Sustainability Development and Organizational Strategic of Petronas 1

Sustainability Development and

Organizational Strategy of PETRONAS

Irfan Iftekhar, M.Phil.

Visiting Faculty and Academic Consultant
 Sustainability Development and Organizational Strategic of Petronas 2

Introduction

Economic definitions of sustainability have been developed within environmental and

ecological economics, which provide an additional dimension to economic theory to

deal with exhaustible and renewable natural resources. Complex task which need the urgency of

sustainability management system have to be dealt with by the Oil and Gas companies. On

drilling and maintenance cost alone, the drilling and oil exploration companies spend more than

$150 billion a each year. When the spending is so huge, it means that even the savings of a few

percent can make a big impact on the bottom line (Soros, G 2000). So it is natural that the

biggest savings possible is possible in the areas where the spending is high. In the Oil and Gas

industry, that area is the 'complex services' (McCracken, 2001).

It is important for business enterprises to implement initiatives which have a focus on

aligning positive impact from those initiatives of the management framework to corporate

strategy and value creation. These goals can be achieved by analyzing the focus of the

stakeholders, the corporate strategy, value drivers and sustainability risk. A value added business

which integrates important parts of sustainable development components into their daily business

operations, is one notion of sustainable development (Dess et.al.2005).

The way how business is being performed is sustainable development. It considerably (i)

impacts the landscape of competitive advantage of the organization (2) influences the ways

through which resources are developed in the organization, including capabilities and activities
 Sustainability Development and Organizational Strategic of Petronas 3

(3) impacts the nature of the strategic measures of the organization and (4) develops the image

and innovation of the organization as source of competitive advantage.

Background

PETRONAS is owned by the Malaysian Government and is an integrated oil and gas

corporation. PETRONAS global operation had extended to Arica countries, the CIS countries,

Middle East and Asia Pacific countries. Some of the African countries included Sudan, South

Africa , Libya and Algeria. In the Asia Pacific, the oversea portfolios included Vietnam,

Myanmar, China and Australia. The investments in CIS were Turkmenistan and Kazakhstan.

Petroleum was PETRONAS core business right from finding hydrocarbon up to processing

and refining, petrochemical industries, manufacturing and transportation. Since PETRONAS

emergent in 1974, it had developed itself from merely management of petroleum resources to

project management and later established itself as the operator in upstream activities before

diversifying its activities and went international. PETRONAS evolution is shown in Figure 1. In

1984, with the establishment of PETRONAS Carigali Bhd, it became the operating arm in the

upstream activities.

Later, several strategic studies carried out by PETRONAS that led to diversification of

its activities into oil refining processing and utilization and petrochemical manufacturing and

international marketing. To optimize the value and maximize synergy of the natural resources, it

had integrated the upstream and downstream activities and transformed PETRONAS into an

integrated oil and gas company. As the foregoing discussion indicates, Malaysia will need an
 Sustainability Development and Organizational Strategic of Petronas 4

extended period of sustained strong economic growth if there is to be substantial progress in

reducing the high incidence of poverty in the country and in creating productive employment

opportunities for the rapidly growing work force (A.M. Schwencke 2012).These are among the

most important challenges facing the country today. Progress on poverty reduction will require:

(i) a reduction the current high levels of unemployment and underemployment in the country,

especially among the rural population; and (ii) creation of productive employment for a labor

force that is growing at about 5% a year with 250,000 new entrants into the labor force each

year. As the SSDP indicates, the petroleum sector adds some two-thirds of the value added for

the country, but makes a minimal direct contribution to employment creation. The vast majority

of the population must therefore find productive employment opportunities in the non-oil sectors

of the economy, and especially in the agriculture, forestry and fisheries sub-sectors. Employment

generation and improved livelihoods is not only important for poverty reduction, but is central to

maintaining peace and security

PETRONAS: Mission, Vision and Objectives

Mission and vision statement is very important to illustrate the organization reason for

existence and the direction towards achieving the objectives and goals in the short and long

term. PETRONAS had long developed the mission and vision statement. However, in 1995,

after its globalization effort, PETRONAS changed its vision statement to incorporate the vision

of being a multinational company of choice. Below are discussion on the three elements of

PETRONAS fundamental principle of its existence and the values system that it adored.
 Sustainability Development and Organizational Strategic of Petronas 5

Vision

Vision of PETRONAS was "To be A Leading Oil and Gas Multinational Company of

Choice". This defined that oil and gas as the core business and emphasized on significance of

integrated upstream and downstream activities in adding values to the primary resource. In line

with the industry trend in the downstream and the relevancy in the value chain, PETRONAS

wanted to increase weighting towards gas and petrochemical. It expressed desired to leverage on

the core businesses and out-sourced the non-strategic activities and units.

Mission

The PETRONAS mission statement was developed to explain the reasons for its

existence, strengthen the vision and articulate the corporate direction in achieving the vision.

PETRONAS described its mission statements as follows:

"We are a business entity."

"Petroleum is our core business."

"Our primary responsibility to develop and add value to the national resource."

Our objective is to contribute to the well-being of the people and the nation."

