Sample News Story
Malaysian gas prospers as Petronas goes international
28/08/2006
Malaysia, with 4.2 thousand million barrels of oil and 827,000 barrels/day of oil production, is not a major oil producing nation (in fact it only accounts for approximately 1% of global oil production). In gas, however Malaysia is a major player. In 2005 it exported 21.85 million tonnes (29.5 Bcm) of LNG – 15.4% of global sales – and consumed 35 Bcm domestically. Gas is, therefore, an important energy source to Malaysia with 87.5 Tcf of proven reserves as at the end of 2005. Malaysia’s important gas position has been reflected in it being elected to the Presidency of the International Gas Union for 2009-2012. Malaysian gas is not synonymous with Petronas, but Petronas dominates all sectors of the Malyasian gas business.
One of the tiger economies of the 1990s, Malaysia had its economic growth trimmed through the Asian crisis but has come through. Current growth is ~ 5% pa with most GDP generated from the services and industrial sectors. For those who have visited Kuala Lumpur (known colloquially as KL), you will know that it is a vibrant city, home to the (Petronas) Twin Towers (the second tallest building in the world) and many air-conditioned buildings and shopping malls. Over 50% of its energy demand is met through gas, the balance through oil and some coal and hydro.
With a population of ~ 24.5 million, Malaysia is a country divided into two parts, West or Peninsular Malaysia, lying between Thailand to the north and Singapore to the south and East Malaysia, the states of Sarawak and Sabah on the island of Borneo, some three hours’ flight from KL. These two states are themselves split by Brunei, a separate gas and oil rich country.
The Malaysian gas business has likewise developed along two different paths. Peninsular Malaysian gas is produced offshore from the east coast towns of Terengganu and Kertih, and supplies Peninsular Malaysia, where most Malaysians live (~ 19 million), through a pipeline system (PGU) owned and operated by Petronas, and is the base for Malaysia’s industrial, commercial and services sector growth. The gas is supplied to key consumers and power plants through the 2,400 km Trans Peninsular Gas Utilisation Pipeline System (PGU), which starts from a Petronas gas processing plant complex on the east coast, crosses to the west coast and also stretches from the Malaysian-Thailand border in the north to Singapore in the south. Within Peninsular Malaysia there is also gas production in the Joint Development Area (JDA) offshore East Coast Malaysia and Thailand.
Sarawak gas is produced offshore in relatively shallow water, but new finds are in deeper water, and there is no ready domestic market as the population is only 2 million, spread out over a large landmass. Gas commercialisation has, therefore, been through development of the LNG schemes, gas to liquids and fertilisers.
The same regional split has also traditionally divided the involvement of international oil companies in the country. East Coast Peninsular Malaysia was historically the domain of ExxonMobil, while Sarawak and Sabah, on the island of Borneo was the domain of Shell. With the success of gas commercialisation and the good exploration prospects, other companies have entered the fray and there have been recent announcements of gas and oil finds.
In 1974 the Government of Malaysia established Petroliam Nasional Berhad (Petronas) to be the owner and manager of petroleum resources in Malaysia. Since then Petronas has grown into an integrated energy company, involved in upstream exploration and operations (through its subsidiary Carigali), oil and gas production, oil refining (with 356,000 barrels/day refining capacity in Malaysia and South Africa), oil marketing, gas processing and distribution. Since the early 1990s Petronas has expanded overseas and today has upstream, midstream and downstream interests in over thirty countries, both within the Asean region and globally (See box on page 14).
Petronas acts de facto as the Malaysian energy ministry and regulator, with its surplus funds being used at times to assist other less cash rich parts of the Malaysian economy. Whether these actions will continue under the new prime minister is not known. In its role of managing the country’s energy resources, it promotes Malaysia as an upstream opportunity, attracting companies such as ConocoPhillips, Amerada Hess, Murphy, Talisman as well as the “incumbents” ExxonMobil and Shell. Some argue that Petronas can at times seek tough terms from investing companies and that this could have slowed down upstream investment in Malaysia. That said, Carigali has grown in importance and actively participates in exploration, development and production of oil and gas on a profit sharing and cost recovery basis. Petronas’s joint role of regulator and IOC could cause some conflicts and over time it will be interesting to see if Malaysia decides to take this domestic regulation responsibility away from Petronas and appoint an independent regulator. Some countries, such as Italy where ENI faced similar conflicts, have gone the independent route, while others, such as Algeria and Brazil are still considering what to do.
