Malaysia's energy sector sees investment amid challenges

With oil and gas prices at a relative low and global economic activity slowing, these are undoubtedly challenging times for oil and gas companies, producers and countries worldwide, and Malaysia is no exception. Yet despite the downsides, these are also key times for the development of new resources and strategies in the sector, with Malaysia at the forefront of many renewable energy (RE) trends (see analysis). Even as the country makes a major contribution to global oil and gas production, it is also leading the way in biofuels and biomass, solar energy and hydroelectric power. Malaysia is also one of the key players in the regional energy network, a system being rapidly enhanced by the arrival of the ASEAN Economic Community (AEC).

Oil Resources

According to the “2015 BP Statistical Review of World Energy”, Malaysia had proven reserves of 3.8bn barrels (500m tonnes) at the end of 2014. This was roughly the same as at the end of 2013, though down on the 5.2bn barrels recorded both 10 and 20 years earlier. The 2014 total gave Malaysia a 0.2% share of global proven reserves, the second-highest level in ASEAN, after Vietnam.

In production terms, the country had an output of 666,000 barrels per day (bpd) in 2014, excluding biomass, coal and natural gas derivatives but including natural gas liquids, shale oil and oil sands. Production was up slightly, by 3.6% on 645,000 bpd in 2013, but was down on the 700,000 bpd plus figures recorded prior to 2011. Peak production over the last 10 years was in 2004, when 776,000 bpd was being extracted. The 2014 figure gave Malaysia a 0.7% share of global daily production. Malaysia has 15.4 years of production at 2014 levels before its total proven reserves are exhausted.

In terms of consumption, the BP figures also show that Malaysia is currently a net oil importer. Indeed, 2014 saw a net daily intake of 815,000 barrels, up 1.9% on the 2013 average of 800,000. The crossover from production exceeding consumption to the reverse occurred when the balance went from plus 29,000 bpd in 2010 to minus 65,000 bpd in 2011.

Natural Gas

In natural gas, Malaysia had some 1.1trn cu metres of proven reserves at the end of 2014, or some 0.6% of the global total. This total was roughly equal to the 2013 amount, although natural gas reserves have also been declining over the years, and now stand at less than half of their 2004 total. The total was around 40% greater 20 years ago, as new discoveries were made during the late 1990s. Production figures for 2014 show 66.4bn cu metres, down 1.2% on 2013’s output of 67.2bn cu metres, but this figure is still higher than each of the 10 previous years. Malaysia was also ASEAN’s second-largest producer of natural gas in 2014, coming in after Indonesia, with 73.4bn cu metres. Much of Malaysia’s natural gas production goes to the manufacture of liquefied natural gas (LNG).

Malaysia has long been the world’s second-largest exporter of LNG after Qatar, although by 2014 Australia was catching up. Figures from the International Gas Union show 25.1m tonnes per annum (tpa) in LNG exports from Malaysia that year, up 0.4% year on year (y-o-y) and ahead of Australia’s 23.3m tpa, while behind Qatar’s 76.8m tpa. Japan and other north Asian states are key customers. With consumption at 41bn cu metres at the end of 2014, Malaysia thus remains a net natural gas exporter. Consumption was up by 1.8% on 2013, when the total was 40.3bn cu metres, a figure that continued a rising trend – 10 years before, consumption stood at 30.5bn cu metres. Economic growth explains much of this, with Malaysia’s GDP rising from $92.78bn at current dollars in 2004 to $338.1bn in 2014. This has meant increasing demand from utilities, industry and households for natural gas.

The reserves-to-production ratio for natural gas now stands at 16.2 years, a similar total to oil, underscoring the need for Malaysia to both continue exploration and develop new finds, as well as to boost its domestic efforts to increase the use of RE and energy conservation methods. These have been the major themes of energy policy in the country for some years, with an increasing stress likely in the years ahead (see analysis). At the same time, oil and gas prices have been dropping sharply on global markets, a factor that has impacted government revenues but has also led to new thinking about ways to encourage the use of alternative energy sources. After a slump during the 2008 global downturn, the European spot price for benchmark Brent crude oil rose to a peak of $128.14 in March 2012, stabilised at around $100 for the next two years, but then went into rapid descent, starting in September 2014. By January 2015, the price had dropped below $50 a barrel, with the year ending at $36.31. In early March 2016, the price was around $39.

