MALAYSIA: THE SECOND-LARGEST OF LNG
Malaysia is the world's second-largest exporter of liquefied natural gas and the second-largest oil and natural gas producer in Southeast Asia, and is strategically located amid important routes for seaborne energy trade.
Malaysia's energy industry is a critical sector of growth for the entire economy, and it makes up almost 20% of the total gross domestic product. New tax and investment incentives, starting in 2010, aim to promote oil and natural gas exploration and development in the country's deepwater and marginal fields as well as promote energy efficiency measures and use of alternative energy sources. These fiscal incentives are part of the country's economic transformation program to leverage its resources and geographic location to be one of Asia's top energy players by 2020. Another key pillar in Malaysia's energy strategy is to become a regional oil and natural gas storage, trading, and development hub that will attract technical expertise and downstream services that can compete in Asia.
Malaysia has unveiled several major upstream and downstream oil and natural gas projects, some coming online in the next few months, as part of the country's strategy to enhance output from existing oil and natural gas fields and to advance exploration in deepwater areas. The incumbent and long-ruling Barisan Nasional party (BNP) won the May 2013 general election. The BNP has a track record of promoting hydrocarbon investment and intends to continue boosting oil and natural gas production, making energy sector reforms to attract investment, and developing the country's energy infrastructure.
Primary energy consumption
As Malaysia targets economic development and increased manufacturing, the country is focused on securing energy through cost-effective means and diversifying its fuel supply portfolio. Petroleum and other liquids and natural gas are the main primary energy sources consumed in Malaysia, with estimated shares of 40% and 36%, respectively in 2012. About 17% of the country's energy consumption is met by coal. Biomass and waste make up another 4%, and hydropower contributes 3% to total consumption. Malaysia's heavy reliance on oil and natural gas to sustain its economic growth is causing the government to emphasize fuel diversification through coal imports and to promote investments in renewable energy.
Petroleum and other liquids
Malaysia's oil reserves are the fourth-highest in Asia-Pacific after China, India, and Vietnam. Nearly all of Malaysia's oil comes from offshore fields.
According to the Oil & Gas Journal (OGJ), Malaysia held proved oil reserves of 4 billion barrels as of January 2014, the fourth-highest reserves in Asia-Pacific after China, India, and Vietnam. Nearly all of Malaysia's oil comes from offshore fields. The continental shelf is divided into three producing basins: the Malay basin offshore peninsular Malaysia in the west and the Sarawak and Sabah basins in the east. Most of the country's oil reserves are located in the Malay basin and tend to be light and sweet crude. Malaysia's benchmark crude oil, Tapis Blend, is a light and sweet crude oil, with an API gravity of 42.7° and a sulfur content of 0.04% by weight.
Exploration and production
Declines in production at Malaysia's major producing oil fields in the past decade have led government efforts to encourage investment in enhanced oil recovery and development of smaller and marginal fields, as well as deepwater fields.
Malaysia is Southeast Asia's second-largest oil producer behind Indonesia. Petroleum and other liquids production (including crude oil, lease condensates, natural gas liquids, biofuels, and refinery processing gains) in 2013 was nearly 670,000 barrels per day (bbl/d), hovering around the same level since 2011 and down from the country's peak production of 844,000 bbl/d in 2003. More than a fourth of Malaysian oil production currently originates from the Tapis field in the offshore Malay Basin. The country's oil production has experienced overall decline as a result of maturing fields, particularly larger fields in the shallow waters offshore Peninsular Malaysia. Some recent drilling efforts in the area such as Lundin Petroleum's Bertam oilfield in the Penyu Basin are expected to offset some production declines from mature fields.
Deep water projects - Sarawak and Sabah
Several major projects are under development in the deepwater area offshore the Sabah state, which could bolster Malaysia's oil production over the next decade. The Kikeh oil field, operated by Murphy Oil in partnership with Petronas, is currently Malaysia's only producing deepwater oil field. The Kikeh field came on stream in 2007 at an initial rate of 20,000 bbl/d, and estimated production in 2013 was 60,000 bbl/d of oil. Output has been hampered by operational delays. Murphy Oil has been working to restore production, which is expected to peak at 120,000 bbl/d.
Also, in offshore Sabah, the Gumusut/Kakap project is under development and will include the region's first deepwater floating production system from 19 subsea wells. The Kakap field came on stream at the end of 2011 with production of 25,000 bbl/d. Production from Gumusut will commence in 2014, and production from both fields is expected to ramp up to 120,000 bbl/d by 2015, according to FGE. Project shareholders are operator Shell with 33%, ConocoPhillips with 33%, Petronas with 20%, and Murphy Oil with 14%. The system will be connected via pipelines to the new Sabah Oil and Gas Terminal being built in Kimanis in the northeastern Sabah state.
