Since the 1997/98 recession, state-owned oil company Petronas has been bent on a drive to diversify, foraying into property development and shipping, for instance.

Analysts however, wonder whether the Fortune 500 company will do as well sprouting arms as it would do concentrating on a few core business activities.

Recently, for instance, the oil giant acquired a stake in Perusahn Otomobil Nasional Bhd (Proton) which involves the development of an automobile engine. A portion of this holding in Proton, was soon swapped with Khazanah Nasional Bhd's illiquid stake in Putrajaya Holdings Bhd. It has also acquired a stake in the company that owns the Petronas Twin Towers in Kuala Lumpur.

Petronas' involvement in non-core activities like automotive engine development and buying into financially troubled companies, especially after the 1997 regional economic crisis, shows it may not be fully leveraging on its experience, skills and resources as an integrated petroleum concern, suggest reports.

Amongst the company's latest property investments is the acquisition of MAI Holdings Sdn Bhd's 48 per cent stake in KLCC Holdings Bhd.

Petronas also recently increased its stake in Putrajaya Holdings by 24.4 per cent to 64.4 per cent through a swap of 84.7 million Proton shares at RM7.87 per share and RM582.5 million cash with government investment vehicle Khazanah Nasional Bhd. (RM10 = $2.6)

The deal was reported to have been undertaken to assist Khazanah's pressing need for cash as sales of assets in the restructuring of Renong Bhd and United Engineers Malaysia Bhd have been slow.

These transactions, say sources, are unlikely to cause sleepless nights at the Petronas' treasury department which is sitting on RM42 billion cash and fund investment balances, an amount, according to Standard and Poor's, that is way above the company's policy of having a minimum cash reserve of about RM22.8 billion.

Furthermore, national oil and gas reserves now stand at 4.24 billion barrels (for oil) and 87.5 trillion standard cubic feet (for gas), with a reserve life of 17 and 34 years, respectively.

Charles Chang, a Hong Kong-based Fitch Ratings credit analyst, is unconcerned with the continuing diversification drive.

'We have considered that (Petronas going into non-core activities) and looked at some past exposure such as investments in Proton and Bank Bumiputra.

These activities happened but they are not regular occurrences to justify regarding Petronas as a quasi-government agency," he says.

'In the few instances that have occurred, the investments were subsequently sold back to the Government. We feel Petronas is managed independently, but it is something worth looking at if occurrences are frequent. It would become a credit concern when we see the magnitude of non-core activities appreciate to 10 per cent of group assets. It is not happening in Petronas.'

As custodian of the national resources, the government has a strong incentive to see Petronas prosper. It also received - in the form of dividend, royalties and taxes - over 20 per cent of its revenue from the development of the country's hydrocarbon resources last year.

Ee-Lin Tan, credit analyst at Standard and Poor's believes the association will ensure Petronas continues to have a monopoly on the country's hydrocarbon resources and receive support when needed.

'However, its rating would have been higher in a different environment, as now there is a risk of its finances being periodically deployed to support policy-related objectives,' she says in a news report.

With the impending dismantling of tariff walls under the Asean Free Trade Area (Afta) and Proton's foreign partner Mitsubishi Motor Co Ltd slow to pass on engine technology to Proton, the Government looked to Petronas to speed things up.

Petronas answered by constructing a two litre working prototype passenger car engine in 1998 via Swiss-based joint-venture company Sauber Petronas Engineering AG, in which Petronas has a 40 per cent stake.

The engine has since been fine-tuned for commercial use.

Proton, however, is reluctant to use the 1.8 and 2.0 litre versions of the Sauber engine since it has developed its own Campro engines at its Lotus Group engineering facilities in England.

Operations-wise, upstream exploration and development efforts in Malaysia have contributed little to reserves due to maturing acreage.

Although reserves have risen slightly, it has proved difficult to replace those already used.

Exploration activities have moved into deep-water, smaller fields while facilities are ageing, resulting in higher costs.

There are 41 production-sharing contracts (PSCs) signed which form the core of Petronas' domestic exploration activities.