PETRONAS: Managing Volatility Through Forward Integration

Leveraging forward integration in hydrocarbon value chain to weather global downturn

OPEC’s no ceiling rule throws world’s oil trade into chaos

OPEC on Friday, Dec 04 2015 decided that it will no longer impose a production ceiling to its members to control global crude oil prices. The current oversupply has sent the prices of global oil benchmark such as Brent and WTI tumbling, severely cutting the profits of oil majors and plunging the currencies of crude-dependent countries such as Mexico and Russia. PETRONAS, the oil giant of Malaysia, faces similar challenges. [1]

Steering the rough sea

“When people talk about innovation, they think about our technology etc., but I think we stretch the definition. Innovation is also in the way that we manage our talent, our planning and budgeting. These are not so obvious but they are culturally important.” – Wan Zulkiflee Wan Ariffin, CEO & President of PETRONAS [2]

PETRONAS is a fully integrated oil & gas company engaged in broad spectrum of upstream and downstream activities, from exploration, development, and production of oil & gas, to liquefaction and sales & marketing of natural gas, refinery and petrochemical operations, and marketing, sales and trading of refined petroleum products.

Maximizing people’s resource for the people

As a fully integrated oil & gas company, PETRONAS creates value through value add processes along the hydrocarbon value chain. Its business model is best summarized by its vision and mission:

Vision: To be a leading multinational oil & gas of choice

Mission: We are a business entity, petroleum is our core business, our primary responsibility is to develop and add value to this national resource, and our objective is to contribute to the well-being of the people and the nation. [3]

Driving operational synergies through forward integration

In order to better respond to the high volatility surround global crude prices circa end of 2014, PETRONAS undertook a Corporate Enhancement Program (CEP) to realign its operating strategy and business model. CEP aimed to improve PETRONAS’ operations through (i) the demarcation of its international and regional upstream operations; (ii) integration of exploration and production operations and its sales of natural gas and LNG into single Upstream Business unit; and (iii) streamlining and optimization of Downstream Business unit. [4]

Upstream: PETRONAS’ upstream business includes exploration, development, and production of crude and natural gas in its country of operations. Recently, with acquisition of Progress Energy in Canada, it had also ventured into Unconventional Hydrocarbon. It is also the third biggest Liquefied Natural Gas (LNG) producer in the world, with LNG operations located both in Malaysia and selected international operations.

Downstream: PETRONAS’ downstream business includes refining and marketing of petroleum products, manufacturing and selling of petrochemical products, and trading crude oil, petroleum and petrochemical products. The downstream segment also includes management of infrastructure such as that used in the processing and transmission of natural gas and LNG regasification, power production and other utilities and technical and engineering services for PETRONAS’ own operations.


[click to enlarge] PETRONAS’ Integrated Business Model

Managing global footprint and profitability

Since its inception in 1974, PETRONAS has grown to become a multinational oil major with operations in over 65 countries. [5]

Its success over 40 years of operation can be attributed to the following strategic choices that PETRONAS has made to align its mission, strategies, and operating model:

  • Full integration across the entire value chain: The integrated nature of PETRONAS’ business helps create a diversified revenue base that mitigates cash flow volatility across the commodity price cycle. This integration, coupled with scale and reliability of its operations allow PETRONAS to realize economies of scale, cost advantages and operational synergies that resulted in improved margins and profitability.
  • Large scale and diversified international operations: PETRONAS has expended its global footprints through organic growth and selected acquisitions. Its international resources stood at 10.0 billion BOE or 30% of its total discovered resources. It has a worldwide lubricants distribution network in over 80 markets and is major petroleum products refiner and retailer in South Africa. With its recent acquisition of Progress Energy, it became one of the biggest shale gas producers in North America.
  • Multinational management culture and corporate governance: Although PETRONAS is a state own enterprise, it operates as a commercial entity and is committed to multinational major oil & gas company culture and governance ethic. An important ethos of its human resource development policy is focus on hiring and cultivating most talented professionals, whether developing junior talent internally through its comprehensive technical and commercial training program or by recruiting senior talent from other multinationals. It reports to an independent Board of Directors that follows strict Board Charter and governance structure.
  • Track record of prudent financial management: Although not required to do so (as a 100% state owned entity), PETRONAS publishes its financial and operational reports quarterly. It also observes conservative financial policies and maintain significant cash balances as to be able to implement project on timely basis, quickly take advantage of business opportunities, and facilitate partnership with partners and sustain disciplined capital investment. From time to time, PETRONAS seeks to improve its overall financial performance through portfolio optimization that includes divestment of non-core assets and monetization of non-core investments, de-risking of projects through business partnership and phasing of capital investment to mitigate cash flow risks.


