Malaysia taps into reservoirs of potential-

The strong showing of Malaysia’s oil and gas sector since the latter half 2012 is expected to continue through 2013. Growth has thus far been driven by a raft of new discoveries; considerable improvements in contract flows; growing interest among service providers and equipment manufacturers to set up base in the country; market-friendly structural reforms; and a strong domestic demand forecast. These developments, coupled with several high-profile discoveries and finalisations of high-value contracts over the past several months, have strengthened the sector’s performance.

The growth trend is expected to continue beyond 2013 into a large part of the present decade. By 2020, experts believe that the oil, gas, and energy industries will grow at a rate of 5 per cent per annum, or by RM 131.4 billion during the period 2010–20, and create over 60,000 jobs. Oil and gas demand by that point is expected to cross the 60 million tonne (mt) mark, up from the current 50 mt.

Policies and demand-driven growth

In addition to strong fiscal incentives and the promise to reform the pricing of the domestic hydrocarbon sector, a major driver of sector growth is the Economic Transformation Programme (ETP) that aims to move Malaysia into the “developed country” category by 2020. In a road map published in July 2012, the following thrust areas for the oil and gas sector were identified for which about 99 per cent of the funding required is expected to come from the private sector.

  • Rejuvenation of existing fields through enhanced oil recovery (EOR): expected to add 166,000 barrels per day (bpd) of oil production in 2020; investment required: over RM 68.6 billion
  • Development of small fields through innovative solutions: expected to add 55,000 bpd of oil production in 2020; investment required: RM 13.3 billion;
  • Intensification of exploration and production: in order to sustain the present rate of production in the long run; investment required: RM 18.4 billion;
  • Developing a regional storage and trading hub: expected to generate RM 1.6 billion in gross national income (GNI) by 2020;
  • Unlocking premium gas demand in Peninsular Malaysia: expected to generate RM 10.5 billion in terms of GNI and create 27,000 jobs by 2020;
  • Attracting international corporations to set up base in Malaysia: pertains mainly to the equipment manufacturing and upstream servicing sector; expected to create more than 20,000 jobs and contribute RM 6.1 billion to GNI by 2020;
  • Consolidation of domestic fabricators: expected to create more than 5,000 jobs and contribute RM 4.1 billion to GNI by 2020;
  • Technical capacity building through strategic alliances: expected to aid Malaysian companies in capturing 15 per cent of the deepwater market and 50 per cent of the shallow water market in the Asia-Pacific by 2020; expected to create over 15,000 jobs and contribute RM 4 billion to the GNI.

 

Investment opportunities aplenty

Malaysia’s oil and gas reserves exceed 3 billion tonnes of oil equivalent, with natural gas accounting for around 74 per cent of the reserves. Since most of the larger onshore or shallow reserves have already been exploited, there is considerable opportunity in the development of deepwater and marginal fields, and even some of the mature fields through techniques such as EOR. On the whole, experts predict that the offshore segment will attract more than RM 176 billion in investments during the 2011-15 period. There are also considerable opportunities for players in the downstream segment, as Malaysia aims to become a major oil and gas trading hub.

