- Newspapers reported that an explosion and fire had occurred yesterday in a section of the Sabah-Sarawak Gas Pipeline (SSGP), located in between Lawas town and Long Sukang in the northernmost district of Sarawak. No lives were lost and the fire had since been extinguished. This has led to a temporary shutdown of Petronas’ RM4bil project, which was under the project management of India-based Punj Lloyd, Dialog Group and Petrosab Logistic. Wah Seong’s 60%-owned Petro-Pipe (Sabah) was involved in providing part of the pipes and pipe-coating services.

- Villagers at nearby settlements felt the impact of the heat wave and had been advised to evacuate to safer areas temporarily. A full-scale investigation has begun in Lawas and Kuala Lumpur to determine the exact cause of the incident. Sarawak Fire and Rescue Department director Nor Hisham Mohamad said that the pipeline had a safety shut-off system to prevent the fire from spreading in such an event.

- The affected pipeline is 400km from Miri. Long Sukang is a hilly settlement along the rural road into the Ba’kelalan highlands. The pipeline's construction cost was estimated at RM1.6bil at the time of award with completion scheduled by March 2011 but has since been way behind schedule. The Star indicated that the pipeline was completed early this year but this was not officially announced by Petronas.

- The SSGP and the Sabah Oil and Gas Terminal (SOGT) in Kimanis involve transporting gas produced off Sabah across a distance of 512km to Bintulu in Sarawak. The pipeline will run 90km in Sabah and 422km in Sarawak, passing through Lawas and Ulu Baram before entering Miri and onwards to Bintulu. SOGT is a storage and processing terminal meant for the oil and gas fields offshore of Kota Kinabalu in Sabah. The crude oil and natural gas condensate produced from the offshore fields will reach the SOGT for storage and/or initial processing.

- We are uncertain if any of the project’s service providers such as Dialog or Wah Seong may be liable for any damages pending completion of the probe. But this will likely defer the commencement of the SOGT as well as Petronas Chemicals’ US$1.5bil Sabah Ammonia and Urea (SAMUR) plant in Sipitang, Sabah which had already been delayed due to a fire aboard a vessel carrying critical equipment. But given that the commencement of SAMUR was expected only in FY15, we do not expect any impact to consensus earnings at this stage.

- We understand that the supply of gas has not been affected for Petronas Gas’ 60%-owned 300MW Kimanis power plant, which is expected to be progressively completed in 2Q-3Q2014. The first block has already started providing test power to the local electricity grid since 13 January 2014.

- But this incident could cause Petronas to adopt a more cautious stance in implementing its massive projects rollouts and potentially slow down its capex build-up momentum. This is compounded by the increasingly complex offshore projects such as high-temperature and high carbon dioxide, deeper water depth, and marginal developments.

- Pending further announcements by Petronas on this development, we maintain our OVERWEIGHT call given that there are still multiple EOR projects in the pipeline which will sustain excitement in the sector. Our BUY calls are maintained for SapuraKencana Petroleum, MMHE, Bumi Armada, Yinson Holdings and Alam Maritim Resources. Our HOLD recommendations are for Petronas Gas and Dialog Group. 

Source: AmeSecurities