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Arif Mahmood – Senior Vice President Corporate Risk and Strategy, Petronas, Malaysia

05.03.2015 / Energyboardroom

Md Arif Bin Mahmood, Senior Vice President Corporate Risk and Strategy at PETRONAS, offers an in-depth portrait of the Malaysian NOC’s breadth of activities – from the launch of the world’s first FLNG by the end of 2015 to the progress of the mammoth RAPID downstream development. He furthermore offers perspective on PETRONAS’s international strategy with insights on the Pacific NorthWest LNG project and the company’s recent entry to the unconventionals market in Argentina, as well as explaining the company’s ambition to reimagine energy ™ and behave as a full-fledged IOC.

Mr. Md Arif Bin Mahmood, you have served as Senior Vice President Corporate Risk and Strategy at PETRONAS since April 2010. How was your portfolio evolved since this time?

In 2010, Tan Sri Dato’ Shamsul Azhar Abbas became President and Chief Executive Officer of PETRONAS. At this time, he introduced a Corporate Enhancement Program to create a more empowered and clear ownership of the company. PETRONAS was then strategically realigned into three core businesses: gas, downstream, and E&P, and within this restructuring, I assumed the position of Vice President, Corporate Strategic Planning.

The second phase of the Corporate Enhancement Program was enacted in 2014 and involved a further realignment, combining the gas and E&P business to create two core businesses: upstream and downstream. Both core businesses now have a clear line of sight for strategy, direction, and accountability. Within this second realignment, my portfolio was further bolstered by the addition of Enterprise Risk, which was previously under our finance division.

Along with my team, I cover corporate strategy review and development, corporate portfolio review, strategic research, corporate M&A and Enterprise Risk Management. Examples of work that we do did was along with the upstream team, we led PETRONAS’s acquisition of Progress Energy, and, along with the downstream team, we came up with the PETRONAS’s strategy for the development of Southern Johor Masterplan and RAPID.

PETRONAS prides itself on reimagining energy ™. What does reimagining energy ™ mean for you?

PETRONAS was established in 1974 as the Malaysian resource owner, and, by the early 1980s, we had added value to this resource through the peninsular gas utilization project and various petrochemical projects and refineries. In the early 1990s, we embarked upon the internationalization of the company, while, in the late 1990s and early 2000s, we started to buy companies to grow both our upstream in downstream portfolio. Example in South Africa, we bought Engen to complement our downstream activities, in Europe, Selenia to enhance our lubricant business, and, in Canada, Progress Energy to bolster our unconventionals portfolio.

Tan Sri Dato’ Shamsul Azhar Abbas wants PETRONAS to behave as a full-fledged IOC, and the Group has implemented many initiatives to instill full-fledged IOC discipline. In this sense, we now announce quarterly results, strategy and KPIs, even if these declarations are not required, and we are more open to scrutiny now than ever before. We have brought in new talents to complement existing talent and welcomed new mindsets and new ways of doing things.

As such, reimagining energy ™ is not simply about R&D, but is rather focused on transforming the manner of thinking at PETRONAS. How can we do things better and faster? Can we dismantle overly bureaucratic processes? Can people take more ownership and be more empowered?

With regards to R&D developments within reimagining energy ™, our focus will be CO2 and contaminants management, EOR, especially in offshore blocks, and Floating Liquefied Natural Gas (FLNG). Our technology focus aims to increase efficiency and improve yields from existing blocks. In the downstream sector, we are looking at ways to remove contaminants, such as sulfur and mercury, as part of refining process and ionic liquids.

PETRONAS’s 2013 financial results were quite impressive, while 2014 results are expected to offer a less rosy picture due to the recent drop in oil prices. Could you please provide insights into 2014 Group results and your expectations for 2015?

PETRONAS’s results for the first three quarters of 2014 are quite strong, with revenue for the first three quarters up by 7.4% compared to 2013, profit before tax higher by 1.8%, and an EBITDA at 5.8%. These results are due to solid upstream production, a stronger dollar compared to the ringgit, and higher oil prices through most of the first three quarters.

