The move by Petronas, the Malaysian state energy company, to buy a 10% stake in Cairn India reflects the country’s growing hunger to invest in overseas energy assets, in part to offset a fall in domestic oil production and rising production costs. In July, Petronas purchased a RM3.95bn ($1.1bn) stake in Rosneft, Russia’s biggest oil producer.

Petronas said in a press release that its recent Indian purchase was a “long-term supportive investment” and the company had no intention of increasing its stake in Cairn India. The purchase values Cairn’s Indian assets at about RM24.7bn, and comes ahead of a planned initial public offering in the Indian stock market in December.

Growth worries

As south-east Asia’s second largest oil producer, after Indonesia, Malaysia is worried that a downturn in crude prices could affect future economic growth. The industry represents about 9% of Malaysian exports and accounts for 30% of government revenue. The country’s exports slowed in August as declining crude prices resulted in the value of oil shipments falling for the first time in four months. Malaysia’s finance ministry said in September that it expected the economy to grow 5.8% this year, a notch lower than the central bank’s 6% estimate in March.

Worries about falling domestic production have plagued the industry. In June, Petronas reported a 5% fall in domestic oil production for last year to 700,000 barrels a day. Najib Razak, Malaysia’s deputy prime minister, warned last year that the country could become a net importer of oil by 2009 if it did not find new oil reserves and domestic demand continued to surge. Analysts say that Malaysia must replace proven reserves, currently estimated at 4.2 billion barrels, with new discoveries at a faster pace.

Although higher oil prices in recent years have enriched the coffers of companies like Petronas, the costs of finding, developing and producing oil and gas have also increased by 50% in the past two years, Hassan Marican, Petronas’ chief executive, told an energy conference in Kuala Lumpur earlier this year. In addition, most of the new oil fields are located in deep-water areas, making production expensive.

Norwegian engineering group Aker Kvaerner, which built a sub-sea oil technology facility last year in Kuala Lumpur, said in early November that it would double its investment in Malaysia to RM278m to serve the fast-growing market in sub-sea oil production in Malaysia and south-east Asia.

To offset these domestic risks, Petronas has stepped up investments in overseas oil production, including investments in Egypt, Sudan and the Caspian Sea. In a major breakthrough into energy-hungry China early this year, Petronas reached a RM89.8bn agreement to sell liquefied natural gas to the world’s second largest energy consumer over 25 years.

As crude oil prices have surged, driving up the cost of diesel and gasoline, biofuels have emerged as an alternative to fossil fuels. As the world’s biggest producer of palm oil, Malaysia is turning to its most abundant resource, its palm plantations, for potentially highly profitable production of biofuels. Palm oil prices have risen by more than 20% in the past year. The International Energy Agency in Paris said in July that supplies of diesel fuel from vegetable oils such as palm, rapeseed and soybean rose 80% in 2005 and it expected biodiesel output worldwide to triple by 2008.

Merger plan

In November, the Malaysian government announced a plan to merge three state-controlled plantations to form the world’s largest palm oil producer. The merger of Sime Darby, Kumpulan Guthrie and Golden Hope would create a company whose market capitalisation would be more than RM25bn, giving them increased pricing power in the biofuels market and encouraging overseas funds to invest in a fragmented sector. The three plantation companies are controlled by Permodalan Nacional Bhd, the state-run equity investment fund.