The mission statement stated that petroleum, which constitute of oil and gas, as being the core

business. Being a natural resource, like other resources, it also had to be explored and when

development is complete, has to be produced and processed and lastly made into consumer

products, like gasoline, lubricants, industrial chemicals etc. This is a way through which the
 Sustainability Development and Organizational Strategic of Petronas 6

value chain of PETRONAS could be maximized including the synchronizing up and downstream

activities.

Objectives

Taking the vision and mission as the foundation of the company direction, PETRONAS

Exploration and Production (E&P) business unit has developed their specific objectives in order

to achieve the Corporate's vision and mission.

PETRONAS value system

PETRONAS value system was developed to explain the values that the organization

advocated and the expectation that the organization has on its employee. There were four values

system adopted by PETRONAS:

"Loyalty"

"Professionalism"

"Integrity"

"Cohesiveness"

PETRONAS organizational environment

Although PETRONAS has a good image for its corporate social responsibility (CSR) in

the realms of education and research activities concerning biofuel yet these are not sustainable.

Only knowledge of an organization can be of help in providing the foundations for the
 Sustainability Development and Organizational Strategic of Petronas 7

sustainable competitive advantage of the organization. In this competitive environment,

knowledge remains productive if applied to create a visible difference and not just that it exists.

The most important factor that can be determinate for an organization is knowledge and CSR

activities (Ducker, 1999).

Some of the factors that impact the development of an organization include the initial,

marketing, operation and management factors. Its had investment in 53 wholly owned

companies with 21 located overseas and 32 locally, 27 partly owned with one in

oversea and 30 associated companies with 11 located overseas. The mode of decision making

was made centralized with specific business units had their own business committee chaired by

the respective Vice President. The organization decision-making and guiding policies were

made through Management Committee meeting and Board meeting. Members represented the

Management Committee were mainly from the various heads of business units. The Board

Members comprised of member from the senior management and Government representatives.

The Exploration and Production (E & P) business unit was responsible for the upstream

activities. Petroleum Management Unit, which was part of the holding company, was

responsible for managing the domestic petroleum operation and supervising the implementation

of Production Sharing Contracts signed between PETRONAS and the contractors. PETRONAS

Carigali Sdn.Bhd. (PCSB) under the E&P business units was the subsidiary of PETRONAS and

was the operating arm of PETRONAS in the upstream sector. It has domestic assets as well as

international assets. The international assets were being managed by wholly owned

international subsidiaries headed by the country managers. The case discussed the globalization

challenges in PCSB,
 Sustainability Development and Organizational Strategic of Petronas 8

PETRONAS Organization Structure

The operating arm of PETRONAS in the upstream was PETRONAS Crigali Sdn Bhd.

(PCSB) which has businesses locally and internationally. The domestic operations were run by

the regional dices located in Kerstin for the Peninsular Malaysia, Miri for the Sarawak operation

and Kota Kinabalu for the Sabah operation.

The main corporate office was located in PETRONAS Twin Towers, KLCC and it

managed and controlled the overall operation of the rganization.The Chief operating

officer(COO) was responsible for the three regional operations and the made regular reports to

the CEO. Three regional General Managers who managed and controlled the daily operation
 Sustainability Development and Organizational Strategic of Petronas 9

gave regular reports to COO. Most of their operations were offshore and they ensure the safety

and objectives of the regional office were met. The main, objective of these regional offices

was to deliver oil and gas production at a certain rate to meet the national target set by

PETRONAS. In doing so the daily running of the machinery, production platforms, maintenance

and safety of the operation were uphold.

Corporate Sustainability Management

After the World Commission on Environment and Development was sanctioned by

United Nations, a report was published in 1987. The major notion of sustainable development

thus got a wide attention from all stakeholders (Murphy, B. 2006). This notion transformed into a

major reference point whcih began to shape the global agenda including the global attitude

towards socio-economic and environmental development. Corporate sustainability management

strategy contains important elements of the components of sustainable development into the

daily operations (Tonn, B. E 2006). Through it the business needs and development of the

organization as well as the sustainable development of the ecosystems, are all ensured. Strategies

of the management of sustainability will impact the competitiveness of the organization by

monitoring the organization's resources, activities and capabilities. All these elements influence

the nature of the organization. Corporate sustainability management strategies are like the

building blocks which empowers the organization to act, manage its operational risks and the

hope of the stakeholders.

PETRONAS Stakeholders
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PETRONAS has five stakeholders:

i. Governments The Malaysian Government as well as other local governments where it operates

ii. Customers

iii. Employees

iv. Local community

v. Environment

Impact on Strategy

As the foregoing discussion indicates, Malaysia will need an extended period of sustained strong

economic growth if there is to be substantial progress in reducing the high incidence of poverty

in the country and in creating productive employment opportunities for the rapidly growing work

force (Gabriel Chong 2012). These are among the most important challenges facing the country

today. Progress on poverty reduction will require: (i) a reduction the current high levels of

unemployment and underemployment in thecountry, especially among the rural population; and

(ii) creation of productive employment for new labor force. The vast majority of the

populationmust therefore find productive employment opportunities in the non-oil sectors of the

economy, and especially in the agriculture sub-sectors (Benthall, J., and J. Bellion-Jourdan

2003). Employment generation and improved livelihoods is not only important for poverty

reduction, but is central to maintaining peace and security of any state.It should be noted that no

organization is free enough or is at liberty to adopt its own policies, on whatever programs or

futuristic goals (Y M Yusof 2012). An organization today has transformed like an amalgam of

stakes and greed with the stake holders, which include the funding institutions, governments, the
 Sustainability Development and Organizational Strategic of Petronas 11

shareholders, partners etc., controlling every aspect of policy making of the organization (J.