Natural gas prices have followed oil down. Also slumping after 2008, the price built slowly back up to $5.83 per million British thermal units (Btu) in January 2010, then rose and fell over the following few years before beginning a sustained slide downwards in early 2014. In January 2016, the Henry Hub Natural Gas Spot Price was $2.28 per mbtu.

This has all had a clear impact on Malaysia’s revenues. In February 2016, Prime Minister Najib Razak announced that in 2015, government revenues from the oil and gas trade had fallen by RM40bn ($9.9bn) on 2014. This has had major implications for the 2016 national budget, which had originally been based on an assumed oil price of $48 a barrel, with this then recalibrated to $30-35.

Income from LNG was reported in early 2016 to be down 25.1%, y-o-y when comparing the January-November periods of 2014 and 2015. This meant a drop in revenue from $13.1bn to $9.8bn. One of the main losses was in LNG sales to Japan, which dropped by $2.4bn over the period in question.

Sector Players

The key governmental bodies involved in the energy sector are the Economic Planning Unit and the Implementation and Coordination Unit, both located at the Prime Ministry; the first is responsible for policy and the second for delivery. Operating since July 2011, the Malaysian Petroleum Resources Corporation (MPRC) is another key state agency, reporting to the Prime Ministry.

The MPRC has been charged with promoting and transforming the oil and gas sector to make the country the number one oil and gas hub for the Asia-Pacific region by 2017.

This goal came a step closer to realisation in 2012 with the launch of an MPRC subsidiary, the Johor Petroleum Development Corporation (JPDC), which is in charge of planning, driving and coordinating oil and gas development in the southern state. This has been designated a project of national importance by the prime minister, with the goal of turning Johor into a centre similar to Amsterdam-Rotterdam-Antwerp in Asia. The JPDC consists of a 8094-ha site for the Pengerang Integrated Petroleum Complex. This location will house oil refineries, naptha crackers, petrochemical plants and an LNG import terminal and regasification plant.

Serving all of this will be the RM5bn ($1.2bn) Pengerang Deepwater Petroleum Terminal, a joint venture between Malaysia’s DIALOG Group, Royal Vopak of the Netherlands and Johor’s State Secretary Incorporated. Also within the JPDC domain will be the Tanjung Bin Petrochemical and Maritime Hub, a 900-ha development, which saw its first operator, petroleum products storage outfit ATT Tanjung Bin, complete phase two of its expansion at the port in August 2015. A third project within JPDC is Tanjung Langsat port, in operation since 1993, and the nearby naval facility. These will be developed as part of the overall JPDC and MPRC strategy.

Towering Presence

The key commercial venture in oil and gas is the national oil company (NOC), Petroliam Nasional (Petronas). This has complete and exclusive rights of ownership over all oil and gas exploration and production (E&P) projects within the country. It also has managerial rights over all licensed projects. Petronas’s importance to the national economy is clear not only in the iconic Petronas Towers in Kuala Lumpur, but also in the fact that its board is headed by the prime minister. Thus, the planning, policy and implementation functions, as well as control of the main sector player and NOC, are the responsibility the prime minister.

Incorporated in 1974, Petronas runs operations throughout the whole oil and gas chain, from E&P to petrol station forecourts, via a complex web of refining, liquefaction, petrochemical and petroleum product plants, and LNG carriers. As a fully integrated and wholly state-owned outfit, it is one of the Fortune 500’s largest companies. Petronas has an upstream presence in over 20 countries and a downstream presence in more than 50.

In April 2014, a reorganisation consolidated Petronas’s E&P interests into a single unit, upstream business, which then breaks down into E&P and LNG segments. The E&P segment includes Malaysian Petroleum Management, whose job it is to ensure optimal development of the country’s domestic oil and gas assets. The oil and gas operating arm at this level is Petronas Carigali, which has 63 ventures operating worldwide. As of January 2015, the company had 33.2bn barrels of oil equivalent (boe) in discovered petroleum resources.

