Oil and gas to Malaysia

Trends and opportunities

The market

Throughout the last 20 years, Malaysia’s economic strength has been largely underpinned by the oil and gas sector, which makes up about 20 per cent of the total gross domestic product (Source: Malaysian Investment Development Authority 2016).

Malaysia is the second largest oil and natural gas producer in Southeast Asia, the second largest exporter of liquefied natural gas (LNG) globally, and is strategically located amid important routes for seaborne energy trade.

Malaysia's offshore blocks lie in two distinct areas, namely Peninsular Malaysia and East Malaysia. More than half of Malaysian oil production currently comes from the Tapis Oil Field in the offshore Malay basin. Its oil reserves are of very high quality (light and sweet) and is one of the most expensive in the world.

Malaysia has more than 3,600 companies in the hydrocarbons industry according to the Malaysian Petroleum Resources Corporation (MPRC), the government’s agency responsible for promoting the oil and gas sector. The market offers substantial partnership opportunities across the upstream, midstream and downstream spectrum.

Low oil and gas prices over the past two years have impacted national and international oil company operations globally. Malaysia in response has prioritised upstream activities with a focus on deep sea water exploration and production (E&P) activities, brownfield rejuvenations through enhanced oil recovery (EOR) production and marginal field development through risk-sharing agreements.

Based on forecast production levels and without further discoveries, Malaysia has liquid reserves/production and gas reserves/production of approximately 10 years and 15 years respectively.

Malaysia’s newer reserves are mostly found off the coast of Northern Borneo at depths up to 1,200 meters deep. Bintulu in Sarawak is the main hub for Malaysia's natural gas industry. The Malaysia FLNG Terminal and Sabah FLNG Terminal are currently being constructed to monetise smaller gas assets. Many of the producing oil fields are mature, resulting in overall decline in crude oil production. These maturing reservoirs are particularly larger fields in the shallow waters offshore Peninsular Malaysia.

As part of Malaysia's goal to compete with the oil refining and storage hub in Singapore, the country’s national oil and gas company, Petroliam Nasional Berhad (PETRONAS), is also constructing a major new refinery and petrochemicals complex, the Pengerang Integrated Petroleum Complex (PIPC). This project is located in the state of Johor at the southern tip of Peninsular Malaysia and is expected to be completed in 2019. Both the PIPC and the Sipitang Oil and Gas Industrial Park (SOGIP) in Sabah, East Malaysia will almost double the refining capacity nationwide from 588,000 barrels a day to 1,158,000 barrels a day (Source: Deloitte 2015).

PETRONAS

PETRONAS holds exclusive ownership rights to all oil and gas exploration and production projects in Malaysia, and is responsible for all licensing procedures.

Most oil and natural gas production comes from production-sharing agreements operated by foreign companies in conjunction with PETRONAS. Despite a smaller capex, Malaysia may not be adversely affected by the full impact of the cutbacks as PETRONAS will refocus on domestic fields and assets, which favor Malaysian oilfields services companies.

Petroleum rights are divided into licenses (or blocks) which encompass specific areas of acreage and the associated subsea mineral rights within that acreage. Qualified oil and gas contractors are able to bid for the rights to conduct exploration on these Blocks. If successful in their bid, they can negotiate for a production sharing contract (PSC) with PETRONAS which sets the fiscal terms and other arrangements for carrying out oil and gas activities on that block. Oil and gas activities under the remit of PETRONAS typically fall into three main categories: upstream, midstream (including infrastructure) and downstream. There are more than 100 PSCs and 30 operators currently operating in Malaysia (Source: MPRC 2016).

Oil

Nearly all of Malaysia's oil comes from offshore fields, from three producing basins: the Malay basin, the Sarawak basin and the Sabah basin. To help offset production declines from mature fields, the government is focused on opening up new investment opportunities by enhancing output from existing fields and developing new fields in deep water areas offshore Sarawak and Sabah. Malaysia has a relatively limited oil pipeline network because of its island geography, relying on tankers for transportation and trucks for distribution of products onshore. Malaysia has invested heavily in refining (downstream) activities during the past two decades and is now able to meet most of its demand for petroleum products domestically.

Gas

Malaysia’s gas reserves are predominantly located in offshore Sarawak. Malaysia has one of the most extensive natural gas pipeline networks in Asia. The Association of South East Asian Nations (ASEAN) is promoting the development of a trans-ASEAN gas pipeline system (TACP) aimed at linking ASEAN's major gas production and consumption centres by 2020. Malaysia is a natural candidate to serve as a hub to TACP due to its strategic location and extensive natural gas infrastructure. Malaysia has bilateral gas pipeline connections with Thailand, Indonesia and Singapore (Source: ASEAN Council on Petroleum). 

Opportunities

Malaysia has more than 100 marginal fields containing 0.6 billion barrels of oil (Source: PWC 2016). Special tax incentives are given to these fields, which include reduced tax and capital allowances as well as special procurement arrangement. While fit-for-purpose technologies such as offshore enhanced oil recovery are being considered, good reservoir management and understanding of subsurface architecture are in demand. Opportunities also exist in technologies and services to extend the lifespan of platforms or upgrade existing assets.