The Malikai oil and natural gas field, first discovered in 2004, is another deepwater find located offshore northwestern Sabah and has a peak production capacity of 60,000 bbl/d. The Malikai project will use a tension-leg platform and will tie into the Kebabangan Northern Hub development project (KBB) via a petroleum liquids and dry natural gas pipeline. Shell, the operator and a 35% stakeholder, expects to bring Malikai online at the end of 2016. Other project partners include ConocoPhillips (35%) and Petronas (30%).
Development is underway at the KBB slated to begin operations in late 2014. KBB will be a floating platform hub for the development of a cluster of deepwater natural gas fields offshore Sabah and will tie in the Malikai oil field. The KBB platform has a design capacity of 825 MMcf/d of natural gas and 22,000 bbl/d of condensate.
Malaysia began cooperating with neighboring countries bordering the South China Sea (SCS) to exploit the area's significant hydrocarbon potential. The country holds estimated reserves of 5 billion barrels of crude oil and liquids and 80 trillion cubic feet of natural gas in the South China Sea, the largest of any of the border countries (see South China Sea Analysis Brief). In May 2009, Malaysia submitted SCS territorial claims to the United Nations Commission on the Limits of the Continental Shelf and disputes China's territorial claims through its nine-dash line, a series of lines encompassing most of the South China Sea and based on China's historical territorial claims. Malaysia has not filed a legal case against China and has preferred to advance bilateral relations between the two countries.
The 20-year dispute between Malaysia and Brunei over land and sea boundaries, particularly in the Baram Delta Basin, was resolved when the two countries signed a boundary agreement in April 2009. Oil blocks L and M were ceded to Brunei, while Limbang, on the Sarawak-Brunei border, was ceded to Malaysia. Since the agreement, energy cooperation between Malaysia and Brunei has strengthened. In 2010, Petronas and the Brunei government agreed to jointly develop the two blocks offshore Borneo Island, and they signed a 40-year PSA for newly named Blocks CA1 and CA2. Drilling commenced in 2011, along with further investment plans. The two countries signed several energy cooperation agreements in 2013 for joint development of some deepwater fields and for Brunei to purchase a 3% share as part of Petronas' stake in the Canadian Pacific Northwest LNG export terminal.
Malaysia and Vietnam share the 520-square mile area of the PM-3 Commercial Arrangement Area (CAA) in the Malay Basin. PM-3 CAA commenced production in 1997 and contributes to the country's oil production from six offshore fields. Talisman Energy (Canada) holds operating interests in the Northern and Southern oil fields in the CAA. Talisman holds a 41% interest, Petronas holds a 46% interest, and PetroVietnam has a 13% interest.
As discussed in further detail below in the natural gas section, Thailand and Malaysia signed an agreement in 1979 to jointly develop oil and natural gas reserves from the Malaysia-Thailand Joint Development Area (MTJDA), which overlap the maritime borders of both countries.
Other areas in the South China Sea such as the Celebes Basin that borders Indonesia and Malaysia have remained underexplored because there are competing territorial claims between the two countries. Shell holds an exploration contract with Petronas for two deepwater blocks off the east coast of Sabah; however, Indonesia also awarded separate PSCs for the blocks and claims them. It is likely these PSCs will be dormant as long as territorial maritime disputes remain unresolved.
Malaysia remained a net oil exporter of crude oil and petroleum products in 2013 despite the narrowing gap between production and consumption in the past several years. Malaysia exports about half of its crude oil production because the crude quality (light and sweet) is attractive to the Asian markets and fetches a higher premium compared to other crude oil blends. In return, Malaysia imports lower-cost heavy sour crude oil, about half from the Middle East and the rest from several other regions, for its refineries and domestic needs. In 2013, Malaysia imported 183,000 bbl/d of lower-cost crude oil for processing at its oil refineries.
Malaysia exported 240,000 bbl/d of crude oil in 2013, according to Global Trade Atlas, significantly lower than the 400,000 bbl/d export volume in 2000. All of Malaysia's crude oil is exported within Asia Pacific, the bulk of which is sent to Australia, India, Thailand, and Japan. Japan began buying more crude oil for direct burn in 2011 after it lost nuclear electric generation following the Fukushima accident.
The country's imports of petroleum products have grown faster than its exports in the past few years. Much of Malaysia's oil product trade occurs in Asia, especially with neighboring Singapore. Gasoline is the key import product, making up about 45% of product imports and about a third of all oil product demand.
Malaysia was the world's second-largest exporter of liquefied natural gas after Qatar in 2013. Although the country's growing domestic demand and regional gas imbalances in the past few years caused the country to open its first regasification terminal as another source of imports.
According to the OGJ, Malaysia held 83 trillion cubic feet (Tcf) of proved natural gas reserves as of January 2014, and it was the third-largest natural gas reserve holder in the Asia-Pacific region. More than half of the country's natural gas reserves are located in its eastern areas, predominantly offshore Sarawak. Most of Malaysia's gas reserves are associated with oil basins, although Sarawak and Sabah have an increasing amount of non-associated gas reserves that have offset some of the declines from mature oil and gas basins offshore Peninsular Malaysia.
