Room for competent bumiputera companies

The Edge Malaysia, February 25, 2013

By Azam Aris

If there is such a thing as a Petronas ‘agenda’ for the bumiputera community, then it is aimed at creating genuine bumiputera companies that are resilient and able to compete in the tough environment of the oil and gas industry.

There is no room for RM2 and Ali Baba companies – and don’t expect any handouts, says Petronas president and CEP Tan Sri Shamsul Azhar Abbas. The national oil company, he adds, will continue to be supportive of bumiputera companies but those bidding for contracts must be realistic and have the experience and expertise to compete. He says there are many good and capable bumiputera companies and the notion that Petronas is not doing enough come mostly from those that cannot compete or are being used as fronts by non-bumiputera companies.

In 2010 and 2011 alone, Petronas awarded about RM74 billion worth of contracts to bumiputera-controlled companies, a sum that cannot be described as anything but huge. Despite this, the company has become a punching bag for Malay right-wing and business groups in recent months.

The latest salvo was fired by the Malay Economic Action Council (MTEM) – an umbrella body of more than 60 business groups – that blamed Petronas for sidelining bumiputera companies, including those it claims are qualified, and favouring foreign companies. The MTEM has called for Shamsul, chairman Tan Sri Mohd Sidek Hassan and members of the board to resign.

Dismissing these views, Shamsul says Petronas works closely with the Malaysian Oil and Gas Services Council (MOGSC) – an association driven and promoted by the oil and gas service sector – to better know the capability of bumiputera companies.

“These are the professional groups of local companies that understand governance is required. They understand that there is such a thing as tender of contracts, the Petronas code of business ethics or why we have a no-gift policy. They are prepared to participate through open competition.

“MOGSC can give you a list of qualified and professional bumiputera companies with whom we are working. These companies understand it is all about competition and competitive bidding. They have got no problems,” he tells The Edge.

In terms of capital expenditure, Petronas will spend RM312 billion over the next five years, RM 187 billion of which will be for domestic operations. The size of this amount as given the impression that there are a lot of contracts out there, so much so that it has attracted a sled of RM2 and Ali Baba companies, many without industry experience and expertise, bidding for contracts and looking for handouts.

Shamsul clarifies that the joint committee anoounced by the MTEM is not one to identify and decied on awarding projects, but a consultative forum to discuess and look into the problems face by bumiputera companies.

The award of enhanced oil recovery contracts involving marginal fields is one of the areas where Petronas has been accused of discriminating against local companies. In the first round of awards – for risk service contracts (RSCs) – the bidding is open to foreign companies which then have to select local partners.

“RSCs are no easy task. These are marginal fields on which even the oil majors have given up and where local companies have no experience and capability. So we invite foreign companies with niche expertise like Petrofac. Then we insert the local agenda by putting in a requirement that these foreign companies identify  local partners, including bumiputera companies, that are public listed, financially strong and in the oil and gas industry,” explains Shamsul.

Petronas first RSC – the Berantai fields of Terengganu’s shores – was awarded to Petrofac, an UK-listed company with SapuraKencana Petroleum as the local partner. Through such joint ventures, the local companies are expected to learn and gain experience in areas new to them.

While many of the bumiputera companies have to compete for oil and gas contracts, Petronas has, since 1993, conducted a bumiputera vendor development programme (VDP) that focuses on small and medium manufacturers and self-operated providers. The objective is to create competitive and resilient bumiputera entrepreneurs with emphasis on import substitution.

The base period for the VDP is five years with a possible extension of one to five years, subject to certain criteria. It covers both upstream and downstream activities, for example manufacturing and refurbishment of mechanical seals and well-pumping services.

Under the VDP, the vendors are awarded contracts that are meant to be the base volume for them to grow their business and their performance is strictly monitored through a set of key performance indicators (KPIs). It is an entrepreneurial grooming process, which exposes them to best management practices through training and proper collaboration with internal experts.

Currently, there are 12 active vendors in the programme, over the years, 52 vendors have graduated without the assistance Petronas gave them while they were in the programme or were terminated for not meeting their KPIs and other conditions.

Petronas also follows a standardized work and equipment category (SWEC) code – a list that group jobs into specific categories used by the oil and gas industry in upstream and downstream activities. If a company wants to be registered or licensed with Petronas, it needs to apply according to a specific SWEC code.

For example, if a company is licensed under the compressor SWEC code, it can only participate in bids in this category. It is no licensed for all jobs.

Each SWEC code has different criteria and requirements, including minimal technical requirements and bumiputera participation. There are 1,290 SWEC codes, of which 35 are for 100% owned companies with 51% bumiputera equity and 135 for companies with 30% bumiputera equity. The remaining eight SWEC codes do not require bumiputera participation.