Offshore

In Malaysia, oil and gas reserves were first commercially developed by Shell, in Miri, Sarawak, then in offshore Terengganu, in peninsular Malaysia. Around 90% of the country’s current hydrocarbons production is offshore, with the Sunda Shelf the main maritime geological feature. This stretches underwater between the peninsula, Indonesia, Borneo and the Gulf of Thailand, with this region particularly rich in deposits and relatively shallow waters, allowing ease of exploration and development. There are three main clusters of offshore activity – and nowadays, almost all extraction takes place offshore – with these being offshore Sabah and Sarawak and offshore Terengganu. Petronas is actively involved in all three areas.

In LNG, the corporation’s operations centre on the Petronas LNG Complex at Bintulu, Sarawak, which has three LNG plants, each run by a different subsidiary of Malaysia LNG (MLNG), and numbered MLNG Satu, MLNG Dua and MLNG Tiga. The complex is being expanded via the Bintulu Integrated Gas Project Big P, which involves the construction of new onshore receiving facilities, as well as pipelines.

The plant will also be brought up to a total of nine trains – three each under MLNG Satu and Dua, two under MLNG Tiga and a ninth independent train. The Bintulu complex will then have a capacity of 29.3m tonnes per year, making it the largest LNG facility in the world operating from a single site.

Downstream

The downstream business divides into five segments: oil, lubricants, petrochemicals, technology and engineering, and infrastructure and utilities. In the oil business, the corporation owns and operates three refineries – two at the same site in Melaka and one in Terengganu. The first two are run by Petronas Penapisan (Malaka) Sdn Bhd (PPMSD) and the Petronas subsidiary, the Malaysian Refining Company (MRC). The third refinery is run by Petronas Penapisan (Terengganu) Sdn Bhd (PPTSD). Petronas also owns and operates a refinery overseas, in Durban, South Africa.

PPTSD’s Kertih refinery, Petronas’ first, processes some 49,000 bpd of crude and now has a condensate splitter with a rated capacity of 74,300 bpd of naptha condensates. In Melaka, PPMSD’s refinery, PSR-1, has a 100,000 bpd capacity, while MRC’s PSR-2 has a capacity of 170,000 bpd.

Oil trading is then undertaken by Petronas Trading Corporation, while retail falls within the remit of Petronas Dagangan. The latter has operations overseas, too, with retail businesses in the Philippines, Thailand, Vietnam, Sudan and South Sudan. Engen Petroleum is Petronas’s African-based downstream petroleum products marketing and retail outfit.

Petronas Lubricants International has the corporation’s lubricants manufacturing and marketing business, while Petronas Chemicals Group. (PCG) leads the petrochemicals business. PCG is the world’s fourth-largest manufacturer of methanol, and the third-largest producer of granular urea, worldwide. It is also the third-largest producer of low-density polyethylene in South-east Asia.

The group includes some 25 companies in its portfolio, along with two integrated petrochemical complexes – one at Kertih in Terengganu and the other at Gebeng in Pahang. It also has three manufacturing complexes, in Kedah, Sarawak, and Labuan, which produce fertilisers and methanol. Involved in a wide range of joint ventures with companies such as BASF and BP Chemicals, it is also the sole producer in Malaysia of a range of key chemicals, including methanol and urea, methyl-tertiary butyl ether and glycol ethers. PCG also announced in March 2016 that while Petronas as a whole might be cutting back on investments, it would still be spending some $4bn over the next five years on a refinery and petrochemicals complex in Johor state, next to Singapore. The company also announced fourth-quarter 2015 net profits of RM704m ($174.3m), up 40% on the fourth quarter of 2014, bringing PCG’s cumulative 2015 net profit to RM2.78bn ($688.1m), up from RM2.47bn ($611.4m) in 2014.

The Petronas Technology and Engineering Division undertakes everything from project management to technical services. It is also at the forefront of Petronas’s research and development activities. Petronas Gas Bhd (PGB) is a partly owned subsidiary that owns and operates the corporation’s gas processing plants and the Peninsula Gas Utilisation (PGU) system, as part of the infrastructure and utilities sub-division. PGB also supplies feedstock for the petrochemical plants and has a role in the LNG regasification terminal at Sungai Udang, Malaka.

