CNBC News Releases

CNBC Transcript: Tevin Vongvanich, President and CEO, PTT

Following is the transcript of an exclusive CNBC interview with Tevin Vongvanich, President and CEO, PTT. The interview was broadcast on Managing Asia on 4 March 2016 at 6.30pm SG/HK Time.

All references must be sourced to a "CNBC Exclusive Interview".

Interviewed by Christine Tan, Anchor, CNBC.

Christine Tan: The rout in oil prices and a slowing global economy have put oil producers under great pressure, including PTT, Thailand's largest energy player. Tevin Vongvanich is facing his biggest task yet. As CEO of PTT, he has to steer Thailand's largest energy company through one of the most tumultuous periods for oil in years. But Tevin is unshaken, saying he had an idea what he was getting himself into when he took over the hot seat in 2015.

Tevin Vongvanich: Well, I had a hint, because I took the job in September last year, and oil prices already went down for about a year. So I have a hunch of what is ahead of me. The speed and the scale yes, but the duration, not this long. If you remember, in 2008, oil prices came down from $150 per barrel to about 30 something dollars per barrel in less than six months, in about three to four months. So that is the speed and the scale. It is actually faster and lower than this time, but this time I think it is going to last longer than last time.

Christine: So it feels much worse than last time?

Tevin: It is more challenging, yes. Now that we are in a different environment than what we were expecting two years ago. Our strategies going forward, our growth direction, our portfolio management, and even with the business scope, it will be under review.

Christine: Lower oil prices have eaten into PTT's profits, in terms of earnings, the whole of last year, losses widen for fiscal 2015, how do you expect to do this year? Is it going to be a lot tougher?

Tevin: Well last year, our performance was affected heavily by the impairment of some of our assets in the upstream, exploration production, as well as in the coal business, so that was a one-time adjustment of the difference in price environment that came down so so so much. This year, we started off with a price level of about 30 plus, minus dollars per barrel, provided that throughout the year, it is not going much lower than this, which I believe it would not. I think we can manage the performances of the other business. The performance of the upstream exploration production is still a challenge because while the oil prices drop so much, the cost side has not really reflected the scale of reduction. Obviously we have done a lot of cost management, increasing productivity, but the scale is still not matching with the price reduction, so that is still a challenge on the upstream side.

Christine: Are you on a big cost cutting drive?

Tevin: Yes, yes we have started.

Christine: Where are you cutting?

Tevin: Well, actually if we talk a little bit about the survival strategy, I'm using the term, a bit easier for our colleagues to understand, is "R-O-I-C". The "R" is rationalization, we are actually reviewing our portfolio, and focusing on the assets that we are doing very well. We are strong in that and we are focusing on increasing that. And probably, digesting some of our non-performing assets with low potential. That was "R". The "O" one is optimization, and that is actually increasing productivity, and cost management. We are doing everything we can, the synergy, defer off the investment that is not actually needed now, cooperating with other operators or within our different assets to optimize our costs, so that part is actually ongoing. We have been able to reduce last year, I believe, more than about 15 percent of our operating expense in the upstream sector.

Christine: Let's talk about capital expenditure, because you set aside 50.8 billion baht of operations this year and that was based on the assumption that oil would average $40 a barrel. But when you look at where oil prices are at now, would you have to revise down your budget again?

Tevin: We changed our budgeting concept a little bit. Before, we used to do budget based on certain assumptions, right, and now what we do is that we keep our capex budget items a bit flexible. We identify each item and understand that if this budget item would only be feasible under a certain oil price, so when the oil price changes, we will revise our budget continuously, because we know which one will not fly with this level of oil price. Most of our budget, actually for PTT ourselves, is in the infrastructure where we would continue to invest,where it is not so sensitive to oil price. For the upstream, yes, I think they would have to really review the spending of the drilling of wells, building of the platforms, developing the new reserves, based on the level of oil price that is currently in place and what they would be expecting. So, the number that we use at our best case of $40, if the oil prices continue to drop down, we know in advance which project would not go so we would cut those budget out.

Christine: When you look at where oil prices are at now, as I am talking to you, it is at around $30 a barrel. Do you think we have seen the worst? What is your outlook for oil prices this year?

Tevin: Well, I hope we have seen the worst. But our assessment is that, at $30 per barrel is not a sustainable level in a few areas. It will be limiting the development of the new supplies to supplement the declining fuel. It will suffer a slowdown, the development of the renewables, the alternative energies, because the gap is so large. At the same time, it will stimulate the consumption. We have seen, in Thailand, in December, consumption of gasoline, in itself alone, increased by 10 percent in one month. That shows the consumer maybe less aware or cautious of spending on energy, because it is so cheap. And with all these factors, we believe that oil prices will adjust itself because of this change in demand and supply, to a level where it is a bit more sustainable.

Christine: What level is more sustainable to you? What is your outlook?