Petronas prides itself on well trained staff, operational efficiency, reliability and its ability to add value as well as being a global company. During the financial year to end March 2006, it enjoyed higher energy prices and sales, with revenues rising 22% over the previous financial year to RM 166.9 billion (US$ 45 Billion), and gas production increasing by 9% (and oil falling by nearly 4%). These extra revenues will be used to further Petronas global expansion plans as well as to invest more in planned, but costly deepwater developments offshore Sarawak and Sabah. No doubt, the Malaysian Government will also seek higher dividends.
The Malaysian-Thailand JDA (Joint Development Area) was established to resolve the overlapping claims made by the two countries over the hydrocarbon resources in the area. It is divided into three offshore blocks and is administered by the Malaysian-Thailand Authority, of which each country owns 50%. Production has commenced from block A-18, and is expected to reach 390 MMcf/day. Initial volumes will be taken primarily by Malaysia, but when full production is reached, it will be split 50:50 between the two countries. Linked to this gas production is the development of the 374-km Trans-Thailand-Malaysia Gas Pipeline System which will feed JDA gas into the Malaysian PGU. This linkage provides increased security of supply to Malaysia and, at the same time, by linking Malaysia, Singapore and Thailand, represents a potential segment of the planned ASEAN Gas Grid.
Peninsular Malaysia gas sales volumes have grown by 7.8% between 2004 and 2005 to 21.9 Bcm/y, reflecting the growth in the Malaysian economy. Of this volume around 96% was transported through the PGU, two thirds was used by power generators and just over a quarter by the industrial and petrochemical sectors (the remaining 5% was exported to Singapore). Since May 1997 gas prices in Malaysia have been regulated and in periods of high gas prices Petronas provides subsidies which now total RM 42.5 billion (US$ 11.6 billion).
To promote the use of gas in transportation, Petronas has developed and introduced compressed natural gas (CNG) filling points at several of its domestic service stations. It has also introduced a system using natural gas as an energy source to produce chilled water for air conditioning together with co-generation in an integrated energy system. This Gas District Cooling scheme is used is some offices, including the twin towers, in KL.
Developed around the PGU, the petrochemical business is growing in Malaysia through the development of two complexes at Gebang and Kertih. The structure of the plants means that they can be integrated with common infrastructure, such as centralised utility facilities (including steam, power, oxygen, nitrogen, water and waste treatment) as well as central tankage. Petronas is constructing a Mega Methanol Project at Labuan, off Sabah, which is scheduled to be operational by early 2008. This plant will utilise some of the new offshore gas that has been found there (the rest will be piped to Bintulu as mentioned below). Petronas also has an interest in a polyvinyl chloride plant in Vietnam.
Eight major deep-water discoveries have been made so far in Sarawak and Sabah, including Murphy’s Kikeh field which is under development and due to come on-stream in 2007/8. In June 2006 Murphy signed heads of agreement to supply 250-300 MMcfd to the MLNG Bintulu LNG complex for up to 15 years with gas starting to flow in 2008. Also, ConocoPhillips has had oil and gas success in the Kebabangan field and Shell found oil in the Malakai field. These three finds are reported to amount to reserves of 1.3 billion barrels of oil and 7.4 Tcf of gas.
Other blocks have been awarded to international companies, and it is hoped that the new hydrocarbon finds will replace the fall in production of the older facilities. Petronas has also confirmed that it plans to invest large sums in new oil and gas facilities in Kimanis Sabah, with gas then being sent 480 km by pipe to the MLNG complex at Bintulu. Consideration has been given to developing a gas export project in Sabah, which local politicians and population would like, as the local state would enjoy considerable revenues and kudos! That said, it is the central government’s decision to focus LNG production at Bintulu, hence the statement that this new gas will move to Sarawak, this is believed to have resulted in some strains in the relationship between Sabah and the central government.
Border disputes With such gas and oil-prone acreage offshore Sarawak, Sabah and Brunei, it is not surprising that there are some territorial disputes. In 2003 Brunei and Malaysia ceased gas and oil exploration in their disputed offshore and deepwater sea beds and negotiations have stalemated, prompting consideration of international legal adjudication; Malaysia’s land boundary with Brunei around Limbang is in dispute.
