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    Malaysian medium-term gas outlook remains bullish: Fitch

Summary

The country's robust offshore projects pipeline and LNG exports sector are set to maintain the strong uptrend.

by: Shardul Sharma

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Malaysian medium-term gas outlook remains bullish: Fitch

Malaysian natural gas production in the medium-term continues to be bullish with a robust offshore projects pipeline and LNG exports sector set to maintain the strong uptrend in gas output over the coming years, a report published by Fitch Solutions on March 8 said.

The southeast Asian nation is the third largest gas producer in Asia, behind China and Australia in absolute volume terms. The growth in its gas output, which has remained resilient in recent years and emerged through the height of the COVID-19 pandemic relatively, has further to go, the report said.

In its medium-term business outlook published at the end of 2021, Malaysian state-owned Petronas stated the desire to focus on the development and monetisation of high contaminant fields including high CO2 fields, the bulk of which lie offshore Sarawak.

Petronas has lined up several new projects out to 2025, to lead the next wave of output growth, all of which bar one are high contaminant projects. These include the Pegaga, Kasawari, Jerun and Lang-Lebah gas fields, all of which are located offshore in the gas-rich state of Sarawak, and earmarked to supply additional feed-gas to the company’s LNG liquefaction complex at Bintulu.

 

Major gas project details

The FID for the Pegaga project was reached in March 2018, although start-up has been pushed back to Q1 2022, after the discovery of mercury in the field's gas. Gas production could reach 5-6bn m3 at peak along with condensates and will supply the Bintulu LNG complex.

The Jerun gas field is slated to come online in 2024, producing 5 bn m3 at peak. The FID for the field was reached in April 2021. The EPCIC contract for the project was awarded to Marine and Heavy Engineering Holdings in April 2021.

The Kasawari field is part of Petronas’ Block SK316 production sharing contract, offshore Sarawak, estimated to hold some 3 trillion ft3 of gas reserves with CO2 content of 30-40%. First gas is anticipated by 2025, with peak output capacity of 9.3bn m3. In July 2019, MHB announced that it had been awarded a EPCIC contract for the project.

The Lang-Lebah project is operated by Thai state-run PTTEP. The FID for the Lang Lebah field has been delayed to 2023 from 2022. The field will produce about 7bn m3 at peak.

Fitch believes additional output contributions could come from a number of foreign contractors-led projects, including a ramp-up in output at the recently commissioned NMB-Phase II (PM302) being led by Hess, while the Shell-led Marjoram-Rosmari project, located deepwater Sarawak, is also believed to be targeting FID approval at some point during 2022.

“These could add more than 36bn m3 of peak gas production capacity to Malaysia’s books,” the Fitch report stated.

Fitch added that the main risks arrive from the fact that the bulk of these fields in addition to being located offshore and in deepwater areas, are highcontaminant fields, adding to overall development costs due to the need for contaminant removal units and carbon capture and storage (CCS) facilities.

“This when viewed next to Petronas’ keen desire to curb annual spending amidst broader recalibration of its business towards lower-carbon initiatives, brings minor risks to future project progress,” Fitch said, "although nonetheless, the company has made it a point to reiterate its intention to maintain the focus on unlocking domestic sour gas fields."

A broad recovery in global oil prices, coupled with the recovery in gas demand, both at home and in regional LNG importing markets, will also provide ideal backdrops for Petronas to pursue these higher cost ventures, the report said.

 

Malaysia to be an Asian outperformer

Among Asia’s large gas producers, Malaysia still lags behind China and Australia in terms of sheer production volume, Fitch said, but is set to well outperform both in terms of growth over the coming years.

The successful implementation of its planned offshore pipeline will make Malaysia among the outperformers in Asia in terms of gas production growth over the next three to four years, it added.

China’s growth will be driven by a strong state-led push to increase gas adoption across industries and accelerate unconventional gas developments, although subject to significant cost and technical barriers.

Australia’s growth meanwhile will decelerate markedly over the coming years, as the main focus in its gas sector shifts to maintaining output through brownfield developments, rather than bring through significant new projects.

PNG is due to see new gas developments add to its already impressive LNG exports, although new project sanctions have hit snags due to the government’s hardline stance during fiscal negotiations.

“Malaysia, while being heavily state-dominated, has not exhibited the same issues, with foreign operators generally finding it easy to work in tandem with Petronas,” Fitch said.

Vietnam is another projected to see strong growth in gas output, also due to a robust offshore pipeline, although face greater downside risks, due to history of project delays and growing maritime tensions with Beijing influencing certain projects.

 

Malaysian LNG exports to rise

Fitch said that the strong forecast growth in output will help Malaysia to meet both rising domestic demand for gas-generated power and also elevate LNG exports.

Additional output from new fields will help Malaysia’s position as an LNG powerhouse among the five net LNG exporters in Asia, more so as LNG growth decelerates in Australia, while natural declines take toll on the likes of Brunei and Indonesia.

Domestic gas demand meanwhile is forecast to strengthen in Malaysia as gas continues to play a key role in the national power mix even amidst strong state push to increase the share of renewables, Fitch said.

Gas faces strong competition from renewables in the aftermath of the government’s strengthened renewables growth target and an ambitious pledge to achieve carbon neutrality by 2050. The aim is to increase the share of renewables-fired power generation – defined to include solar, biomass and bio-gas – to 31% (raised from the previous target of 20%) of total by 2025, from the current 23%, while fossil fuel sources such as coal and gas expected to bear losses to accommodate.

However, most of it is expected to occur at the expense of coal, with gas continuing to be embraced for its cleaner burning properties, availability and ability to provide stable baseload power, and continuing to be viewed both by the state and Petronas as an integral power generation fuel and a partner to renewables energy in its sustainable future energy system.

“In fact, boosting gas use forms a core part of state-owned Petronas’ medium-term growth strategy with it committed to boosting capabilities in carbon capture and storage tech, production of carbon-neutral LNG and LNG bunkering, alongside growing commitments in renewables,” Fitch said.

The heavily renewables-oriented 12th Malaysia Plan, a national development roadmap for the period 2021-2025, also expects gas fired plants to replace coal-fired power plants in Peninsular Malaysia amidst the pursuit of cleaner power generation.