Malaysia, the world’s third largest LNG exporter, will begin importing the super-cooled fuel next year into its Melaka LNG terminal, a move that will help it protect the large amount of revenue it receives from its LNG exports.
“The intention currently is to get prices up to the level you need to attract new gas, which is the LNG price,” Graham Tyler, an analyst with Wood Mackenzie said.
“They’ve realized ever since the last oil price peak that subsidies were no longer sustainable across food and commodities,” Tyler said.
Petronas recently struck an LNG import deal with Qatar to buy 1.5 million tons per annum (mtpa) from 2013 and also has a supply contract to buy 3.5 million tons from Australia’s Gladstone LNG project, in which it has a 27.5 percent stake.
Malaysia’s first LNG import terminal, a 3.8 mtpa terminal in the central state of Melaka, is due to come online in mid-2012.
With the government expecting unsubsidized gas demand at more than 500 million standard cubic feet per day by 2020, Petronas is likely to give the green light at the end of this year for a second import terminal in south Johor state.
Malaysia has also been forced to turn to imports as declining output from ageing fields and rising demand from its power plants eroded exports, though it has been working to boost output from domestic fields and stakes in projects abroad.
Malaysia’s LNG demand is part of a rush of Southeast Asian demand that is set to come online in the next five to ten years, stretching an already tight market.
Thailand commissioned the region’s first LNG regasification earlier this year, but several other countries including Malaysia, Indonesia, Singapore, Philippines, and Vietnam, are expected to follow suit.
By 2020, Southeast Asia will have nearly 25 million tons of LNG import capacity, according to some analyst estimates.
Malaysia currently exports much of its own LNG through long-term supply contracts to Japan, Korea, and Taiwan, an important source of revenue for the government that it would sacrifice if it sold its LNG to the domestic market at subsidized prices.
LNG shipments in the first half of 2011 rose 15.4 percent from a year ago to 21.8 billion ringgit — accounting for nearly a tenth of total exports, government data showed.
Without import contracts compelling Malaysia to pay prices in line with the rest of world, Prime Minister Najib Razak’s government remains torn between trying overhaul the economy to woo investment and soothe public anger over higher inflation.
The most recent power and gas price hike in June saw inflation jump to near 27-month highs and subsidy removal will be a political hot potato with elections likely to be held at the end of this year or in early 2011.
“Political realities may see some delays or smaller quantum in tariff hikes,” said a senior government official involved with plans to raise power and gas rates but who declined to be named due to the sensitivity of the issue.
“The government is between a rock and a hard place with this, but we will need to face some hard realities and pull through with these LNG imports. Short term pain for long term economic growth,” the official said.
Demand for LNG in the aftermath of the Japanese earthquake has pushed prices for the fuel sharply higher in recent months to over $15 per million British thermal unit (mmBtu).
By comparison, Petronas sells natural gas for domestic power generation at13.70 ringgit ($4.60) per mm Btu. The government has promised to allow domestic natural gas prices to rise by 3 ringgit every six months till they reach market levels, with the next revision due at the end of this year.
If it works, Malaysia’s strategy of easing its domestic gas market toward market prices by importing LNG will save Petronas billions in domestic gas subsidies.
The government’s fuel and food subsidies are expected to double to almost $6.9 billion this year, undermining the nation’s struggle to reduce its fiscal deficit to 5.4 percent of GDP.
Petronas on its own forks out about 20 billion ringgit of gas subsidies annually. In a rare rebuke, Petronas recently said subsidized gas prices have hampered investments in the exploration and development of gas projects, as it is set to pipe out gas from the North Malay Basin. Market prices for gas will also likely rein in domestic demand.
“The Qatar deal shows that eventually Malaysia will have to get used to paying market rates for gas and power generation,” said a Petronas official who could not be named as he is not authorized to speak to the media.
“And this means that demand will be more market driven rather than based on artificial subsidies.”
He said Petronas is still determining how much Malaysia will need to import but it is fair to say that Malaysian power demand will rise by 5 percent each year.
Government think-tank PEMANDU estimates demand for foreign investors who could not set up shop due to gas shortages but are willing to pay market rates could be at 270 million standard cubic feet per day by 2020.
With regasification terminals, Petronas appears to be setting the stage for other suppliers to penetrate a market it has monopolized for over four decades while it maintains its export contracts to the Far East.
“During this time, we will no longer be a monopoly. Any party can bring in LNG and supply gas to Tenaga Nasional,” Chief Executive Shamsul Azhar was quoted as saying by local media.