Exploration and production
Malaysia's natural gas production has risen over the past two decades to serve the growing domestic demand and export contracts. Recent foreign investment in deepwater and technically challenging fields, primarily in the Sarawak and Sabah states, provides impetus to maintain natural gas production levels over the next few years.
Although Malaysia's dry natural gas production has risen steadily over the past two decades, reaching an estimated 2.3 Tcf in 2012, growth slowed somewhat since 2007. Meanwhile domestic natural gas consumption has increased, reaching 1.1 Tcf in 2013, and it accounted for about 50% of production. The power sector consumed about 51% while the industrial sector accounted for 33% of the Malaysia's natural gas market sales in 2013, according to FGE. Demand for power, especially in Peninsular Malaysia, is expected to steadily increase, and gas demand for industrial development is likely to remain strong as the government pursues greater economic development. Rising domestic demand, particularly in Peninsular Malaysia, and LNG export contract obligations are placing pressure on the natural gas supply and driving Malaysia to actively seek investments for reservoir development. There are several ongoing projects that will expand natural gas production in Malaysia over the near term. Exploration and development activities in Malaysia continue to focus on offshore Sarawak and Sabah. Over the long term, Malaysia needs to attract higher levels of investment and technical capabilities to develop deepwater fields and those fields containing high levels of carbon dioxide and sulfur.
Malaysia remains a key exporter of LNG as the second-largest exporter in the world after Qatar in 2013. However, the limited natural gas supplies and rising demand in the western part of the country triggered investment in regasification terminals, the first of which commenced in 2013.
Malaysia remains a key global LNG exporter as the second-largest exporter after Qatar in 2013. Malaysia is developing sizeable reserves in its eastern region. However, growing natural gas supply shortages in demand centers in the western region have prompted Petronas to construct the country's first LNG import terminal in the western region to augment the supply from pipelines.
Malaysia shipped more than 1.2 Tcf/y of LNG and contributed to 11% of LNG exports worldwide, according to IHS Energy. Key importers of Malaysia's LNG are Japan (60%), South Korea (17%), Taiwan (12%), and China (11%), all holding medium- or long-term supply contracts with Malaysia. Malaysia also has sold LNG cargoes to Petronas LNG Limited, a trading company based in Malaysia, which ships spot LNG cargoes to many locations around the world. Despite growing demand for natural gas at home, Petronas is keen to maintain its long-term export contracts as they currently capture a higher price than natural gas sold domestically where the gas prices are regulated and subsidized.
Although Malaysia is one of the world's largest LNG exporters, the country currently experiences a geographic disparity of natural gas supply and demand among its regions. The Western Peninsular Malaysia demands more natural gas to fuel the power and industrial sectors, while the eastern states of Sarawak and Sabah, located on Borneo Island, produce natural gas and currently lack the local demand for it. To meet pressing gas needs in Peninsular Malaysia, Petronas is developing various regasification terminals to secure supply from the global gas market.
Petronas is the leading developer of several regasification projects slated to start operations by 2017. Malaysia's first regasification terminal, located near Malacca with a capacity of 184 Bcf/y, began operating in May 2013. In 2013, Malaysia imported 76 Bcf of LNG from Lekas LNG. In addition, Petronas Gas has plans to construct two regasification terminals in Lahad Datu in Sabah and one in Johor in Peninsular Malaysia over the next four years. Lahad Datu is the only project located in the eastern region of Sabah. It is a smaller terminal designed to primarily serve the proposed 300 megawatt (MW) power generator at Lahad Datu and replace some of the diesel that is heavily used for power in the Sabah state. Petronas' terminal in Johor is part of the NOC's RAPID project that will include regasification and LNG storage and serve as a strategic oil and gas trading hub for the Asian region. A consortium composed of Royal Vopak, Dialogue Group, and the State Government of Johor proposed a second terminal in Johor with a similar concept â" to be the first independent LNG trading facility in Asia, allowing users to store and trade gas.
Petronas signed several agreements to supply its planned regasification capacity for the next decade. The NOC has a combination of long-term agreements with Qatargas and Gladstone LNG (Australia) and short-term agreements with Pluto LNG (Australia), Snohvit LNG (Norway), and GDF Suez for its global portfolio. Shell also holds a contract with Brunei LNG to deliver LNG to Malaysia. Petronas plans to source some of the gas from its new liquefaction projects coming online in Sarawak. The NOC could also direct natural gas supply from its stakes in liquefaction facilities in Australia and Canada to the proposed regasification facilities, according to PFC Energy. Although, Petronas has not signed any purchase contracts for the supply from its proposed liquefaction projects.
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