LNG outlook: Petronas bets on projects

Malaysia

The collapse of LNG prices has hit state-owned Petronas’ earnings hard. Riding out the downturn, Malaysia’s gas industry is focused on major infrastructure projects to serve a diversified market, pinning hopes on long-term developments, from two floating LNG facilities to a new train at its massive onshore LNG facility in Bintulu, Sarawak.

Malaysia’s LNG sector faces a bruising 2015, with the collapse of prices, a supply glut that looks poised to worsen and the prospect of weakening demand in key export markets.

The challenge for Petronas will be to weather adverse conditions without compromising the infrastructure projects central to its hopes of capitalising on a future upturn in regional markets.

GAS PRICES: The backdrop to the LNG sector’s challenges is the sustained low oil price, reflected in LNG prices at a lag of several months. By one projection, prices of LNG may be 50 percent lower year-on-year by mid-2015.

The cratering of crude prices has already taken on a toll on Petronas’ bottom line. The national oil company reported a $2.7-billion loss for the fourth quarter of 2014.

Ratings agency Moody’s projects that the company’s earnings will drop 30 percent, assuming oil at an average price of $55 a barrel for the year.

An immediate casualty of the price drop is investment. Outgoing Petronas president Tan Sri Shamsul Azhar Abbas announced that capital expenditure would be cut by 10 percent in 2015 and 15 percent in 2016. He noted that the Sepat gas-processing facility project off Peninsular Malaysia was to be shelved at least until 2017. However, the company says its most critical infrastructure projects will be unaffected.

UPSTREAM: The collapse of crude and LNG prices hits all the harder given the abundance of supply. This glut owes, in part, to discoveries that promise to meet rising domestic gas demand, which touched 31.2 bcm (1.1 tcf) in 2013, not least for power generation and industrial usage, in addition to export contract obligations.

2014’s biggest finds include Shell’s in offshore Sarawak block SK 318, Mubadala’s at the Pegaga-2 well in block SK 320 – the site of a discovery earlier in 2014, and SapuraKencana’s findings at block SK 408. These join the Damar field, where ExxonMobil and Petronas Carigali began production in February 2014. The field is projected to yield 5.66 mcm (200 mcf) of gas per day.

The new supplies can help support production, which in 2013 totalled 69.1 bcm (2.44 tcf) according to the BP Statistical Review 2014, while addressing increasing domestic demand.

This includes the use of gas for electricity generation, which doubled between 2002 and 2012 to 134 billion kWh. Demand for electricity is projected to increase at a rate of more than 3 percent through 2020, at the least.

SUBSIDY REDUCTION: The expansion of domestic supply and continued imports destined for Malaysia’s first LNG regasification import facility, opened in 2013, will be accompanied by the gradual reduction of subsidies for domestic consumers of gas and electricity produced using the resource. Natural gas accounted for around 46 percent of electricity generated in Malaysia during 2012.

Steps towards market-based pricing have accelerated with the advent of regasification capacity, though discounts for volume purchases by power producers were still in place at the start of 2015.

Regional market developments will only increase the LNG glut and compound pressure on prices in 2015, and perhaps beyond. As many as four new Australian LNG plants are pegged to come on line in 2015.

The country’s Wheatstone project, to cite just one, is projected to export 12.2 bcm (431 bcf) of gas per year when the first two of its trains become operational in 2016.

With an estimated $190 billion of LNG projects under construction in the country and established as the largest supplier of LNG to Japan, Australia’s emergence as a top-three LNG exporter raises the prospect that LNG prices may recover even more slowly than those of crude.

The expected restart of Japanese nuclear reactors, idled following the Fukushima Daiichi nuclear disaster in 2011, may signal flat or lower Japanese LNG imports in 2015, with relatively subdued growth in China also damping down demand and keeping a lid on prices.

That gloomy regional market outlook raises the stakes for the large infrastructure projects that will be crucial to Malaysian fortunes in a healthier environment, as well as those underpinning industry-led ambitions to diversify the industry beyond the export of LNG.

The expansion of Malaysia’s onshore LNG facility at Bintulu with a ninth train is scheduled for completion in 2015. A $510-million engineering, procurement, construction and commissioning contract for additional storage and shipping facilities was awarded to Japan’s JGC Corporation in late January 2015. There has also been progress on Petronas’ FLNG-1, which will be the first floating LNG endeavour to begin production globally when it comes on line in 2015.

South Korean shipbuilder Daewoo Shipbuilding Marine & Engineering released photographs of the vessel in late March 2015, following the installation of its topside modules.

Petronas’ second floating installation, which received a final investment decision in early 2014, moved forward with the award of a contract for the provision of control and safety systems to a Malaysian subsidiary of Yokogawa Electric Corporation in late March of that year. Production remains slated to begin in 2018.

MALAYSIAN GAS: Malaysia sill undoubtedly remains a key producer in both the Asia-Pacific region and globally. Malaysia has 2.35 tcm (83 tcf) of proved natural gas reserves in 2015, according to the US Energy Information Administration, making the country the third-largest natural gas reserves holder in Asia Pacific.

It is the second-largest exporter of LNG after Qatar and some estimates by research and consultancy group Woods Mackenzie indicate it might surpass the Gulf state by 2020. More than half of the country’s natural gas reserves are located in the east, mainly in offshore Sarawak.

Gas reserves have been mostly associated with oil basins in Malaysia, but the Sarawak and Sabah assets have non-associated gas reserves, which are starting to be developed.

Plans for the Refinery and Petrochemical Integrated Development (RAPID) seemed likely to be buoyed by Petronas’ issue of $5 billion in dollar-denominated debt in March 2015, avoiding the punishing borrowing costs associated with local currency issues, owing to the effects of sustained low hydrocarbons prices.

Petronas’ massive RAPID project is acting as the cornerstone of the broader Pengerang Integrated Complex. Also forming part of the complex, the construction a deepwater terminal by Malaysia’s Dialog Group, which received its first very large crude carrier in March 2015, accompanies the technical services provider’s work with the national oil company to undertake associated LNG facilities.

The project will include LNG regasification facilities, encompassing a regasification unit and two 200,000-cubic-metre LNG storage tanks with a send-out capacity of 3.5 million tonnes per year, equivalent to around 13.9 mcm (490 mcf) of gas per day and support the Pengerang co-generation plant, generating power for RAPID.

Click here for more news and features from Malaysia

Read our latest insights on:

• Malaysia
• Qatar