Courtesy of The Diplomat, an article on how Petronas – Malaysia’s state-owned energy giant – benefited from the global spike in oil and gas prices, but its long-term future is less certain:

By any measure, 2022 was a banner year for Petronas, Malaysia’s state-owned energy giant. Petronas deals mainly in extracting, refining , and selling oil and gas and their byproducts. Malaysia, a country of around 34 million people, is endowed with significant oil and gas resources and when the price of these commodities skyrocketed last year, Petronas saw huge revenue increases and windfall profits.

A quick look at the 2022 financials shows that gross revenue increased year over year from 223 billion ringgit ($50 billion) to 333 billion ringgit ($75 billion) in 2022. Pre-tax profit nearly doubled from 70 billion ringgit ($16 billion) to 132 billion ringgit ($30 billion). Petronas ended the year with 200 billion ringgit of cash on hand – the equivalent of $45 billion. It’s a remarkable turnaround from 2020, when the pandemic caused a loss of 21 billion ringgit, or nearly $5 billion.

Two years later Petronas has not only returned to profitability but is seeing staggering profits thanks to the wild ride that energy markets took us on last year. As a result, it paid a total of 50 billion ringgit ($11 billion) in dividends in 2022, and authorized a further payout of RM 35 billion ($8 billion) last February. That will show up in the 2023 financial statement, but a distribution of that size so early in the year reflects the scale of Petronas’ positive cashflow.

It is also a good example of how essential commodities that everyone uses, like oil and gas, respond to market pressures. When demand outpaces supply, as it did last year when the global economy began lurching back to life, the price goes up. This in turn provides an incentive for companies like Petronas to invest in more production to meet that surging demand. In theory, that’s how a market is supposed to work. When scarce commodities are in high demand, periods of high prices are necessary, so producers have a reason to increase supply, after which the price is supposed to fall.

But an interesting thing about 2022 is that even as Petronas booked big revenue increases and wide profit margins, sales volume didn’t change that much from the previous year. According to the company’s Q4 operational report, sales of crude oil were up 4.2 percent in 2022, and petrochemical products were up 1.2 percent. Petroleum products, measured in millions of barrels, actually decreased by 0.6 percent.

Another way of looking at it is that revenue increased by 49 percent, while the cost of that revenue (that is, the direct operating costs incurred in producing and refining oil and gas and their byproducts, excluding admin, marketing and other ancillary expenses) increased by only 30 percent. So there wasn’t a huge upswing in production, and revenue increased by a lot more than the cost of production. Clearly, the main driver of Petronas’ record profits was simply that the market value of the products it sells was unusually high in 2022, and much of that price differential has been passed onto Petronas’ shareholder, the Malaysian government.

This touches on another important and, in my opinion, somewhat overlooked issue, which is that the Malaysian state is highly dependent on Petronas to fund itself. In 2022, the government took in 294 billion ringgit ($61 billion) in revenue. Of that, Petronas contributed 81 billion ringgit ($18 billion) through dividends and taxes, which is 27.5 percent of the total. Without Petronas, the Malaysian government would find a big hole in its public spending.

2022 was a great year for Petronas, but not for those who bought its oil and gas at market prices. Ironically, a probable long-term effect of really high energy prices last year is that more countries will now accelerate the transition to cleaner and renewable forms of energy. There may not be many more opportunities in the years ahead for Petronas to book this kind of windfall profits thanks to skyrocketing oil and gas prices. That will have serious implications for public finances in Malaysia as well as other countries that are heavily dependent on state-owned energy firms for revenue, and I have yet to see anyone come forth with a really good plan for dealing with this eventuality.