastructure (tankers, pipelines) means greater difficulties in
delivering products to offset imbalances. This means a price response, such as that
which occurred last summer in the US Midwest, is necessary to balance the market.
• They have no great impact at the national and global level, the likely increase in their
occurrence in coming years probably means slightly higher average product prices and
thus, higher refinery and retail margins.
• Some regulations also present a barrier to entry for products from other markets. This
will probably also increase the differential between light, sweet and heavy, sour crude
oils internationally, but will apply only to the cost of processing, on average. And the
industry's history of overbuilding capacity while upgrading facilities remains a threat to
depress differentials for extended periods.

Alternative Industry Discussion: the renewable energy and agricultural industry.

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Conclusion

Is the oil and gas industry facing a decline in Malaysia? The answer would be a yes,
substantiated by the fact that oil revenues are decreasing year by year and the national
currency is weaker than before. With lesser control in the supply and demand chain, rent
seeking practices in the oil and gas industry which affect the economic efficiency and stricter
product regulations, more capital and operating costs are incurred towards the industry and
the market share of oil and gas industries in the global energy demand are diminishing with
the rise of renewable energy amongst an environmentally conscious global community.
Malaysia needs an alternative industry as its breadwinner, such as the agricultural industry.

References (as of research phase)

Fetkovich M.J., F. E. (1996). Useful Concepts for Decline Curve Forecasting, Reserve
Estimation, and Analysis. SPE Reservoir Engineering, 11(1). Retrieved from
https://www.onepetro.org/journal-paper/SPE-28628-PA
Forbes. (2017, July 10). PETRONAS Malaysia. Retrieved from Fortune Global 500:
http://fortune.com/global500/petronas/
Robert T. Deacon, A. R. (2012, September 26). Rent Seeking and the Resource Curse.
Retrieved from Department of Economics:
http://econ.ucsb.edu/~deacon/RentSeekingResourceCurse%20Sept%2026.pdf

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