Sunday, January 18, 2009

Sustainability Analysis on PETRONAS

Executive Summary

PETRONAS is a fully-integrated oil and gas multinational corporation fully owned by the Malaysian Government. The nature of its business itself is causing sustainability issues because while oil is a key resource to generate power, it is also a great environment polluter and is not renewable natural resource. Although there are various stakeholders for PETRONAS, the Malaysian government and local governments where PETRONAS operates have the greatest impact on its strategies and actions. Whenever there is a conflict between governments and local community/environment, the viewpoints and expectation of the governments seem to be given priority, much to the detriment of the local community and environment. PETRONAS’s corporate social responsibility (CSR) activities such as in education and biofuel research are great but certainly not enough and sustainable. PETRONAS must take ownership of its direction to be a sustaining corporation. There are 4 main recommendations outlined for PETRONAS to help it be a “sustaining corporation”. First, PETRONAS must take environment stewardship by taking a three-pronged approach of “finding out where and how it damages the environment”, “mitigate and reduce the damage” and “reverse the damage”. Second, it must begin to sincerely respect human rights especially in places it has its operations. Third, it should work to find renewable and sustainable energy sources and technology; and economical way to them to consumers. Fourth, it should leverage its partnership with its education institutes to research, share and promote renewable energy technology and management processes. The key driver to all this change will be to place the Environment to where it really belongs – as a definite stakeholder in the Stakeholder Salience model of PETRONAS.


1 Introduction
PETRONAS (Petroliam Nasional Berhad) which is based in Kuala Lumpur, Malaysia is a fully-integrated oil and gas corporation and is ranked among FORTUNE Global 500's largest corporations in the world with a workforce of more than 30,000 and operating in more than 30 countries the world over. It is wholly-owned by the Malaysian government and is vested with the entire ownership and control of the petroleum resources in Malaysia through the Petroleum Development Act 1974. PETRONAS is the largest single revenue contributor to Malaysian government. This report will delve into PETRONAS’s various stakeholders and their impact on its strategies; its corporate social responsibility programs; and the criticisms level against it to understand where it stands in terms of a sustaining corporation. This report will also recommend further actions for PETRONAS to take it closer to be a sustaining organization.

2 Stakeholder Analysis
2.1 Stakeholders
There are 5 major stakeholder groups for PETRONAS:-
i. Governments - comprises the Malaysian Government and the various local governments where PETRONAS has its operations.
ii. Customers – consists of retailers/dealers and end-users of its products and services.
iii. Employees
iv. Local community - people living in countries/places where PETRONAS runs its operations
v. Environment



2.2 Impact on Strategy
Each of the various stakeholders of PETRONAS has their own claims and different degree of impact on PETRONAS’s strategies.

Based on stakeholder salience model for PETRONAS, the definite stakeholders for PETRONAS are the Malaysian government which fully owns the corporation and the various local governments which grant PETRONAS rights to explore and extract oil and gas in their countries.

The strategies that can be linked specially to the Malaysian government are:-
i. Enhance shareholder’s value (in this case it’s the Malaysian Government)
ii. Ensure continued future supply of petroleum for Malaysia by seeking opportunities overseas to explore, secure and develop new reserves


These are in addition to its vision to be a good corporate citizen. These two stakeholders are the most important for PETRONAS and this can be seen in its strategies and actions that usually favor the governments, sometimes to the detriment of the local community or environment as described in the 2 sustainability issues that follow.

Human Rights Violations
PETRONAS was listed in the “Dirty List” in 2003. “Dirty List” is an effort by The Burma Campaign UK, a human rights organization, to expose companies whose operations are directly or indirectly helping to finance the military dictatorship in Myanmar (formerly known as Burma). PETRONAS has also been linked to human rights violations in Sudan.

Environment/Ecological Destruction
According to Culture Change (2008) (which compiled findings from “Rainforest Action Network”), pollution from offshore rigs causes ecological imbalances such health and reproductive problems for surrounding marine life, destroys kelp beds, reefs and coastal wetlands, and exposes the wildlife to threats of oil spills. Since PETRONAS’s key activities are off-shore oil exploration and drilling, its activities do contribute to those environmental issues.

The examples above clearly shows that, in the eyes of PETRONAS management, the local community and the environment may be seen just as the dependent stakeholders and are less important than governments. Although there are mentions (listed below) on the well-being of society and environment in its strategies, it seems to take a back stage especially when there is a conflict between Local community & environment versus Governments.