  • Development of deepwater fields: Malaysia’s deepwater reserve potential has been estimated to be over 1 billion tonnes of oil equivalent, and at present, less than one-third has been discovered. In the long run, most experts believe that there will be a greater focus on the development of deepwater fields as it becomes harder and harder to find oil and gas reserves in shallow waters. It provides an excellent opportunity for collaborative development, as deepwater investments are still considered quite risky. In early 2013, Petronas, Shell, and ConocoPhillips finalised their decision to invest in the Malikai deepwater oilfield. Experts believe that this will lead to a keenly contested tendering process for contracts worth at least RM 1 billion.
  • Development of marginal fields: There are over 100 marginal fields (defined as fields that may not generate sufficient income over a certain period of time to justify the development cost) in Malaysia, with reserves of around 79 mt of oil. Under the risk service contract arrangement, 25 of them have been earmarked for development over the next few years, requiring investments exceeding RM 25 billion. The focus on marginal fields is expected to attract a considerable number of small-scale developers and service providers that typically have difficulties with developing larger projects.
  • Development of mature fields and extensive use of EOR techniques: The use of EOR, especially with regard to sustaining the development of mature fields, is a major opportunity, based on the predictions of the ETP. EOR techniques can extend the life of existing platforms by 15 to 20 years; thus, the segment is also an opportunity for the growth of the chemical manufacturing industry. Over the next few years, the fields that are likely to be developed with EOR techniques include Angsi, St Joseph, Tanjung Bara, and numerous fields in the Baram delta region.
  • Other field development opportunities: In the short term, a fair number of shallow fields (particularly for natural gas) are also likely to be developed. These include gas fields at offshore Peninsular Malaysia: Petronas is reportedly planning to spend RM 15 billion in this region. The tenders for shallow fields, including those in Bokor, Semarang, Damar, and Besar, are likely to amount to over RM 8 billion in contracts.
  • Strong floating production storage and offloading (FPSO) market: FPSO unit providers have particularly benefited from upstream development taking place primarily in the offshore segment. Over 150 FPSO projects are under development: on a yearly basis, at least 15 project developers are expected to place orders for new facilities or lease existing units. This situation provides an excellent opportunity for the global FPSO industry to regroup after the global financial crisis forced many players into bankruptcy and led to a wave of consolidation to ensure the survival of the remaining players.
  • Equipment manufacturing and upstream service providers: Factors such as a strong portfolio of projects across all verticals, Malaysia’s proximity to other major markets in Asia Pacific, the relatively lower costs of production, a skilled labour force, and business-friendly policies have already attracted a number of domestic and international players to the oil and gas equipment manufacturing and service sector. Malaysian companies have, in general, remained competitive against foreign manufacturers; companies ranging from small-scale developers to multinational conglomerates have carved their own niche in the industry. New technologies and contracting strategies that are being implemented for exploration and production are expected to create fresh business opportunities for foreign as well as domestic manufacturers, service providers, and contractors.
  • Malaysia’s target of becoming a trading hub: Malaysia is planning to become a liquefied natural gas (LNG) trading hub of Southeast Asia through the independent LNG terminal at the Pengerang Integrated Petroleum Complex (PIPC), whose first phase is expected to be completed in the first quarter of 2014. Malaysia plans to attract a significant amount of LNG regasification and storage traffic from a diverse range of players across the globe. The PIPC, as a whole, is likely to play an important role in this regard, with the facility likely to host oil refining and storage, as well as petrochemical facilities.
  • Opportunities in pipeline and downstream development: Malaysia, which has over 3,000 km of oil and gas pipelines (predominantly gas), is expected to build more than 2,500 km of new pipelines in the next five years. It aims to connect its offshore fields to processing facilities and link LNG import terminals to the natural gas grid. Opportunities also exist in the downstream segment, specifically in LNG import and regasification (with a number of floating terminals planned), LNG storage, oil refining, oil storage, and petrochemicals, apart from PIPC.

Challenges and risks

Upstream project developers, however, are likely to face a number of technical and economic challenges in developing deepwater, marginal, and mature fields. Additionally, in terms of establishing a hub for LNG trading and for equipment manufacturing and the service sector, Singapore has emerged as a major competitor. Other concerns include the growing import dependence, lack of associated infrastructure development, inadequate level of technology transfer, the pace of development of human capital, and the effectiveness of proposed regulatory changes.

  • Techno-economic challenges for upstream development: The techniques employed in deepwater, marginal, and mature field development are relatively new in Malaysia. The increased complexity of these techniques creates a number of technical and financial issues. Technical challenges include high pressure and temperature, excess carbon dioxide in a number of fields, difficulties in formulating effective reservoir management plans, and fabrication issues in deepwater fields. The lack of experience of developers and contractors in undertaking these types of projects is a major deterrent to accurate cash flow projections. The recent softening of crude prices is also another concern with regard to project profitability.
  • Competition from Singapore as a hub: Despite the absence of any notable domestic oil and gas reserves, Singapore has been able to compete with Malaysia in terms of revenue generation. A comparison of the listed companies at the respective stock exchanges shows that Singapore-based companies have a revenue of RM 149 billion, compared to RM 73 billion for their Malaysian counterparts. The primary factors that have contributed to Singapore’s performance is its superior infrastructure, as well as its logistical and regulatory support. Singapore is also looking to compete aggressively in the storage and LNG market: its Jurong Industrial Estate and associated facilities will pose strong competition for Malaysia’s PIPC.
  • Increased import dependence: Increased import dependence on both oil and gas could adversely affect the overall health of the sector, especially if proposed structural and pricing reforms do not take place. Increasing gas prices has been a difficult task in Malaysia: the authorities have repeatedly failed to meet deadlines for price revisions, partly due to the rising inflation rate.
  • Investments in research, technology transfer, and human capital: In order to increase its effectiveness in implementing new upstream technologies, Malaysia needs to put more effort in research and development, technology transfer, and the upgrading of its human capital. Such measures will enable the country to establish a good resource base that can help it achieve its objective of developing a manufacturing and service sector hub for the oil and gas industry.

Building on a strong foundation

For investors, project developers, and manufacturers, the Malaysian oil and gas sector continues to demonstrate significant growth prospects, characterised by strong performance across all verticals, a progressive policy and regulatory framework, as well as rising domestic and Asian hydrocarbon demand. One threat to the sector is the emergence of Singapore as an alternative gas hub for Asia. The city-state is already a strong competitor in refineries and petrochemicals. However, through increased investments in technology and human capital, coupled with more investment-friendly policies and regulations, Malaysia remains a strong oil and gas investment destination in Southeast Asia.