Sudan Referendum Poses Dilemma for Malaysia's Petronas

The ongoing referendum on independence for southern Sudan is sending shock waves in faraway Malaysia, in particular, in the upper decks of the iconic Kuala Lumpur Twin Towers, which house the corporate headquarters of national oil company Petronas.

Sudan ranks as one of the most crucial sources of Petronas’ international oil-producing assets, which are a major contributor to the company’s profits.

But the problem for Petronas is that its success in the country has been tied to its close relations with the ruling government of Sudan’s Arab-Muslim north headed by President Omar al-Bashir, while its oil-and-gas-producing fields are located in the largely Christian south, which is pushing for self-rule and independence in accordance with a 2005 peace agreement with the north.

Since Sunday, southern Sudanese have flooded polling stations to cast their votes in a referendum that seeks to have the south break off from the north. And most political analysts and diplomats believe southern independence is inevitable.

“Malaysia and Petronas will have a lot of bridge-building to do if the referendum is carried in favor of independence for the south,” said a senior Kuala Lumpur-based oil industry consultant, who has extensive business with Petronas.

In response to queries from The Straits Times, a senior Petronas official said the oil corporation was closely monitoring developments in Sudan and “has taken adequate steps and actions to best serve our rights and interests”.

“At the same time, we have had and are in continual discussions and high-level engagements with all relevant officials and parties, including with the government of South Sudan, on our intention and way forward in growing our business,” the official said in a written response. Petronas’ woes in Sudan underscore the high-risk strategy of the oil corporation’s much-envied global campaign.

By venturing into countries where other international oil companies have not been able to enter because of sanctions or political instability, Petronas has developed an impressive portfolio of international oil and gas assets in Africa, Egypt, North Asia and Russia.

According to industry estimates, Sudan is one of Petronas’ most lucrative sources for its assets in oil and gas.

The international operations of the oil corporation, which is Malaysia’s only Fortune 500 listing, contribute to about 40 per cent of its income and stand as the single largest contributor to group revenue.

But as its Sudan experience is now showing, these international bets carry an expensive downside when the political situation in these countries sours.

There are other potential problems as well. The penchant to do business in highly unstable regions also makes the company an easy target for global pressure groups and exposes it to the vagaries of international financial markets. It has nearly US$20 billion in bonds traded in global markets.

How it navigates through its troubles in Sudan has far-reaching implications for the Malaysian government, which has come to rely heavily on the country’s petroleum profits to fund its development plans.

The firm has emerged as a serious player among the world’s second-echelon oil majors because of its successful overseas expansion drive.

It began in the early 1990s by piggybacking on former premier Mahathir Mohamad’s activist brand of diplomacy, which was rooted in championing Third World causes and investing in economically troubled Islamic countries.

War-torn Sudan was among the oil corporation’s first forays abroad.

Foreign companies led by United States-based Chevron discovered oil in Sudan in the 1970s and 1980s, but the civil conflict in the country, attacks from human rights groups and economic sanctions imposed by the US against dealings with the country in 1997 forced many Western oil companies to abandon their investments.

The vacuum paved the way for Petronas and China’s China National Petroleum Corporation (CNPC) to move into Sudan, and both firms currently rank as the African nation’s largest foreign investors.

According to petroleum industry executives, Petronas and CNPC have rights to recoverable reserves amounting to 560 million barrels in Sudan.

Source: http://www.rigzone.com/news/article.asp?a_id=103049

It will be interesting to see if Petronas can continue operating in the south where the oil and gas fields are and due to its close relations with the ruling government of Sudan’s Arab-Muslim north headed by President Omar al-Bashir.