Jurisdiction over the Spratly Islands, a group of approximately 100 reefs and islets in the South China Sea is also disputed. Part of the South China Sea Islands, the Spratly Islands are surrounded by rich fishing grounds and gas and oil deposits, whose true extent is unknown and disputed. China, Taiwan, Vietnam, Brunei, Philippines and Malaysia claim sovereignty over all or part of the islands, and from time to time there is the odd confrontation but to date no hostilities. In the mid 1990s China occupied one of the islands, and the Philippines claimed that China was building military installations on the reef.
Malaysia LNG (MLNG) The Bintulu LNG Complex consists of three LNG projects, Malaysia LNG Satu, Dua and Tiga (one, two and three in Bahasa Malaysia). The ownership structure is shown in the table on page 11. Exports in 2005 were 21.85 mtpa and there is currently a debottlenecking / upgrading project underway to increase LNG production by 1.4 mtpa. The three projects are located on one site, all use APCI liquefaction technology and share common facilities. LNG cargo exports are through Bintulu port ex-ship (for all term Japanese sales) and FOB (for some Korean volumes) on various sized ships. Slightly unusually, Malaysia Dua has agreed a sale ex-ship to Sendai City Gas and Saibu Gas using small ships. These vessels of 18,928 cu.m. can cause some operational problems as they are relatively slow in loading and occupy one of the berths at Bintulu that is also used for larger ships.
MLNG Japan buys 65% of Malaysian LNG, and this represented 22% of Japan’s LNG requirements in 2005. Korea (26%) and Taiwan (9%) take the balance. MLNG has a sophisticated LNG sales organisation and sells spot cargoes into the Asia region and, from time to time, into the Atlantic Basin. MLNG prefers to commit its volumes on a long-term basis, has developed excellent relations with its customers, and has shown itself to be a very reliable supplier since it started production in January 1983.
The table on page 13 shows that MLNG Tiga has entered into a variety of contractual arrangements with Kogas, short-term arrangements to cover the next few years through to longer term arrangements. The Japanese contracts, which expire at various dates, are of particular current importance to Japan. Gas supply problems at both of its operating LNG plants have meant that Indonesia, previously the main supplier to Japan, has been unable to meet its contractual commitments, with the result that the Japanese buyers have been driven to source significant volumes of spot LNG cargoes. Indonesia has also said that it will give priority to domestic consumption over LNG projects, putting at risk the extension of 12mtpa of LNG contracts that expire in 2010/11.
Petronas subsidiary Malaysian International Shipping Company (MISC) is the world’s largest LNG fleet operator, with 21 ships in operation – all owned and operated – and 8 on order for delivery between 2006 and 2008) (MISC also owns 89 other energy, FPSO and liner vessels).
In its latest results statement Petronas stresses performance excellence and globalisation as key strategic themes. It is fair to say that “Malaysia Inc’s” gas performance to date has been impressive, riding the economic turmoil of the 1990s to become a mature gas supplier domestically and internationally today.
One cannot write an article on Malaysia without mentioning the food, a topic close to the heart of all Malaysians globally and one that is normally a major topic of conversation. Go try it, you will be pleased I can assure you, and while you are eating in KL, look at the 21st century city and the Twin Towers, home to Petronas, a very successful and growing global energy player.
Petronas as a global player
In July 2006, Petronas purchased US$ 1.1 billion worth of shares in Rosneft. President and Chief Executive Officer Tan Sri Mohd Hassan Marican said at the time: “Petronas aspires to be a global player and Russia is in a central position of providing access to markets in the East and West for oil and gas players”. “The next step”, he said, “is to widen the presence and, at the same time, reduce, dilute and spread the risk through this investment”.
Petronas had already, in June 2003, acquired a 35.5 % stake in the Egyptian LNG Project from Edison SpA of Italy and 50% equity in the West Delta Deep Marine offshore concession, where the gas produced supplies the LNG project as well as the Egyptian market. In December 2003 it also acquired a 30% equity stake and capacity in the Dragon LNG terminal at Milford Haven in South Wales, which is currently under construction and expected to be operational in 2008. These investments were unique for a National Oil Company and positioned Petronas in the Atlantic Basin LNG market as well
as confirming the company as a global gas player. It is also an investor in Pars LNG in Iran, should the project move forward.