However, all is not bad for PETRONAS. There are many corporate social responsibility (CSR) programs actively run by PETRONAS. The key ones are:-

Biodiversity
PETRONAS supports, funds and work towards conserving “nature parks” in Malaysia and other countries where it operates. It also encourages its employees to volunteer for nature conservation works.

Community Programs
Over the years, PETRONAS has organized, sponsored or actively involved in community based activities such as sports, drug prevention, classical music appreciation, arts and science exhibitions, and environment conservation understanding. Most of them are in conjunction with
associations owned by or linked with the Malaysian government. In the international forefront, PETRONAS’s contribution are mostly centered around education and health programs such as sponsoring students, funding for vocational facilities, clean water supply and mobile clinic
operations.

Renewable energy research
PETRONAS is repositioning its research and development activities to identify alternative energy sources such as bio-fuel. It utilizes renewable feedstock such as palm oil, the high yielding vegetable oil available (Palm Oil Truth Foundation, 2006). Additionally, PETRONAS is
working with car manufacturers such as Proton to develop “green engines” such as E01 engine which runs on natural gas . In 2007, it signed an agreement with Battelle Memorial Institute of the US, Battelle-Japan Corp and Mitsubishi Corp to set up a renewable energy laboratory in Bangi, Malaysia (Daily Express, 2007) which also has an Engine Vehicle Testing (EVT) facility.

Customers can be considered as the dominant stakeholder for PETRONAS. Two key PETRONAS strategies are “customer focused” and “ensure the products it manufactures and services it provides are in accordance with appropriate industry standards and best practices”. Truly enough, its products and services can be considered satisfactory especially to Malaysian consumers.

From strategic point of view, employees are seen as a great asset by PETRONAS and one of its key strategies is to “enhance the capability of its employees”. One major program by PETRONAS is its education and human resources training and development. PETRONAS’s involvement in education and training began in 1978 as part of the corporate initiative to develop its workforce to meet its human resources needs especially in the petroleum sector.

Last year, PETRONAS Education Division, which was setup in 1998, won the 2007 Prime Minister’s CSR Award for the education category awarded by the Malaysian government (The Prime Minister’s CSR Awards, 2007).

3 Current Issues
Apart from the issues described in the preceding section, there are another two key sustainability issues facing PETRONAS. There are:-

3.1 Sustainability Reporting
In a 2006 annual survey titled “World’s Most Sustainable and Ethical Companies” conducted by Management & Excellence among 15 major oil companies, PETRONAS was ranked last. The annual survey, conducted by Management & Excellence (M&E), evaluates and compares the compliance of each company with over 280 internationally recognized standards in transparency, corporate governance, social responsibility and ethics. The survey concluded that PETRONAS is ranked the world’s least transparent corporation (Malaysiakini, 2006). However, over the years, there seems to be some improvement on the part of PETRONAS to be more transparent in its reporting (TheEdgeDaily.com, 2008).

3.2 Renewable Energy
Biofuel is renewable but may not sustainable according to a web article. Quote below from Suite101.com (2007) summarizes the sustainability issues of biofuel industry.

" Suleiman Jasir al-Herbish, Director-General of the OPEC Fund for International Development noted that: "...biofuels had negative side effects such as reducing food production, distorting food market prices and exacerbating water shortages..."(UN Press Release, May 10, 2007)"


In short, biofuel benefits may be offset by serious environmental issues such as water shortage and soil erosions and ecological problems because of rapid deforestation for plantation to produce ingredients for biofuel and increased food prices in general caused by the shortage. It is also considered an ethical issue to burn food for fueling cars. (CNN.com, 2008).

4 Recommendation to achieve Sustaining phase
From the discussion above, PETRONAS can be categorized to be in the COMPLIANCE-STRATEGIC PROACTIVITY phases of the Sustainability Phase Model. There is still great opportunity for PETRONAS to bring itself nearer to sustaining phase. Few recommendations to achieve it are as follows:-

4.1 Environment Stewardship
To reduce environmental destructions and ecological imbalances caused by its activities, PETRONAS must be proactive and transparent in dealing with these issues. Recommendations for PETRONAS to be a “Sustaining Corporation”:- First, it must conduct an Environmental Impact Assessment (EIA) for all its current and future explorations and oil rigs. Second, it must conduct continuous audit on all its operations (off-shore and in-shore). Third, it should report out the findings (EIA and audit) to all interested stakeholders to get valuable feedback from them. Fourth, it is important for PETRONAS to continuously be innovative to find ways to mitigate and possibly reverse any environmental risks or damage caused by its activities. Better still, PETRONAS should also work closely with environmentalist experts to actively rehabilitate and nurture the many areas that have been damaged (“imbalanced”) by its operations. The benefits for PETRONAS is that its battered image can be improved in the eyes of the public especially environmentalists and governments. If successful, PETRONAS will have a competitive advantage over other oil and gas companies. It may also be a preferred company, especially in countries where there is high concern of environmentalism, to be offered exploration and drilling opportunities.

