Petronas to supply gas below market price

The Edge Malaysia, February 25, 2013

The government has given Petroliam Nasional Bhd (Petronas) the green light to implement a two-tier pricing mechanism for natural gas that will help resolve the country’s growing gas woes.

Petronas president Tan Sri Shamsul Azhar Abbas says the national oil company will keep aside a 3.6 million-tonne reserve in Sarawak to supply the fuel to the peninsula at a discount to its export price.

“The new gas supply contracts will be at a discount to the export price. Supply to the power sector will be at a 15% discount while for industrial users, it will be 1-%.” Shamsul tells The Edge.
However, he adds, supply to the existing contracts will remain at the regulated subsidies price, although this will be gradually raised as part of the gas subsidy rationalization exercise.

“We (Petronas) are still giving them (end users) a competitive edge with the discount (to the international price). But they could always source their own supply (from other sellers) if they want to…they are welcome to do so,” says Shamsul, who is also Petronas CEO.

“All the shipments to the regasification plant in Melaka will come from Bintulu. As for spare capacity, we will sell it to Singapore at full market price.”

Currently, natural gas is supplied at a regulated price, which is half the international price. The power sector is getting its gas supply at RM13.70 mmbtu (million British thermal units) while industrial users, such as steel manufacturers, are paying RM18.35 mmbtu. Because of the regulated/subsidized gas prices that came into effecting May 1997, Petronas had forgone revenue of up to RM154.8 billion as at Dec 31, 2011.

Petronas also continues to compensate Tenaga Nasional Bhd for burning more expensive fuel, for instance distillates, to generate electricity due to the gas shortage. For the financial quarter ended Nov 30, 2012, Tenaga received RM538.5 million from the national oil company compared with RM529.6 million a year ago.

A severe gas shortage, coupled with a sharp rise in international gas prices, is of on the challenges Shamsul faces as the chieftain of Petronas.

In 2010, a year after he took the helm, gas shortage in the country, which had been worsening over the years, escalated to an unprecedented level. Apart from declining production off Terengganu shores, a fire broke out at the Bekok C platform in December 2010, aggravating the problem.

Some find the situation ironic because Petronas is shipping liquefied natural gas by the tankerful to North Asia each year.

The regasification plant near Sungai Udang in Melaka which cost Petronas Gas Bhd (PGas) RM3 billion to build, has the capacity to receive, store and vaporize up to 530 mmscfd of LNG – more than a quarter of the current local supply of 2000 mmscfd from off Terengganu’s shores.

However, the regasification plant has yet to start operating, although its first shipment was expected to arrive in August last year. “The delay is mainly due to technical problems,” says Shamsul, who expects the terminal to commence in June this year at the earliest.

“We have to ensure it is 100% secure and safe (before we start operations),” he adds.

PGas farmed out the construction of the LNG regasification unit, island berth and subsea pipeline to a consortium comprising Perunding Ranhill Worley Sdn Bhd and Muhibbah Engineering (M) Bhd, among others.

Shamsul says the implementation of the two-tier pricing system will pave the way for the liberalization of gas supply in the country. End-used could source their own gas supply and import through Melaka by paying PGas a fee for using the regasification facility and the existing Peninsular Gas Utilisation (PGU) pipeline to deliver the fuel.

PGas owns the regasification as well as the existing PGU pipeline that runs along the coastline and is linked to Singapore.

Petronas probably fears that it will be told to continue to supply natural gas even if it means the national oil company has to import at international prices to prevent an energy crisis when the regasification terminal is up and running. With the two-tier pricing mechanism, this worst-case scenario is quite unlikely.