This article first appeared in The Edge Malaysia Weekly on July 29, 2024 - August 4, 2024

SARAWAK is the largest gas exporting state in Malaysia, with 90% of all Petroliam Nasional Bhd’s (Petronas) liquefied natural gas (LNG) cargoes in the country sourced from or through the state. Thus, when the operating landscape of the state’s natural gas industry begins to change, the national oil company (NOC) is reluctantly pulled into the spotlight.

In particular, Petronas’ role as “gas aggregator” in the state is being taken over - or rather, taken back - by Petroleum Sarawak Bhd (Petros) through state laws. In a nutshell, all gas produced by the state has to be sold to Petros, and no longer Petronas (see also “Petros’ landmark gas sale agreements a sign of more to come”).

Last Monday, Petros signed gas sale agreements (GSAs) with Sarawak Petchem Sdn Bhd and Sarawak Energy Bhd to kick off its role as the state’s sole gas aggregator to buy and sell all natural gas in the state. The GSAs will give Sarawak Petchem access to gas for its methanol plant and provide fuel for Sarawak Energy’s power plants, Petros said in a statement released in conjunction with the signing of the GSAs.

The move is seen as in line with Petros’ commitment to ensure a strategic and fair allocation of Sarawak’s gas supply, which is currently largely exported by Petronas.

Under Sarawak’s laws, the “gas aggregator” will procure natural gas for distribution or supply to anyone and to develop, expand and maintain the gas distribution network and system in the state. Anyone else would need a licence to import, regasify, process, transport, supply or retail gas, as well as to run gas distribution infrastructure, such as pipelines.

The implications of Petros assuming the gas aggregator role are significant on many fronts, including the nation’s coffers. The details of Sarawak’s policy on the distribution of natural gas produced in the state, particularly the export of LNG, which is currently a key income source for Petronas, has not been revealed to the public.

One possibility, according to investment analysts, is that Petronas may play the role of wholesaler, sourcing the fuel from Petros and exporting to importers in the Far East.

“The profit from [Petronas’] gas exports [from Sarawak] is easily between RM10 billion and RM15 billion, sometimes up to RM20 billion a year,” a source familiar with the developments tells The Edge.

In short, Petronas is losing the wide margin that it enjoyed as the NOC when it controlled the entire supply chain. And this may happen sooner rather than later. One of the many moving parts is the mechanism for fixing the gas price in the state.

Sarawak Premier Tan Sri Abang Johari Tun Openg tells The Edge in an interview that the gas price will be agreed on by both Petronas and Petros because the latter is the sole aggregator in the state now. “There is a technical committee now working out the collaboration between Petronas and Petros,” he adds.

Case in point: the Sarawak state assembly was told by a state minister last year that Petronas did not have a licence to handle gas produced in the state. According to Sarawak’s e-government website, the licence fee “varies subject to the category of licence applied”.

Some say the best-case scenario for Petronas might be a margin squeeze but the NOC would still be able to export LNG. In the longer term, it is not known whether Petronas or Petros will be the entity to market and sell LNG to international customers in the future.

In its reply to The Edge, Petronas says it is in discussions with both Sarawak and Putrajaya to achieve a “mutual resolution” on the state’s gas distribution. It adds that “all parties need to understand and acknowledge each other’s constraints”. It also says it “understands” Sarawak’s aspirations and will continue to be a strategic partner to the state.

Abang Johari stressed that the change of gas aggregator in the state will not affect the existing gas supply agreements that Petronas entered into with other countries in the past.

“But we are working with Petronas. We won’t disturb the current agreements, arrangements, between Petronas and the customers,” he replies when asked how Petronas will be affected by the loss of its role as gas aggregator.

Petronas - the world’s third largest LNG supplier - will still get Sarawak’s gas to meet its existing supply commitments with its international customers. However, there is no indication of future sale agreements or contract renewals upon expiry.

“Who knows? When the contracts end, they [international clients] might have to sign with Petros,” says an LNG industry executive.