Petronas is also in the power business, with a 70% stake in the Voltage Renewables, a solar plant in Pahang and a 30% stake in Singapore’s Pacific Light Power. The corporation is also involved in the Trans-Thai Malaysia joint-venture companies running the Malaysia-Thailand Joint Development Area, and in a water treatment plant in Terengganu. Petronas also has a 35% stake in Transasia Pipeline Indonesia, which gives it 40% equity in PT Transportasi Gas Indonesia, the outfit responsible for the Grissik-Duri and Grissik-Singapore gas pipelines.

Back in Malaysia, the pipeline network is also now extensive. The PGU project runs for 1287 km across West Malaysia and has a capacity of 2bn cubic feet per day (cfpd). In Borneo, the Sabah-Sarawak Gas Pipeline can transport some 1bn cfpd over 503 km between the two states.

Profit & Loss

Petronas’s 2014 annual report showed the corporation closing the year with RM537.5bn ($133.1bn) in assets, up 2% on the 2013 total. Revenue was up 4% over the same period, from RM317.3bn ($78.5bn) to RM329.1bn ($81.5bn), driven by an increase in crude oil production, a stronger dollar (oil and gas being priced in US dollars) and higher processed gas and LNG sales.

Yet by the last quarter of that year, the balance sheet started to be affected negatively by the decline in global oil and gas prices. By November 2015, the corporation was reporting that third-quarter 2015 results showed severe pressure in its upstream operations. Profit after tax (PAT) on these fell 57% y-o-y, even though downstream PAT rose 38% y-o-y. For the first three quarters of 2015, revenue was down 25% overall, at RM188bn ($46.5bn). Fourth-quarter 2014 results, announced in February 2015, showed the decline continuing, with a net loss recorded of RM3bn ($742.6m), with revenue down 24% to hit RM60.1bn ($14.9bn). Once again, however, the downstream business continued to enjoy success, with this segment’s profit margins rising by 50% to RM8.9bn ($2.2bn).

Yet the major fall in upstream business prompted the corporation to take further measures to trim its budget, announcing in February 2016 that it would be cutting its expenditures for 2016 by RM15bnRM20bn ($3.7bn-5bn), depending on future price movements. According to President and Group CEO Wan Zulkiflee Wan Ariffin, this cut would be part of an overall RM50bn ($12.4bn) reduction in capital expenditure and operational expenditure over the next four years. Organisational restructuring would likely take place as a consequence, as well as the suspension of some projects, with a delay in the commissioning of the corporation’s second floating LNG facility, PFLNG2, specifically mentioned.

Close Collaborators

In addition to Petronas, Malaysia also plays host to a range of international oil companies (IOCs). ExxonMobil, Shell and Murphy Oil are currently the largest IOCs in the country by production, while a range of smaller independents are also present. The latter group includes Canada’s Talisman Energy, Sweden’s Lundin Petroleum, Australia’s Roc Oil and the UK’s Petrofac.

ExxonMobil currently has four production sharing contracts (PSCs) with Petronas, which between them are responsible for around 20% of Malaysia’s total oil production and 50% of Peninsular Malaysia’s gas supplies. The corporation is also in the chemicals business, while all of ExxonMobil’s IT organisation and support worldwide now comes out of the ExxonMobil Business Support Centre in Malaysia.

ExxonMobil’s main upstream business has long been focused on the Tapis field, which has been in production since the 1970s and remains Malaysia’s largest. Tapis produces a slight, sweet benchmark crude, which, given the age of the prospect, is now in secondary production. ExxonMobil E&P Malaysia has thus been implementing enhanced oil recovery (EOR) techniques in the field for the last few years, with South-east Asia’s largest EOR project, valued at $2.5bn, launched in cooperation with Petronas Carigali in Tapis in September 2014. The project is a water-alternating-gas development.

Shell, meanwhile, began offshore operations in Sarawak in 1963, with the discovery of the Baram field. Shell now has 10 PSCs in offshore blocks in Sabah and Sarawak, supplying gas for LNG and also running the Bintulu Shell Middle Distillate Synthesis plant, the world’s first commercial gas-to-liquids project. Shell is also a major player in the retail business, operating some 950 service stations around the country. The company is also the leading lubricants retailer in Sabah and Sarawak.