Tevin: Well at this stage, we believe that $50 per barrel, would be a bit more reasonable to continue developing certain areas to meet with the demand, but we don't know when it is going to reach $50 a barrel, but I think it is going there.

Christine: Could PTT survive oil prices at $20 a barrel?

Tevin: Right. Good question. So that's what we are doing, we are doing a stress test, at $20 a barrel for two years, at the moment, we still survive. Yes.

Christine: To mitigate the impact, you have been spinning off your assets. You have spun off your stakes in to oil refineries in Thailand, palm oil business in Indonesia. Production in your coal mining business has also been declining. Any plans to exit the coal mining business altogether?

Tevin: That is one business where we are still reviewing.

Christine: What is the outcome?

Tevin: I think we will know at the end of the first quarter. To tell you the truth, there is a threat about the coal business, because of the COP21, the pressure of emission reductions. At the same time, the coal business is not very cheap. The coal price went down a lot and the share price went down a bit.

Christine: As CEO, do you think you should exit the coal business?

Tevin: Let me get more information from all the sides, and then we will make a decision.

Christine: Well, there is not all bad news because lower oil prices also mean there are more opportunities for Mergers and Acquisitions. I know this is something you are very keen on. Are you scouting for any good bargains out there?

Tevin: Yes we are scouting, carefully, carefully, we have done some acquisitions in the past, maybe at the wrong time; we did it at the $100 oil price. At this time, it is probably a good opportunity to do it. And fortunately, our subsidiary, PTTEP, ourselves, PTT, and other of our subsidiaries, have accumulated pretty healthy cash position at the moment.

Christine: What are you looking to buy? What sort of assets are you looking to buy? Upstream, mostly?

Tevin: Well, upstream is more logical, because the prices of upstream assets have comedown quite a lot. We are thinking of entering into the unconventional, the shale, and the shale oil business, in the U.S. or elsewhere, because we feel that that is one area, well actually one of the main reasons for this drop in oil prices is that the development of new technology, the fracking technology, that allowed us to recover this oil. So we need to get into that kind of business for the long term.

Christine: Let's talk about gas, because as Thailand's sole gas supplier, PTT itself has suffered losses because of heavy government fuel subsidies over the years. There was a recent change, the government recently decided to float the price of natural gas. Will this increase in gas have a significant impact on the gas operations this year?

Tevin: Yes. In the past, the government has actually, gradually, lifted the subsidy by gradually increasing the price for CNG, or the LPG, the cooking gas. And that is another benefit of lower oil price, because the price, market price has come down to meet the level where the government is adjusting the retail price. So it is good timing, good opportunity, during this crisis, to liberate the price and so that is a few consequences from that I think the burden from PTT to help the government in subsidizing certain sectors for the customer, the lower income customer would be lower and lower, and should be gone within about this year. I think the second one is that where the playing field where we used to dominate. In other times, there were no competitors. The word "monopoly" is not so good, but you know.

Christine: There have been calls to end your monopoly now.

Tevin: Yes, we are actually supporting that. Because we would like to see more players coming in.

Christine: But will this force you to rethink your investments in the LNG segment?

Tevin: The LNG segment, we will still continue to play a big part in securing supply into the country, investing in the infrastructure to receive the LNG. There could be others interested investing in the infrastructure and that is fine because that is regulated facilities. We believe that our competitiveness in securing additional supplies there, because of our network and our volume.

Christine: When you look at earnings, and how low oil prices are, will gas be a main profit driver of your earnings this year?

Tevin: For this year, our gas business has a special character because on the buying side, our gas costs has a formula that is stabilizing the costs with the price of oil, in the past six to twelve months, so we have a lagging effect, in terms of the effect of the oil prices on the gas prices. This character(istic) also happened last year, when oil price dropped but our gas costs did not drop. This year we are starting to see that as well.

While our gas price, our revenue, depends on the real time price. So with that, our gas business may not yield a very good margin, because gas costs are still high. But that is reversible when the price trend is going up. But I think the refinery sector, the petrol chemicals sector, the retail oil sector will contribute more, and the impact from the impairment, or the write down of our upstream would disappear this year. Because I think if the oil prices stay at the 30, 30 something dollars per barrel, the possibility of having to impair any assets will be a lot less.

Christine: As Thailand's state owned energy giant, you have been asked by the government to secure new supplies of gas, because it feeds about 65 percent of Thailand's power generation. With domestic supplies depleting in about six or seven years, have you found new sources of gas you can tap into?

Tevin: For the supply within this region, I think the Gulf of Thailand, which actually has been a main source of supply, is in its mature stage, which, as you said, is depleting in about six to seven years? I don't think we can find additional big fields in the Gulf of Thailand, other than one of the suspended areas, which is a disputed area between Thailand and Cambodia, which is still not explored. So there is a possibility there, but I think we have to wait till the two governments get to a resolution. During this time, LNG has become more and more important in energy supply all around the world actually replacing a lot of oil supply, so we start seeing growing in gas consumption, reduction in oil consumption, mainly because LNG is becoming a commodity type of the energy. So,we are focusing our efforts on looking at LNG supplies from many places.

