Petronas CEO calls fuel subsidies a “poisoned chalice” at AOGC 2013

Shamsul Azhar Abbas, CEO of Malaysia’s national oil company Petronas, referred to fuel subsidies as a “poisoned chalice” that distorts the true picture of energy pricing, and more often than not, benefit the rich more than the poor. These remarks came in his State of the Industry address on June 10 at the 17th Asia Oil and Gas Conference.
A similar sentiment was expressed by Malaysian Prime Minister Najib Razak at the opening ceremony of AOGC 2013 in Kuala Lumpur, though the tone was far more muted. Najib counted “rationalizing subsidies” as one of the things the country should do to address its near- and medium-term challenges.
These comments may signal an end to, or at least a reduction in, oil subsidies in Malaysia, something analysts had predicted after Najib’s victory in the May 2013 elections.
While the intent of subsidies is good, the notion of consumers paying less than the supply cost of energy is a problem. “Its consequences extend beyond the fiscal costs; it depresses growth and deters new investments,” Abbas said. “Cheap prices encourage imprudent consumption, promote inefficient industries and subsequently increase emissions, to the detriment of the environment.”
Malaysia subsidizes 95 RON gasoline and diesel fuel, the prices of which were last raised by MYR0.05 (US$0.02)/liter to MYR1.90/liter (US$0 .60) and MYR1.80/liter, (US$0.57) respectively, on December 1, 2010.
Subsidies on 97 RON gasoline were removed in July 2010, and the fuel is subject to a managed float, where the price is determined by an automatic pricing mechanism that tracks international oil price movements.
Banking giant HSBC said in a report in May that the government could save up to MYR10 billion (US$3.15 billion) by completely eliminating fuel subsidies this year.
Separately, Abbas said that enhancing energy security will be the single most critical challenge in Asia in the foreseeable future as the region grows increasingly reliant on imports to meet its growing needs.
“Numerous upstream investments in exploration blocks, construction of new pipelines and regasification terminals are a testimony to the energy security strategy,” Abbas said.
Although unconventional resources discovered in North America are widely talked about, it represents only a fraction of the global unconventional estimated reserves.
“This goes to show that we are not running out of oil and gas…. But the remaining hydrocarbon resources are more challenging technically and more complex geologically,” he said.
He highlighted that in today’s world, availability does not necessarily ensure accessibility and commercial viability.
“Instead, security of supply is heavily influenced by geopolitical realities of both producing and consuming markets, as well as cooperation of transit countries through which infrastructure and pipelines traverse,” he said.
“We cannot fall into the lure of short-term gains at the expense of long-term energy security. Energy users need to understand that energy security requires a premium to allow reinvestment,” he said.
(June 10, 2013)