The oil price however falls off starting in July, which means that the 2014 numbers will not be as strong as 2013. Although operations have been very solid in 2014, we are naturally impacted by changing oil and LNG pricing. The more challenging numbers will be 2015, as the 2014 results have been impacted mainly in the last quarter. It is difficult to offer solid predictions for the first half of 2015 since the oil price has not yet settled.

Nonetheless, even the recent given changes in oil price, PETRONAS will retain our focus and strategic direction. We are very long-term in nature, as our investments today will yield results only five to ten years down the road.

What strategies has PETRONAS taken to boost production from mature fields?

PETRONAS plays two roles in Malaysia. We are on one hand the custodian of the nation’s oil and gas resources and on the other hand we are also a contractor like any other IOCs. As a resource owner, our role is to ensure that we add value to our resources by make our resource attractive and encourage continued exploration and adding on the downstream activities. Our role as a contractor and an operator gives us the insight into the needs and conditions of other contractors and operators. It facilitates our role as an efficient custodian of the resources..

The oil and gas business in Malaysia presents many opportunities both in terms of mature basins, new discoveries and new horizons like deepwater. In this exciting environment, PETRONAS has the mandate to be flexible to encourage exploration and production. Indeed, Malaysia is one of the most dynamic country in terms of the diversity of production sharing contracts (PSC) signed, with more than 100 PSCs currently in place. In 2011, we also introduced Risk Service Contracts (RSC) for marginal field developments, those oil fields with less than 30,000 boe and gas fields below 500 bcf.

EOR is another horizon for PETRONAS, and thus far our collaboration with ExxonMobil for the Tapis project, brought onstream in March 2013 after a $2.5 billion investment, has been very successful. This project represents one of the biggest ever EOR projects and investments in Southeast Asia. In addition, we have worked with Shell to develop six small oilfields in the Baram Delta and three more oilfields in North Sabah for EOR opportunities. As offshore projects, these EOR efforts constitute one of the largest R&D efforts for enhanced recovery yet undertaken and have given PETRONAS extensive experience and know-how concerning the technologies needed to boost production in mature fields. PETRONAS aims to deploy these learnings and technology as growth opportunities.

With the current conjuncture of oil and gas prices, both EOR projects and RSC must be studied carefully on a case by case basis for their economic merits. Nonetheless, Malaysia is a very exciting place to be for mature field exploration. As PETRONAS, we continue to drill to gain a better insight on the mature basins, and we also put into play our understanding of the contractor’s needs and associated requirements to best encourage exploration. At the same time, the government has been supportive. These factors, coupled with the country’s stability and low political risk, create a very conducive environment for boosting mature field production.

In September, PETRONAS commenced the lifting of the first topside module for the PFLNG1 facility at the DSME shipyard in South Korea. How will PETRONAS employ its Floating Liquefied Natural Gas (FLNG) facilities?

Our PFLNG1 is slated for service by the end of 2015 in stranded gas fields in Malaysia, specifically the Kanowit field in offshore Sarawak. The PFLNG1 will have a LNG capacity of approximately 1.2 million tons. As PETRONAS owns the resources in Malaysia, we know where the stranded gas lies and can employ these facilities to their upmost efficiency to unlock what would have been unfeasible production on a conventional form.

PFLNG2 will have a 1.5 million ton capacity and is slated for production in deeper waters.

Malaysia has taken the first steps in its ambition to become a downstream oil and gas hub via the Pengerang Integrated Petroleum Complex (PIPC) development in Johor. How has PETRONAS’s vision of the Refinery and Petrochemical Integrated Development (RAPID) project evolved since its initial announcement?

RAPID is a substantial component of the 20,000 acre-large PIPC development, as it will cover approximately 7,000 acres and entail an approximately $26 billion investment. To my knowledge, no other company has ever undertaken a project of this size in one go. PETRONAS has decided to take on this challenge of constructing this one-of-a-kind integrated complex, which means that we must act in a well-orchestrated manner with partners.