An industry veteran points to the reliability of suppliers as a crucial element when it comes to long-term commodity trade. “The customers trust Petronas more than Petros, perhaps,” he opines.

Petronas’ LNG supply agreements with international buyers have varying tenures, with publicly available data showing contracts lasting up to 2033 - roughly nine years from now.

In 2023, RM135.8 billion or 39% of Petronas’ RM343.6 billion revenue was derived from exports. That year, the NOC saw 403 LNG cargoes delivered from the Petronas LNG Complex in Bintulu, Sarawak, representing 90% of all 441 LNG cargoes delivered from Sabah and Sarawak last year.

“The earnings impact on Petronas remains uncertain but it may affect its ability to spend, notwithstanding that it has committed to pay a sizeable dividend to the federal government,” says RHB Research in a July 22 note. It adds that Petronas’ gas segment contributed a net profit of RM30 billion in 2023.

Should Petros also want to export LNG, Petronas’ footprint in the state could be reduced to offshore gas production and the operation of certain gas infrastructure monitored by Petros. Other Sarawak-owned entities also have equity in the state’s gas infrastructure, alongside Petronas.

This will not be very different from international oil giants operating under production sharing contracts (PSCs). The big players in Sarawak include Shell, whose footprint in the state is among its top 10 globally.

Shell’s recent project in the state spearheads the Sarawak Integrated Sour Gas Evacuation System (SISGES), which reportedly will supply one-third of the state’s gas demand and full capacity. In the first onshore gas plant under SISGES, Shell has 80% participating interest while Petronas has 20%.

The latest episode has given rise to concerns about local capex cuts, “especially Sarawak projects”, UOB Kay Hian says in a July 23 report, citing a decline in business enquiries for future local tenders and a trend in increased cautiousness about O&G capital spending in the supply chain.

Over the years, Petronas has been hard at work developing other assets. Its Peninsular Malaysia exploration blocks still form a sizeable portion of its Malaysia Bid Round (MBR) awards. Apart from the Kasawari carbon capture project in Sarawak, the NOC is also exploring carbon capture opportunities in the peninsula.

Overseas, Petronas has upstream exposure in the Americas, Africa and the Middle East. Nevertheless, analysts opine that margins are much lower abroad than enjoyed on its home turf where it has NOC status.

On its operation in Canada, Petronas president and group CEO Tan Sri Tengku Muhammad Taufik reportedly said its 25%-owned associate LNG Canada would ship its first LNG cargo by year end. It has six LNG vessels dedicated to that market.

The North American country is Petronas’ second-largest resource holder after Malaysia at 52 trillion cu ft (tcf), compared with 75 tcf in Malaysia (as at 2020), of which 44 tcf is in Sarawak.

Prior to the escalation of uncertainty in Sarawak, Petronas already faced myriad challenges on both the operational and financial fronts. Its dividend payments to the federal government have remained elevated at a total of RM90 billion over the last two years - a 50% payout ratio - on top of increasing contributions to the states through royalties and the newly imposed sales tax.

Meanwhile, it channels 20% of its capex into much less lucrative decarbonisation efforts and clean energy ventures.

These issues are now overshadowed by the uncertainty in Sarawak - still the biggest O&G market in Malaysia, with 44% of the country’s gas reserves and 39% of oil reserves.

Others could follow in Sarawak’s footsteps, including Sabah, which has 32% of Malaysia’s oil reserves and 8% gas. Combined, the two states have more than 70% of Malaysia’s O&G reserves. So, any changes to the landscape would certainly affect Petronas’ financials and ratings.

Petronas has already pointed to a higher cash balance requirement to fund its operations as financing becomes more expensive for O&G companies due to rising emission requirements globally.

Understandably, Sarawak is seeking more autonomy in the management of its hydrocarbon reserves. Nevertheless, Petronas as the NOC remains a relevant entity in ensuring the growth of Malaysia’s entire O&G ecosystem. As the terms are ironed out, goodwill must prevail and a win-win situation should come out of it all.  

https://www.theedgemarkets.com/node/720897