POLITICAL RISK – IDENTIFICATION

Political risk may increase when oil and gas corporations are operating their business
abroad. In the case of PETRONAS Group, the revenues generate from Malaysia only
accounted for 27% of total revenue. However, the remaining 73% of PETRONAS Group total
revenues are derived from international operation, which Asia Pacific is the major contributor
of revenues, such as 47% from Japan, China, Singapore, Thailand, Indonesia and more.
Therefore, if the operating country is enacting a new legislation or change of regulation, there
will be a significant impact for PETRONAS to compliance it. The common regulatory actions
may be restriction of operations, expanding health and safety requirement, environmental
enforcement, financial and more (Rudloff & Schultz, 2016). Besides, in 2014, PETRONAS
has announced that company may pulls out from the Canada’s Liquefied Natural Gas (LNG)
which worth RM32.56 billion, due to slow progress of new taxation scheme in Canada
(Petronas Warns to Pull Out, 2014). The project was uncertainty and created doubt for
PETRONAS to make their final investment decision.

In July 2017, PETRONAS decided to pull out from the LNG project in Canada. One of
the reason is the opposition from SkeenaWild (environmental association) and First Nation
(local activists group) in Canada (Petronas Drops Canada’s Natural Gas Project, 2017). The
project is located at Lelu Island, British Columbia, which is a home for wild salmon. It is the
Canada’s second largest wild salmon habitat, and First Nation Group claimed that the LNG
project would cause the area to become one of the major greenhouse gas emitters in Canada
(Lavoie, 2016). The environment and local groups have filed a lawsuit; claiming the
environmental certificate issued by Canadian government was unenforceable due to obvious
potential environmental damage. The lawsuit states that the certificate will not be used or sold
to other party for LNG excavation (Canada Challenges Petronas, 2017).

Furthermore, DiChristopher (2017) has reported that the flow of oil supply from Iraq
Kurdish through Turkey decreased because of the recent tension in Middle East on October.
According to PETRONAS Annual Report 2016, Iraq is the key player in Middle East region
that covers three main strategic focus, such as Upstream, Downstream and Project delivery and
technology. On the other, Turkey also involves in the Downstream business of PETRONAS.
Hence, PETRONAS’s operations may be affected due to the instability government and
ongoing civil war in Iraq. Meredith (2017) stated Iraq is one of the OPEC members with
significant influence and high oil consumptions.
 POLITICAL RISK – ASSESSMENT

Likelihood of occurrence: 3 Possible

Severity of Impact: 4 Major Effect

The degree of likelihood is 3 which mean the event is possible to occur in the company.
It has a chance of occurring at a moderate probability. The change of regulation, new legislation,
local protest and civil war may not happen frequently in a year.

The severity of impact is rated as 4 which means the event will cause critical effect to
the company. The environmental and local activist protest against the project had caused
critical damage towards PETRONAS when they withdraw from the LNG project in Canada.
 POLITICAL RISK – RESPONSE

When PETRONAS expands the business operation in other country, the firm will
alliance with the strongest partner. This may minimize the political risk as the business partner
has a strong influencing force within the country and good relationship with government. In
1996, PETRONAS made a contract with China National Offshore Oil Corporation and
Chevron Overseas Petroleum Ltd for exploration purpose in China (International Business
Publication, 2007). China National Offshore Oil Corporation is the largest corporation of
global natural gas market in China, still making agreement with PETRONAS in 2002 about
LNG supply in Shanghai (McGregor & Thornhill, 2006). This reflected PETRONAS has
managed the political risk effectively in China throughout the years.
 RISK MATRIX

High Probability Technology Operational

LIKELIHOOD OF OCCURRENCE

(5) Risk Risk

Probable
OPEC Risk
(4)
Possible
Political Risk Safety Risk
(3)
Unlikely
(2)
Rare
(1)
Very Low Low Medium High Very High
(1) (2) (3) (4) (5)

SEVERITY OF IMPACT
 References

Canada groups continue legal challenge on Petronas’ scrapped LNG project. (2017, Aug 8).
Free Malaysia Today. Retrieved from
http://www.freemalaysiatoday.com/category/nation/2017/08/08/canada-groups-
continue-legal-challenge-on-petronas-scrapped-lng-project/

DiChristopher, T. (2017, Oct 18). US crude dives 1.4%, settling at $51.29, as traders take
profits after recent gains. CNBC. Retrieved from
https://www.cnbc.com/2017/10/18/oil-markets-firm-on-tighter-us-market-expected-
extension-of-opec-supply-cuts.html

International Business Publications. (2007). Malaysia mineral, mining sector investment and
business guide: Strategic information and mining law. Washington, DC: International
Business Publications.

Lavoie, J. (2016, April 20). Opposition to Petronas LNG ‘Extensive’, First Nations leaders
tell Trudeau. Desmog Canada. Retrieved from
https://www.desmog.ca/2016/04/20/opposition-petronas-lng-extensive-first-nations-
leaders-tell-trudeau

McGregor, R., & Thornhill, J. (2006). CNOOC in Petronas gas deal. Financial Times.
Retrieved from https://www.ft.com/content/283f5c7a-4671-11db-ac52-0000779e2340

Meredith, S. (2017, Sep 16). OPEC’s second-biggest producer could possibly split in two –
and start an oil war. CNBC. Retrieved from
https://www.cnbc.com/2017/09/15/kurdistan-referendum-iraq-could-be-about-to-
split-in-two-but-its-oil-riches-may-spark-a-war.html

Petronas drops massive natural gas project in Canada. (2017, July 26). New Straits Times.
Retrieved from https://www.nst.com.my/business/2017/07/260823/petronas-drops-
massive-natural-gas-project-canada

Petronas warns it could pull out of Canada LNG Project. (2014, Sep 26). The Star Online.
Retrieved from https://www.thestar.com.my/business/business-
news/2014/09/26/petronas-warns-it-could-pull-out-of-canada-lng-project/

Rudloff, D., & Schultz, M. (2016, Nov 9). Top risks in oil and gas. Retrieved from
http://www.ogfj.com/articles/print/volume-13/issue-9/features/top-risks-in-oil-and-
gas.html