4.2 Respect Human Rights
Generally PETRONAS complies with the Malaysian government’s or whichever local governments’ (where it has its operations) rules and regulations in terms of social welfare including employee benefits or environmental concerns. However, in countries such as Myanmar, the human rights law itself is very low in standard, so complying with them may not be an issue at all for PETRONAS but certainly not sufficient from sustainable point of view. Recommendations for PETRONAS to be a “Sustaining Corporation”:- it should look beyond just
compliance to the governments’ rules and regulation. PETRONAS management should actively pursue social equity and human welfare issues while continue to be in operations in countries where the local government is condemned for human rights violations such as Myanmar. PETRONAS should use its influence to pressure the local governments to improve their human rights records. PETRONAS also must report out any improvements it has managed to bring out directly and indirectly. The benefits for PETRONAS are its corporate image will be tremendously improved and not be condemned by human rights groups while being able to continue operations in those countries. However, PETRONAS must also be prepared not to continue its business if it doesn’t succeed in improving human rights situation. Note: This may be difficult considering PETRONAS is fully owned by the Malaysian government and the Malaysian government’s position on Myanmar is to work with the present government in Myanmar to reduce its human rights violations and not to isolate it.

4.3 Promoting Renewable Energy
PETRONAS’s active research and development of renewable energy especially bio-fuel is important for its long term sustainability. It is worth to note here that biofuel (using palm oil) is in Malaysia’s “agenda” of renewable energy. Malaysian government is looking for alternate uses for its palm oil which is priced commodity and key revenue generator for the country. However, there are sustainability concerns as mentioned in section 3.3 above. Recommendations for PETRONAS to be a “Sustaining Corporation”:- it should look beyond just fuels (fossil-fuel or bio-fuel) as its revenue generator. PETRONAS should invest part of its research or fuel exploration budget into research of other more natural and sustainable energy sources and technology such as wind farms and solar. PETRONAS should form strategic partnerships with electricity producers in Malaysia and abroad to use PETRONAS’s new technology to generate electricity. The benefits for PETRONAS is by forming early partnerships with electricity producers and tie them with its technology, PETRONAS can ensure it has a great competitive advantage over other “energy sellers” and ensure it can continually be profitable while being a sustaining corporation.

4.4 Sharing of Expertise and Funding
PETRONAS’s involvement and contributions on education and human resource development are exemplary. PETRONAS, being a fully owned government entity, is actually expected by the Malaysian community in general, to contribute back to society. What is being done, however, is not enough. Recommendations for PETRONAS to be a “Sustaining Corporation”:- it should openly share its research findings on sustainable technology and best practices such as alternative energy sources and management & leadership techniques to promote sustainability with the institutes it is running which include Universiti Teknologi PETRONAS (UTP), Institut Teknologi Petroleum PETRONAS (INSTEP) and PETRONAS Management Training. It should also provide financial funding and expertise help for these institutions to conduct their own independent research on “alternative energy” technology. The benefits for PETRONAS (and Malaysia) is that this will help the institutions to achieve academic and research excellence and this will help the Malaysian government’s aspirations to make Malaysian an educational hub in this region. This will in turn help PETRONAS and its institution to attract world class talents into its fold.

5 Conclusion
In terms of Corporate Social Responsibility activities, PETRONAS is doing well. But it focuses more on non-direct activities. In order to become a sustaining corporation, PETRONAS should start practicing “real” corporate social responsibility by reducing and stopping environmental damage caused by its operations and actively seeks renewable and sustainable energy sources. In order to move into sustaining phase, PETRONAS must first treat the Environment as its definite stakeholder.

5 comments:

mylivingwall said...

A very interesting analysis. We appreciate it!

Will feature your analysis in our website http://mylivingwall.com and link back to your blog.

All the best!

http://mylivingwall.com

KULO said...

@mylivingwall

thanks. glad to hear this.

KULO said...

Additional reading on PETRONAS ..actually a short article by one its former chairperson.

http://www.malaysianinsider.com/index.php/general-opinion/30829-petronas-governance-oil-and-talent

Anonymous said...

Interesting entry!!
Keep on sharing ur point of views with us! We're looking forward more entry fr u..

TQ

Mohammed Faisal said...

well structured and detailed ...good work...