Have gas, will prosper

MALAYSIAN POST : KUALA LUMPUR - Petroliam Nasional Bhd's (Petronas) recent announcement on its proposed new US$20 billion (RM60 billion) integrated refining and petrochemicals hub to be developed in Southern Johor is creating huge ripples of excitement: among would-be investors, partners, local industry players and service providers, bankers and not least the people of Pengerang, said to be the recommended site for the massive project.

Greater in scale and scope of any existing Petronas' downstream complexes, one can imagine the amount of foreign direct investment it would attract, the next-level technologies it would require, the spin-offs it would create, the employment it would provide and the multiplier effects it would have on the economy.

Indeed, the project augurs well for the government's Economic Transformation Plan and is in line with the aspiration to turn Malaysia into a leading petroleum industry hub in the region.

But what is also very interesting to note is Petronas' plan to build a liquefied natural gas (LNG) receiving and re-gasification terminal in the proposed site.

The terminal would be the second of such facility to be built by Petronas. Its subsidiary Petronas Gas Bhd (PGB) is already building a similar terminal in Melaka, slated to be operational next year. Both would be linked to PGB-operated pipeline system that transports gas to Petronas' customers in Peninsular Malaysia.

The proposed new terminal in Pengerang is to cater to the energy needs of the project and will contribute towards the efforts of diversifying the sources of shrinking gas supply to meet existing and future demands in Peninsular Malaysia.

"The two LNG facilities underscore Petronas' resolve and seriousness in tackling the tight gas supply situation in the country and to ensure the security of future supply," said Datuk Anuar Ahmad, Petronas' executive vice-president of gas and power business when contacted via email recently.

"The facilities will allow for more volumes of gas to be imported by Petronas from various LNG sources to meet the growing demand in Peninsular Malaysia. Other parties would also be able to source their own LNG and use the facilities," Anuar added.



Gas demand situation

Just how high is the demand for gas, and how did the country become so dependent on it as an energy source?

Data provided by Petronas indicates that total gas consumption for the 2000-2009 period increased by 31 per cent, from 1,639 million standard cubic feet per day (mmscfd) in 2000 to 2,143 mmscfd in 2009.

Among Petronas' large customers (those that consume more than two mmscfd), there was a 97 per cent increase in consumption during the period, while among small customers (whose off-take is two mmscfd and lower), the demand shot up by 341 per cent. Consumption among the power sector rose by two per cent.

The increase in demand and consumption was largely influenced by the subsidised prices, regulated by the government since 1997 for the power sector and subsequently in 2002 for the non-power sector. While prices had been revised twice (first in 2008 and then in 2009), gas is still sold at heavy discounts to the customers.

The power sector now pays RM10.70 per mmbtu (million metric british thermal units) of gas it buys from Petronas, which at current market prices is a 77 per cent discount. To the non-power customers, gas is sold at RM15.35 per mmbtu (72 per cent discount).

The artificially low prices have created major distortions in the gas supply and demand balance as customers switched to gas from other fuels whose prices have been left to market forces to determine. This has led to an artificially high demand for gas.

An industrial analyst observed that since the gas price to the industry was fixed in 2002, gas off-take by Gas Malaysia Sdn Bhd - which supplies to small customers - increased by 28 per cent per year.

"Of the new gas demand created by Gas Malaysia, 90 per cent was from the conversion of its customers from other fuels to gas," she said, adding that even in the power sector, due to the subsidised prices, power producers would usually dispatch their gas plants first before plants that use other fuels to generate electricity.

"The thing is, there is no shortage of alternative fuels in the market, such as LPG, diesel or fuel oil. But when you have a subsidised option, why go for the more costly alternatives?" she asked.

LPG for industries costs RM73.25 per mmbtu and industrial diesel is RM75.24 per mmbtu.

The gas subsidy, of course, is borne by Petronas, which buys the gas at contractual prices (formulated based on market prices) from domestic upstream producers and at market prices from external sources.

From 1997 to 2010, this totalled a whopping RM131.3 billion. Petronas' latest figures indicate that the subsidy amount averages RM19 billion a year.



Supply side of the equation

While the demand for "cheap gas" continues to rise, production from domestic fields has been declining at the rate of 12 per cent per year.