Christine: Like where?

Tevin: Well we had the contract with Qatar, the major producer in LNG, now supplying into Thailand for a couple of years now. Our upstream E&P invest in Mozambique, and hopefully we will be developing a project where part of the LNG will come to Thailand. We are discussing with several other companies to look into the long term contract for LNG supply to Thailand. We might be looking into the shale gas opportunity, together with LNG exports from the U.S. to Thailand. So our principle is that during this time, we believe it is a biased market for LNG, a lot more production capacity than demand. So we are taking this opportunity to look into several options for long term contracts, in couple, with the investment opportunities in the upstream and the liquid faction facilities.

Christine: This shift into LNG, cleaner fuel energy, I mean, with oil prices so low, I know you make a lot of investments into renewable energy. Does it still make sense to continue on these projects?

Tevin: Actually we have set up a company called GPSC, just listed in the stock exchange of Thailand, recently. And that is our focus on investing in the power sector. So they invested in hydro power, solar power, and also the conventional gas fire power. To me, it is still relatively small in the portfolio. So actually we were going to increase our portfolio a bit in the renewables.

In many areas, renewables still receive a little bit of support by the government. The support is becoming a burden now because conventional has become so low. But I think with the recent agreement in Paris, on the COP21, the effort of going into the lower CO2 emissions is still there. So going into renewables is something that, I think we still have to maintain now.

Christine: You are 57-years-old. You have more than 25 years of experience in the petrol industry. You have worked for UnoCal before it was bought over by Chevron, joined the PTT Exploration and Production arm in 1989, rose up the ranks, to head PTTEP, was made CEO of the entire group last year. How would you describe your leadership and your management style?

Tevin: I am putting emphasis on the stakeholders. I think the role of the leaders, is actually, of any organization, is to understand the expectations of the stakeholders around us, and then try to stay in the position that balances the expectations of the stakeholders.

Obviously you cannot fulfill 100 percent of the stakeholders but you need to understand what they are expecting from us and understand how much influence they have on us at that time. And this influence can change with time. I think that is the best thing I have learned, in the past many years working with a lot of good leaders.

Christine: Let's talk about that, because your major stakeholders, of course, is the government, and sometimes, PTT is being called to do national duty, you are forced to shoulder, of course, heavy losses because of your subsidies. How do you balance the need to do national service and the same time need to make money?

Tevin: Right. That is a challenging part. We know that the mission of PTT, since the start up was to ensure energy security for the country. And for that front, weneed to invest in infrastructure, we need to provide good service. But at the same time, after we are listed, we also have to fulfill the expectations of our shareholders, we need to provide fair returns to our shareholders.

We need to ensure that the investment makes sense. So that is how, I think, we can fulfill the role in two areas. Now the subsidy part is something that would be required in the beginning stage, when there are you know, difficult situations, but I think the government realizes that this subsidy thing would be temporary. So we work into the timing, and this is probably the right timing to exit from that subsidy requirement. But at the same time, we would be exiting from any privilege that we used to have as a state owned company as well.

Christine: So it works both ways?

Tevin: It works both ways. But I think now, PTT is strong enough to be prepared to work in an environment where we have to compete with others, no more monopoly as well as no more subsidies.

Christine: As CEO of PTT, what is it like operating under a military government?

Tevin: Well, I think the government has good intentions to provide good foundations for the longer term. And from that viewpoint, they might be doing a lot of things politically and in terms of the other economic foundations. On energy side, we are seeing the government doing similar things.

Christine: Are you happy with the way energy reform is being carried out here?

Tevin: I think so, yes. I think we are going into the right direction. We are gradually deregulating the price subsidies, we are opening up for competition, which is fine. One of the challenges in Thailand is that we still face with alot of misunderstanding with the public. It was pretty serious in the times of the high price because a lot of people suffered from the high price and that was because of the global oil price was high. Now with the low oil price, I think we should try to educate, to provide more information to the public so that they would understand and they would know that during this low oil price, don't spend too much, don't consume too much because we still have a long road ahead, because we still are a net importer of energy.

Christine: And finally, your tenure as CEO of PTT ends in 2018, what would you like to achieve within this time frame? What impact do you want to have on PTT itself?

Tevin: Well, I think, that within the two and a half years, we can see PTT with a more resilient portfolio focused on certain assets which have very good potential, and be strong in that. We have a good management team with the proper successor for the CEO and other management positions. We hope to get a bit leaner structure in terms of corporate structure because now, we have over 100 companies. If we can consolidate some of them, some of them which are doing similar work and maybe delegating.

Christine: Does that mean that some jobs would have to go?

Tevin: As I said, we would be looking at expansion at the same time. So we would be re-designing the job. We don't have any plans to fire any people. So I think we would be able to accommodate the new work with the current task force.