Murphy Oil has majority interests in eight PSCs, all offshore Sabah and Sarawak, including in Malaysia’s first deepwater development, the Kikeh oil and gas field, off Sabah. Situated at a depth of 1330 metres, the field first began producing in 2007, and is serviced by a floating production storage and offloading (FPSO) vessel with a capacity of 120,000 bpd. Murphy also has a share in the Kakap oil field, at a depth of 1220 metres, which came on-stream in 2014 in the Sabah Delta basin. This is also home to Murphy’s Siakap North oil field interest, which arrived the same year and is located at a depth of 1400 metres. Siakap is serviced by a tie-back to Kikeh. The company’s first field development in Malaysia was West Patricia, in just 40 metres of water, an oil field currently serviced by a floating storage and offloading (FSO) vessel of 700,000 bopd capacity. This is also at the end of a tie back from a series of other oil reservoirs in neighbouring blocks in the Sarawak Delta basin in which the company also has an interest.

Murphy also has interests in two other blocks offshore Sarawak and is also scheduled to begin gas production from a third, Block H, in 2018. A final scheme is the Sarawak Gas Project, which is a multi-phase development of several gas and condensate reserves in the Sarawak Delta, which sends gas to Petronas’s Bintulu LNG facility.

Restructuring Fallout

It is not only Petronas that has begun a major restructuring in recent times in response to falling oil and gas prices. The other international players in Malaysia have also been cutting back, globally and locally. With most of the country’s hydrocarbons offshore, overheads are higher than onshore production, making investments more expensive. This has had spin-off effects on the wide range of support services currently operating in Malaysia, particularly in E&P. In this context, a number of services companies told OBG that the introduction of a goods and services tax in April 2015, combined with a major devaluation of the ringgit, has pushed up costs, as many components in maintenance and repair are imported, making the business increasingly competitive. This has affected ship repair and maintenance as well – vital in an offshore-dominated sector – while many banks and other sources of finance now see the oil and gas-related businesses as risky, leading to a squeeze on service-sector financing.

Another issue that smaller companies in particular face is a shortage of human resources. With salaries in Malaysia generally lower than in many other oil and gas producing countries, trained and experienced staff are more difficult to find, particularly when the ringgit devaluation has made overseas dollar salaries all the more attractive.

Nonetheless, the current squeeze does have some benefits: cuts in the projects being undertaken by the major players have created a larger pool of out-of-work staff for companies to recruit, while the increasingly low margins in maintenance and repairs have made many outfits restructure and develop new lines of business, such as in consulting.

One area too where business is still good is in the FPSO niche. Companies operating these vessels usually have a long-term contract, which gives them some protection against the current downturn. In this field, however, small players may soon be edged out, as Malaysia moves towards creating the world’s largest FPSO company. The country’s shipping giant, MISC – which is controlled by Petronas - was reported looking to invest in Bumi Armada, Malaysia’s largest provider of offshore oil- and gas-vessels, in late 2015. This would bring all of Petronas’ FPSO business under the same umbrella. While both giants have played down these reports, speculation has continued into 2016.

Outlook

The Malaysia oil and gas sector thus faces considerable challenges in the year ahead. Oil and gas price forecasts are generally expecting the market to remain soft into the latter part of 2016 and possibly beyond. This would mark one of the longest sustained periods of lower global prices in decades, which means considerable downsides for E&P and other upstream activities. The LNG market has also recently become saturated with new output from Australia and Papua New Guinea, with the US also being added into the mix.

In the downstream, the picture is slightly rosier. Here, demand from industry and consumers both in Malaysia and internationally is more of a factor, with GDP growth slowing worldwide and suppressing demand for petrochemicals, fertilisers and other oil and gas products. In such times, restructuring, consolidation and careful cost control are likely to be watchwords, with companies holding off on any major new investments.

In the longer term, however, the sector needs a great deal of investment, with much of the existing infrastructure now beginning to age and in need of a revamp. Reserves have also been dwindling, revealing a pressing need for the discovery of more reservoirs. New technologies in EOR will need to be deployed, while more efficient processes and products in the downstream are also in the pipeline. In the meantime, many are anxiously watching for the signs of a sustained rise in prices and demand.