Malaysia is endowed with abundant energy resources, particularly in the oil and gas sector. It continues to be an important sector of Malaysia’s economy as it contributes nearly 20 per cent to the country’s annual gross domestic product. The services covered under the sector include upstream field services, midstream (transportation and storage), and maintenance of machinery and equipment.

As of 2019, Malaysia is the second-largest oil and natural gas producer in Southeast Asia and the fifth-largest exporter of liquefied natural gas (LNG) in the world. The country is strategically located at the intersection of east-west shipping lanes and has established economic relations with its regional neighbours. Malaysia’s flourishing oil and gas industry provides a definite advantage and robust market opportunities for businesses.

In a bid to enable economic growth, the government has focused on increasing hydrocarbon production through upstream investment and exploration.

Recent developments in the oil sector

According to the Oil & Gas Journal (OGJ), Malaysia held proven oil reserves of 3.6 billion barrels as of January 2020, the fourth-largest reserves in the Asia Pacific after China, India and Vietnam. Malaysia’s national oil and natural gas company, Petroliam Nasional Berhad (Petronas) holds exclusive ownership rights to all oil and natural gas exploration and production projects in Malaysia. Petronas holds stakes in most of the oil and natural gas blocks in Malaysia, and its financial contributions to government revenue comprised nearly 35 per cent of total government revenue in 2019.

According to Rystad Energy’s production estimates, the major international oil companies producing the most oil in Malaysia are Exxon Mobil, Shell, and Conoco Phillips. New opportunities for investment in Malaysia’s energy sector have attracted other foreign oil independents and national oil companies like Repsol, Pertamina, PetroVietnam, and JX Nippon Oil and Gas.

The prices of crude oil fell significantly after the sharp drop in demand caused by global restrictions and the breakdown of negotiations at the March 2020 Organization of the Petroleum Exporting Countries+ (OPEC) meeting. This led to a temporary surge in production, primarily from Saudi Arabia and Russia. In 2020, Malaysia volunteered to cut its crude oil production by 136,000 barrels per day (bpd) from May 2020 to July 2020 to comply with the April 15 OPEC+ agreement. The agreement also stipulated that Malaysia cut 109,000 bpd from August 2020 to December 2020. OPEC members and select non-OPEC members agreed to reduce their production to rebalance the crude oil market after the steep pandemic-induced decline in demand.

Despite being a major oil producing country, Malaysia has a relatively limited oil pipeline network and relies on tankers and trucks to distribute products onshore. An oil product pipeline runs from the Dumai oil refinery in Indonesia to the Melaka oil refinery in Melaka City, Malaysia. Further, an interconnecting oil products pipeline runs from the Melaka refinery through Shell’s Port Dickson refinery to the Klang Valley airport and to the Klang oil distribution centre.

The completion of Phase 2 of the Pengerang oil storage terminal in Johor increased its crude oil storage capacity to 20.8 million barrels for crude oil and petroleum product storage. It has now begun Phase 3 of the construction, which it expects to complete in 2021. It will add about 2.7 million barrels of storage for clean petroleum products. The Pengerang facility is Malaysia’s largest commercial oil storage facility.

Malaysia has also invested heavily in refining activities during the past two decades and can now meet most of its demand for petroleum products with domestic supplies. The country has a refining capacity of about 880,000 bpd at seven facilities. As part of Malaysia’s goal to compete with the oil refining and storage hub in Singapore, Petronas completed a refining and petrochemicals integrated project in Johor, located at the southern tip of Peninsular Malaysia. The project has a nameplate capacity of 279,000 bpd and is expected to be fully commissioned by 2021. The Pengerang energy complex is currently developing a condensate splitter. It is expected that the project will be complete by 2024.

Recent developments in the natural gas sector

Malaysia is also one of the world’s largest natural gas producers and exporters. According to the OGJ, Malaysia holds 41.8 trillion cubic feet (tcf) of proven natural gas reserves as of January 2020. The country’s marketed dry natural gas production has risen during the past decade, touching 2.5 tcf in 2018, while domestic natural gas consumption has remained flat for most of the period because coal has become increasingly competitive to natural gas as a feedstock for power generation.

Petronas has historically held a monopoly on all upstream natural gas developments in Malaysia. In March 2018, Petroleum Sarawak Berhad (Petros), Sarawak’s state-owned oil and natural gas company, was established and was declared to have equal status with Petronas. In February 2020, Petros signed a domestic natural gas agreement with Petronas and took control over the sale, distribution and supply of natural gas in Sarawak.

Shell is another of the largest natural gas producers operating in Malaysia after Petronas and is a key player in the development of deep-water fields in the country. Other key international companies include Exxon Mobil, JX Nippon Oil & Gas, PTT Exploration and Production Public Company Limited, and Pertamina.

Malaysia has one of the most extensive natural gas pipeline networks in Asia, totalling about 1,530 miles. The Peninsular Gas Utilisation pipeline network, located in Peninsular Malaysia, has much of the natural gas pipeline network. Major pipelines in Sabah and Sarawak transport natural gas from their offshore fields to power plants for power generation or to LNG terminals for export.

At present, Malaysia has a geographic disparity between natural gas supply and demand. While Peninsular Malaysia demands more natural gas to fuel the power and industrial sectors, the eastern states of Sarawak and Sabah produce the natural gas. In order to meet natural gas needs in Peninsular Malaysia, Petronas has developed two regasification terminals to secure supply from the global natural gas market. Both these terminals are connected to the major natural gas pipeline network, that transports natural gas for domestic use and for export to Singapore. In order to realise the Malaysian government’s intent to become a regional LNG bunkering hub, these terminals have begun providing commercial LNG bunkering services. According to the latest estimates provided by BP’s 2020 Statistical Review of World Energy, Malaysia was the fifth-largest LNG exporter in the world in 2019. It shipped approximately 1.2 tcf of LNG and accounted for 7 per cent of LNG exports worldwide.

The road ahead

The outlook for the sector remains challenging due to Covid-19 and prevailing uncertainties over OPEC+ production cuts in 2021. In April 2021, Malaysia’s national oil and gas services and equipment (OGSE) industry launched its blueprint for 2021-30. The 10-year plan outlines key goals that include increasing the OGSE sector’s export potential, diversification into adjacent areas such as renewable energy, and industry consolidation. The plan also mentions export grants and tax breaks, support for mergers, as well as funding for emerging adjacent ventures into areas such as new energy. Going forward, the industry must shift towards greater digitalisation and make the switch to providing greater technology-driven solutions.