Our initial timeline for the project was too aggressive given the major implications of the mega-project for the entire area in terms of obtaining land, relocating the local population, and completing the necessary infrastructure. These upfront issues had to be resolved in interactions between the local government, the federal government and the local population. As such, we have now rephrased the project with a goal to have it online by 2019, and we are confident in reaching this target.

PETRONAS has historically operated internationally in such areas as South East Asia and Africa but has more recently expanded its operations to first world countries such as Canada and Australia. Can you elaborate on this strategic shift in your international portfolio?

PETRONAS’s upstream portfolio today covers a vast geographic sweep from Southeast Asia to Central Asia, the Middle East, Africa, and Latin America. In addition, we have expanded our presence in the unconventional space to new markets such as Australia for coalbed methane, Canada for shale gas to LNG, and Argentina for shale oil. PETRONAS embarked upon these investments in new zones after a careful examination of the risks and of our capacity to deliver. We pay close attention to potential partners in each geography, as well as the specific value we can add in unlocking resources.

In terms of the downstream business, we are predominantly domestic and regional, while our lubricants business have a global reach with growth areas in Latin America, China, and India.

In December 2014, PETRONAS announced that it had delayed taking a final investment decision on the Pacific NorthWest LNG project. Can you tell us more about the evolution of this project?

Traditionally gas in Canada is sent via pipeline to the US, but the US now has an excess of gas thanks to local production. As such, LNG facilities are an apt solution for Canada to monetize its gas reserves. Progress Energy had begun to follow this logic in British Columbia, and PETRONAS saw that our experience and capacity as a LNG player would help to substantially improve this play.

Making a final investment decision on this project will be challenging with the current situation, as every project much pass economic scrutiny. Even as the oil price has come down, the cost of building the associated facilities for Pacific NorthWest LNG has not substantially changed. PETRONAS has completed the engineering for the project, but at the end of the day costs must be lower to make a viable project.

In December, PETRONAS finalized a $550 million contract with Argentina’s YPF as a strategic inroads into shale oil potential. How did you weigh the risks of investing in a market like Argentina?

Our venture in Argentina is in its first phase to explore the potential of these resources, and PETRONAS will only move into a second phase following positive results from phase one. Not many countries are free of risk, and the particular political, economic or financial situation in Argentina is manageable, especially given the phased nature of this venture. We are fully aware of the risks present, but there is an aligned interest between PETRONAS and YPF to monetize this resource. Overall, the resource’s potential appears very promising, and Shell, ExxonMobil and Total have all made similar investments in Argentina. Furthermore, this venture in Argentina has also opened the door for us to enter a new market like Mexico.

PETRONAS is ranked the world’s sixth most-profitable Fortune 500 Company in the oil and gas space, but how would you measure success for PETRONAS?

PETRONAS is very agile and willing to learn and grow. In the early days, we learned a lot from our own PSC contractors and invested substantially in education. This effort continues today in all the countries we operate. Being a global company comes with a heavy responsibility to ensure our operations are sustainable, that we add value locally, and that we do not harm the environment. Delivery, HSE and sustainability are thus of paramount importance.

PETRONAS is resilient and will grow in a steady form, employing the strength of its human capital to deliver on its strategy. Quality people ensure quality delivery, justifying our strong investment in education, training, and leadership training. In the past, we had to deal with much qualified talent leaving our organization, but today we have become a company of choice for leading talent, a key achievement for a NOC.

Our vision is to be an oil and gas multinational of choice. This means that our track record of delivery and our capacity to enhance the value of resources will be unquestioned. As such, no recognizable differentiation between PETRONAS and the IOCs in terms of quality will exist. Being a NOC means our shareholders are 100% the government, but beyond this fact all indicators of operational excellence will be on par with the leading IOCs.

To give an example of how we are arriving at this goal, our Syntium lubricant was developed for the domestic market and can now be found in more than 80 markets, while all the fluids used in the Mercedes car that won last year’s Formula 1 were fully developed by PETRONAS.

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