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Between 2018-2019, utilization rates at the Malaysia LNG (MLNG)
complex have fallen to between 80-90%, a decrease from the high
utilization rate, typically above 95%, which the liquefaction
facility has historically maintained. This downward trend is
expected to continue into 2020 as the COVID-19 pandemic and the
attendant travel restrictions and physical distancing guidelines
implemented to contain the spread of the virus led to a slowdown in
LNG demand and decreased nominations.
While near term lack of demand is expected to drive down
utilization rates, this should not obscure the tricky
near-to-medium term gas supply situation the MLNG complex
confronts.
In this report, we examine the various challenges that the MLNG
liquefaction complex faces from a feedstock gas supply perspective
as well as the potential impact of the Sarawak state government
which is looking to take a greater role in the state's upstream oil
and gas sector.
Gas feedstock supply challenges
Gas feedstock availability challenges have come to the forefront
in recent years as the existing gas supply sources mature. The
Sabah-Sarawak Gas Pipeline (SSGP) was commissioned in January 2014,
to provide breathing room for PETRONAS by delivering feedstock gas
from the Kebabangan Cluster, offshore Sabah, to the MLNG complex
located in Bintulu, Sarawak. However, since being brought online,
the troubled 750 million standard cubic feet per day (mmscf/d)
capacity gas pipeline has been non-operational or operating at a
reduced capacity for much of the time. Explosions and gas leaks
have repeatedly taken the pipeline offline, the latest of which
being an explosion on a remote section of the pipeline reported in
January 2020. With the expected feedstock supply from SSGP largely
never materializing, greater pressure has been placed on existing
supplies to fill the shortfall.
Figure 1: Sarawak non-producing gas fields: Gas quality and
comparative economics
Closer to the MLNG liquefaction complex in Bintulu, gas fields
that could serve as feedstock supply presents their own set of
challenges. While significant gas discoveries continue to be made
in Sarawak within the last decade with multi-Tcf discoveries
including Kasawari (2011), B14 (2013), Rosmari-Marjoram (2014) and
Lang Lebah (2019), commercialization of these discoveries has been
complicated by the presence of acid gas contaminants.
Sizeable fields with sub-$2/mcf breakeven - Bakong, Pegaga, and
Jerun have either been sanctioned or are in the process of being
sanctioned. Bakong (~10% CO2) and Pegaga are planned to
come onstream in 2020 and 2021, respectively. Similarly, Jerun is
currently expected to be sanctioned by the end of 2020. Despite the
Kasawari field containing higher levels of CO2
contaminants and a higher breakeven, the significant resource size
of the Kasawari field makes it hard to ignore and a development
decision was made by PETRONAS in Q3:2019. The future of MLNG
feedstock lies in the development of a handful of large, acid gas
fields or smaller, sweet gas fields which are likely to be
insufficient on their own to provide backfill.
High CO2 gas development though is not a new
challenge for PETRONAS in this region. Some acid gas fields such as
B11 is blended with sweet gas to meet gas entry specification for
MLNG Dua. Furthermore, the 3.6 million metric tonne per annum
(mmtpa) MLNG Train 9 which began commercial operations in 2017 is
equipped to handle feedstock gas of up to 20% CO2 and a
few hundred parts per million (ppm) of H2S. The
PETRONAS-operated NC3 gas field in SK-316 supplies feedstock gas to
MLNG Train 9 and is reported to contain CO2 of between
17-20% and H2S of 70-150 ppm.
The challenge here is threefold:
Sweet gas availability- as the existing sweet gas fields
increasingly reach production maturity, the availability of
blending stock is likely to be limited. This would limit the supply
options for feedstock gas going into MLNG Trains 1 to 8.
High H2S discoveries- recent material gas
discoveries have recorded H2S contaminants of a few
thousand ppm including the Rosmari-Marjoram and Lang Lebah gas
discoveries.
CCUS Commitments- to meet PETRONAS' public commitments to
carbon capture, utilization, and storage (CCUS) will require costly
solutions for compliant acid gas removal and disposal.
Aboveground challenges lead to a cloudy
outlook
Setting aside the challenges with feedstock availability,
PETRONAS is also facing increasing above-ground pressures. The
regional state government of Sarawak which plays host to the MLNG
complex has in recent years taken a more assertive stance. In
November 2018, the Sarawak state government imposed a 5% sales tax
on petroleum products which came into effect on 1st January 2019.
The state government launched a suit against PETRONAS in November
2019 following the NOC's refusal to comply and pay the state's
sales tax.
In May 2020, PETRONAS and the Sarawak state government reached
an initial agreement which sets out a potential pathway for
resolution between the NOC and Sarawak (see Malaysia: 14
May 2020:
PETRONAS-Sarawak sales tax agreement does not resolve broader
upstream uncertainty). By August 2020, both sides have
withdrawn their respective legal challenges and appeals in the
Kuching High Court with PETRONAS largely agreeing to pay what is
owed. It is worth noting here that the state government's
unilateral imposition of a sales tax as well as ongoing
negotiations with the federal government on issues surrounding
territorial rights and regulatory authority over Sarawak's oil and
gas resources is likely to cast a cloud of uncertainty for
investors and could deter investments.
Separately, the state government has publicly championed plans
to establish a petrochemical hub in Tanjung Kidurong. This is part
of the state's attempt to participate in the higher value-added
downstream petrochemical industry and to create employment
opportunities. The Chief Minister of Sarawak has also reported that
the state government intends to transform Bintulu from an LNG
producer to a petrochemical hub.
The introduction of the sales tax is likely to erode project
economics of any future gas developments and the push by the state
government for a petrochemical hub could threaten the availability
of future feedstock gas supplies to the MLNG complex. These
challenges should also not overshadow the real pressures that a
more muscular Sarawak state government represents to PETRONAS if
the situation impedes the ability of the NOC to restock its
domestic portfolio of opportunities.
The resource potential of Sarawak which has been amply
demonstrated by the past decade in which the state continues to
rack up most of the discovered volumes in the country, contributing
~80% of discovered volumes over the past decade with 93% of these
volumes comprised of gas resources. This highlights the centrality
of Sarawak and the region's importance to the future of PETRONAS'
portfolio and underscores the uphill challenges the NOC faces. Any
further diminution of its role resulting in a loss of control or
access to Sarawak resources would have important implications for
the future of PETRONAS.
Figure 2: Malaysia - Discovered resource volumnes by
political province
Where do we go from here?
There is a pressing need to upgrade and expand the existing acid
gas removal facilities to process gas with higher levels of
CO2 and H2S. Such investments could unlock
over 10 Tcf of gas resources, that can serve as feedstock gas.
Shell (Rosmari-Marjoram), PTTEP (Lang Lebah), PETRONAS (SK-316
fields, K5), SapuraOMV (B14) would benefit in the establishment of
an acid gas production hub. However, considering the downturn in
oil prices precipitated by the COVID-19 pandemic, there is a fear
that the necessary investments are not made as companies seek to
conserve cash and reprioritize capital expenditure.
Whether the state government will succeed in its petrochemical
ambitions remains uncertain. What is clear though, is that as
potential sources of low-cost gas dries up, the next slate of gas
feedstock supply whether supplying a petrochemical hub or the MLNG
complex are likely to be developed at higher upstream breakeven
price points and consequently cost more for gas purchasers.
Posted 8 September 2020
David Ooi is a principal research analyst at IHS
Markit.