According to Petronas, this is due to depleting reserves from largely maturing fields, some of which have been producing for 20 years or more.

Despite active upstream exploration, new discoveries have mainly been small. The new fields are technologically and commercially challenging to develop. The reserves are usually much smaller with high carbon dioxide content. The fields are also scattered while some are located in high-pressure high-temperature plays.

The rising demand has forced the existing offshore production and the processing and transportation infrastructure to work overtime, constantly running at full capacity which has put "tremendous strain" on the facilities, according to industry observers, leading to frequent unscheduled maintenance works.

"These have resulted in frequent supply curtailment and disruption," remarked a Terengganu-based industry insider.

"But what to do, the demand is as such that most of the time there is no window for proper scheduled maintenance shutdown."

Prolonged maintenance postponements, he added, would pose a risk to the integrity of the systems and facilities, most of which are ageing.

To meet the demand, Petronas has been securing gas from external sources, mainly from Indonesia and the joint development areas that Malaysia shares with Thailand and Vietnam.

Currently, about 32 per cent of the gas demand is met from these imported sources.

Experts warned that the only way to address the tight supply situation is via securing more import molecules from more sources.

Artificial price, real impact

The "cheap gas" comes with a costly price to Malaysia's economy. It causes wastage and provides no push for Malaysia's industries to become internationally competitive and efficient.

There has been little or no attention paid to the promotion of energy efficiency, particularly among industrial users.

This is making Malaysia less competitive in the effective use of scarce energy resources compared to regional economies like Thailand or India.

Campaigns or support for renewable energy programmes have also been less than lukewarm.

"There seems to be no real concern to conserve this valuable depleting resource, or to prioritise its usage for more value-adding activities that could contribute more to the national economy," Anuar said.

"In other economies, gas is used further down the value chain, creating more income and economic opportunities. Here in Malaysia, the bulk of our gas is burnt as fuel, wasting this precious resource," he added.

Wastage and inefficient use of the energy source is only part of the situation. The amount of subsidy incurred is mind-boggling.

Let's take a look at the annual average of RM19 billion that Petronas has borne for the past couple of years. Based on 2009 cost structure, that amount of money could pay for: 550,000 PPR homes, 130 smart schools, 60,000 school computer labs, 35 new 500-bed hospitals, 465 new police stations and 17 new private universities.

These are only a few examples. There are a lot of other things that could be funded with that amount of money.

For Petronas, the amount incurred could be used to finance more value-adding projects, just like the one recently announced, or in its efforts to find more barrels of oil and gas molecules here and overseas, which are getting costlier.

Recently, it announced that it would spend RM50 billion annually in capital expenditures in the next five years, and RM19 billion in additional revenue would certainly come in handy.

The subsidy incurred also robs the government of additional income in the form of taxes and dividends from Petronas, which could be used for other useful purposes or projects.

Prolonging a finite resource

Gas, like oil, is a finite and depleting resource. Once extracted, almost nothing is left in the ground. Malaysia's gas reserve, which currently stands at about 89 trillion cubic feet, is relatively small.

It is about 5 per cent of Russia's reserves and 9 per cent of Iran's reserves.

At the current production rate, it has a life of about 38 years. If its production rate is increased, its reserve life will be shortened.

The more it is consumed, the faster it depletes.

"In Malaysia, our extraction of these resources has been carefully planned to ensure that the reserves are prolonged to meet future obligations.

Gas reserves are being developed on a sequential basis, to meet contracted domestic and export requirements.

"More importantly, this is planned in such a way so that our children and their children and grandchildren would continue for as long as possible to enjoy the benefit from these resources," said Anuar.

Prolonging the life of the country's energy resources should be high on everyone's agenda. It is not a responsibility to be shouldered by Petronas alone.

Malaysia as a country must be pushed to be more energy-efficient; otherwise it will never be competitive.

The country must find the will to deregulate prices to remove market distortions.

The man-in-the-street could also play a role by becoming smart energy consumers.

Industries must realise and should be encouraged to view gas as raw material that should be made available for higher revenue-generating and value-adding projects, like the manufacture of petrochemicals and their downstream products.

What Petronas plans to develop in southern Johor is a perfect example of such projects.

Only then the country would really prosper.

- Business Times