[click to enlarge] PETRONAS’ Global Footprints

Third Quarter Financial Results [6]

Whilst many oil majors have seen profits plunging further due to declining crude prices, PETRONAS has somewhat been successful in managing the downturn due to increase margins from its downstream business.


[click to enlarge] PETRONAS’ Revenue by Regions, 2014

PETRONAS’ downstream business recorded 38% increase in Profit After Tax (PAT) for Third Quarter 2015. This improved profitability was a direct benefit of lower feedstock supply to its refineries and petrochemical complex. Its forward integration operation model manages to leverage the declining crude prices to secure cheaper feedstock and thus maximize the value of its refined petroleum and petrochemical products. Whilst the crude prices are expected to continue declining, petrochemical industry is expected to benefit from cheaper feedstock and thus PETRONAS is able to hedge the cash flow risk from low crude prices through its efficient downstream operations and increase demands for refined petroleum and petrochemical products.

Betting on the energy future

The synergy between its business model and operational strategy also allows PETRONAS to continue its capital investments in major projects for its future growth. Despite other major oil companies cutting investments in capital projects, PETRONAS remains committed to its flagship projects such as RAPID, Pacific North West LNG Project in Canada, LNG Train 9 in Bintulu, and two Floating LNG projects.

“These CAPEX projects are investments for the long-term, and we are set on seeing them through successfully to ensure PETRONAS’ sustainability well into the future,” said Wan Zul. [6]



The following sources were used in writing the analysis about PETRONAS:

1] OPEC Opts for No Limits After Marathon Meeting, Bloomberg, Dec 04 2015:

2] Fall in oil price becomes opportunity for Malaysia’s PETRONAS, interview with Datuk Wan Zulkiflee Wan Ariffin, CEO & President of PETRONAS, Dec 01 2015:

3] PETRONAS’ Mission & Vision, PETRONAS’ Corporate Website:

4] Offering Circular (OC) for PETRONAS’ 2015 $5 Billion Bond exercise by Bank of America Corp., CIMB Group Holdings Bhd., Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley:

5] PETRONAS 2014 Annual Report:

6] PETRONAS Perseveres Amidst Challenges – PETRONAS Announces Financial Results for Third Quarter FY2015, Remains Profitable Despite Low Oil Prices, Nov 11 2015,

The author also included his personal experience and various syndications and communications with the management of PETRONAS in this write-up.

PETRONAS’ Youtube Channel:


The opinions expressed in this article represent the author’s point of view and are by no mean a direct endorsement by PETRONAS’ management.


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Student comments on PETRONAS: Managing Volatility Through Forward Integration

  1. PETRONAS is a very familiar name in the upstream world. Having worked for the company from the services end, I did realize some inefficiencies in the operating model. As the organization is primarily state owned, I wonder how the company is able to align its goals, overcoming the inefficiency that comes with any state run organization. I would like to know your thoughts on the role of MPM in the most minuscule of decision making. Especially in the down-turn these days, is the over involvement of MPM helping the cause for the company, or is it mis-aligning the business and the operating model? In my opinion, the situation requires faster decision making as the market is very volatile these days. Also, how do you see the organization moving forward? Is there a possibility to privatize to keep the business and the operating models aligned?

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