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Feature: Malaysia's natural gas market liberalization faces political, market risks

Singapore (Platts)--13 Jun 2018 518 am EDT/918 GMT


Malaysia's gas market liberalization, which kicked off in earnest in 2017, faces a sluggish future due to slow gas demand growth and political uncertainties after the surprise outcome of the recent general elections.


  • Third party access in Jan 2017, but no companies participating yet
  • Coal, renewables and slow economy curb gas demand growth
  • Anti-subsidy stance of new Mahathir government poses risks

Malaysia is one of several Asian countries looking to deregulate its domestic gas markets and open them for non-state players, in an effort to reform energy policy and boost competition in everything from gas imports to power distribution.

While liberalization is instrumental for the commoditization of LNG and finding new markets for the fuel, each country is hobbled by peculiar challenges that dictate the pace of reforms.

In Malaysia's case, gas liberalization began with the Gas Supply (Amendment) Act in September 2016, and the implementation of third party access or TPA in January 2017. Until then national oil company Petronas was the sole importer of gas, and its affiliates Petronas Gas Berhad and Gas Malaysia Berhad handled gas distribution.

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While these regulations opened the door for other companies to import gas and access Petronas' distribution infrastructure, none have yet to do so. One oil major had reportedly applied for a TPA license, but no approvals have come through.

"Nobody has done it yet. These things take time to do," Malaysia Petroleum Resources Corp's chief executive Shahrol Halmi said at the Platts Malaysia commodities forum recently.

He said one problem was the small size of the potential customers who can switch from diesel to natural gas, and companies were looking to aggregate small demand to meet big LNG import volumes.

"The market is still small and still maturing," Halmi said. "The challenge we have in Malaysia is more on the availability of customers. I don't think we are short of people who want to sell into this market."


GAS DEMAND GROWTH SLOWS TO A CRAWL


Economic growth in Malaysia has been tepid, and a strong showing of 5.9% GDP growth in 2017 is expected to moderate to 5.5%-5.7% in 2018.

A big chunk of falling gas demand comes from declining gas-fired power generation, which makes up around 60% of total gas consumption, and is the largest contributor to gas demand in peninsular Malaysia.

S&P Global Platts Analytics estimated that decline in gas-fired power will cut gas demand in power generation to 45 million cu m/day in 2018, and 44 million cu m/day in 2019; from about 47 million cu m/day in 2017.

Malaysian utility Tenaga Nasional Berhad was one of the key proponents of gas market liberalization, but its own gas demand was expected to ease from 2019 as it adds new coal-fired capacity.

"The cost of energy is still a very big concern, and coal remains the most cost effective way for us to generate electricity," Halmi said.

Additionally, the 11th Malaysia Plan aimed to add 2,080 MW of renewable energy capacity by 2020. Effectively, gas is being displaced by both coal and renewables.


POLITICAL FALLOUT


For Malaysia's gas market liberalization to be successful, domestic gas prices need to be on par with global markets to incentivize imports. However, they had been lagging the market for a long time now.

Domestic gas prices follow a two-tiered pricing mechanism -- volumes up to 1 Bcf/day are priced at the domestic rate, and above 1 Bcf/day are priced at ex-Bintulu LNG prices, according to Tenaga's annual report.

It is currently implementing a program to close the gap between domestic subsidized gas prices and the market price with increments every six months for both the power and non-power sector. However, there is a risk that the subsidy reform could stall.

"There is a disconnect between the previous government's policy on eliminating subsidies, and Mahathir's populist measures that favor maintaining subsidies and removing taxes," Wood Mackenzie's senior research analyst for Asia gas and power Edi Saputra said.

This created uncertainties for Malaysia's gas market liberalization, Saputra added.


LNG IMPORTS CAPPED


The groundwork for LNG imports into Malaysia were laid out by two projects in Peninsular Malaysia, where most of the gas demand is concentrated, as opposed to Sarawak where Malaysia's LNG export facilities and most upstream activity is located.

In 2013, Petronas built the Lekas LNG regasification terminal in Sungai Udang, in the state of Malacca, with a capacity of 3.8 million mt/year and in 2018 the Pengerang LNG terminal with a capacity of 3.8 million mt/year started operations.

However, slowing economic growth and a decline in gas demand for power generation had left the terminals operating below capacity. The new Pengerang LNG terminal was designed to meet gas demand from the neighboring RAPID refinery project, which will not start until early-2019 and take months to ramp up.

Malaysian LNG imports had dropped to 1.29 million mt in 2016, from 1.53 million mt in 2015, and rebounded to 1.7 million mt in 2017, according to Platts Analytics. It expects a marginal rise to 1.78 million mt in 2018.

--Eric Yep, eric.yep@spglobal.com
--Edited by Norazlina Jumaat, newsdesk@spglobal.com




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