Gupta, and S. Sharma 2012).

These stakeholders of PETRONAS have their own claims and different degree of impact

on its strategies (Foltz, R. Denny, F, Baharuddin A.2003). The strategies that can be linked

specially to the Malaysian government are:-

i. Enhance shareholders value, or put simply, the Malaysian Government.

ii. Ensure continued future supply of petroleum for Malaysia by seeking opportunities overseas

to explore, secure and develop new reserves

iii. Working overseas, it must also make sure not to make the local bosses angry, whether the

local government or the local political parties. These are apart from its vision to be a good

corporate citizen (H. Robinson 2006). Like any other stakeholders these are very crucial

Stakeholders for PETRONAS. This is evident from the strategies and actions which usually go in

favor of the governments, to an extent that it seldom makes the local community unhappy and

the environmentalists, angry as described below.

Human Rights Violations

A UK based human rights organization named The Burma Campaign has listed the name of

PETRONAS in its 'Dirty List'. This list exposes those corporations which either directly or

stealthily help military dictatorships through funding, like in Myanmar. PETRONAS has also

been claimed to have links to the violations in Sudan concerning the human rights (Cooper, PwC

2012).
 Sustainability Development and Organizational Strategic of Petronas 12

Environment/Ecological Destruction

Offshore rigs are the roots of ecological disasters and imbalances like health and reproductive

health as claimed by Culture Change (2008). It revealed that there were breeding problems to

marine life, as the pollutants destroyed kelp beds, reefs and wetlands. To date oil spills have

polluted the sea water like no other and has destroyed marine life near the oil spill surrounding.

Being an off-shore oil exploration and drilling organization, like Shell, Exxon, Indian Oil etc., its

activities, like those others, also contribute to those environmental issues (Speth, G 2001). The

above example show that the local community and the environment is taken as dependent

stakeholders which are not as important as the government (R. Barclay, and P. Murray 2012).

Though PETRONAS always mentions about the welfare and good of the society and the

environment in its strategies and policies but everything seems to take a back stage when there is

an engagement between the environment and community versus the governments. But with

several bad aspects there are several good aspects, the law of nature, today under the patronage

of PETRONAS various corporate social responsibility (CSR) programs are being implemented,

of which the major ones are:

Biodiversity

In Malaysia and other countries where it operates, PETRONAS helps and supports,

directly or indirectly conservation of natural parks, natural habitats and forests.

Community Programs
 Sustainability Development and Organizational Strategic of Petronas 13

Community welfare including Sports, drug prevention campaigns, traditional and

classical music appreciation concerts and ensemble, arts and science fairs and beach cleaning

programs are some of the activities with which PETRONAS is actively involved in Malaysia. In

other countries it generally helps in the eradication of illiteracy, funding the vocational training

programs, clean and safe drinking water supply and health programs (Jarle T. 2010).

Renewable energy research

R&D is on the forefront of PETRONAS activities, it utilizes renewable feedstock like

vegetable and palm oil (F. Lai, and N. Azizan 2012). It also has been actively involved in the

development of 'environmental friendly car' such as the E01 engine which runs on natural gas.

The R&D activities of PETRONAS are being repositioned in order to identify the sources of

alternate energy like bio-fuel and ethane. Palm oil, one of the many renewable feedstock is being

processed into high yielding and refined cooking and vegetable oils. PETRONAS has also

entered into 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 in this regard.

Conclusion

The theoretical underpinning for sustainability is in disarray. There are several competing

frameworks to classify definitions of SD, although none provides either a complete typology or a

theoretical underpinning for the categorization (K. Metaxiotis 2005). PETRONAS is doing good
 Sustainability Development and Organizational Strategic of Petronas 14

in terms of Corporate Social Responsibility activities and endeavors (MIT 2012), but its focus is

more on the non-direct activities. If PETRONAS wants to be seen as a good corporate citizen

and also become a sustaining corporation, it is imperative that 'real corporate social

responsibility' practices are followed by it. It should try hard to put a stop to such actions which

damage the environment which are the result of its operations (M. Rodriguez et.al 2002).

Environment alone should be taken as the foremost stakeholder, not just by PETRONAS

but by all oil and gas companies. The way forward will be through sustainable business

practices, because it ensures the well-being and survival of the corporations as well as improves

the unique competitive advantage of the companies engaged in oil and gas business (M. Alavi,

and D. Leidner 2001).

 Sustainability Development and Organizational Strategic of Petronas 15

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