Providers of innovative low-cost solutions to commercialise reserves and technologies to improve efficiency are in high demand.

The following key subsectors have been identified:

  • operations and maintenance facilities
  • asset integrity and management
  • upskilling and multiskilling programs
  • drilling technology
  • robotics and autonomous underwater vehicles
  • decommissioning.

Competitive environment

Oil and gas in Southeast Asia is starting to lose market share to coal in terms of power generation. However, rising domestic demand and LNG export contracts place pressure on the gas supply, and Malaysia is actively investing in industrial development to meet these needs. In fact, the Refinery and Petrochemical Integrated Development (RAPID) project could potentially offset the fall in gas-for-power demand.

Domestic upstream activities cover 101 production sharing contracts (PSCs) and six risk sharing contracts (RSCs).

Active oil and gas companies in the market include:

  • ExxonMobil’s predecessor, Standard Oil, began prospecting for oil in this region as far back as the early 1900s. Today Exxon has working interest in PSCs with PETRONAS. Exxon operates over 40 offshore platforms in 17 fields in the South China Sea, off the East Coast of Peninsular Malaysia, which produce about a sixth of Malaysia's oil and condensate.
  • Shell first set up operations in Sarawak in 1910. Shell upstream companies have interests in more than 10 PSCs in offshore blocks in Sabah and Sarawak.
  • Murphy has been active in Malaysia since 1999, and holds majority interests in eight separate production sharing contracts (PSCs): Block K, Block H, Block P, SK 309, SK 311, SK 314A, SK 2C and PM 311.  In 2015, production was 65,000 barrels of oil per day representing approximately 31 per cent of total net production.
  • Talisman holds a 41 per cent operated interest in Block PM-3 CAA between Malaysia and Vietnam and associated production facilities. In addition, Talisman holds a 33 per cent interest in Block 46-Cai Nuoc adjacent to PM-3 CAA and a 60 per cent interest in each of Block PM-305 and Block PM-314. 

Tariffs, regulations and customs

Energy policy in Malaysia is set and overseen by the Economic Planning Unit (EPU) and the Implementation and Coordination Unit (ICU), which report directly to the Prime Minister. PETRONAS holds stakes in the majority of oil and gas blocks in Malaysia, and it is the single largest contributor to Malaysian Government revenues by way of taxes and dividends. Under a legislation enacted in 1985, PETRONAS is required to hold a 15 per cent minimum equity in PSC’s with all foreign and private companies.

MAFTA allows for tariffs elimination on a wide range of petrochemical products including chemicals, iron and steel, electrical-mechanical and manufactured products. The Ministry of International Trade and Industry (MITI) is responsible for the issuance of licenses for the processing and refining of petroleum and the manufacture of petrochemical products, while the Ministry of Domestic Trade and Consumer Affairs (MDTCA) issues licenses for the marketing and distribution of petroleum products in Malaysia.

Marketing your products and services

Market entry

The market for oil and gas as well as related equipment and services in Malaysia is mature, robust and growing. On the equipment and services end, Australian companies will need to engage in a license agreement with PETRONAS in order to supply to the industry. Undoubtedly, acquiring licenses and contracts required to enter the market will be both complex and time-consuming.

Getting a foothold in the industry calls for a relatively long-term commitment, sustainability and durability. It is thus recommendable for you to appoint a Malaysian representative or local partner who has extensive market knowledge and industry connections. The appointed agent company must hold a valid PETRONAS license/ registration and comply with the general requirements for such licensing/ registration. Alternatively, a foreign company can form a new joint venture (JV) company with a local company/individual. The JV company must also submit for its license/registration application to PETRONAS and comply with the regulations accordingly. All in all, Australian oil and gas companies need to know how to respond to emerging trends, process integration, digital technologies, internet of things and innovation that are key enablers to reduce cost.

Links and industry contacts

Oil and gas-related resources

ASEAN Council on Petroleum – http://ascope.org/
Malaysian Gas Association – www.malaysiangas.com
Malaysian Oil and Gas Engineering Council (MOGEC) – www.mogec.org.my
Malaysian Oil & Gas Services Council (MOGSC) – www.mogsc.org.my
Petronas – www.petronas.com.my

Government, business and trade resources for Malaysia

Australia Malaysia Business Council – www.ambc.org.au
Central Bank of Malaysia (Bank Negara) – www.billionm.gov.my
Department of Statistics Malaysia – www.statistics.gov.my
Economic Planning Unit (EPU) – www.epu.gov.my
Malaysia Australia Business Council – www.mabc.org.my
Malaysian External Trade Development Corporation (MATRADE) – www.matrade.gov.my
Malaysian Government Official Portal – www.malaysia.gov.my
Malaysian Investment Development Authority (MIDA) – www.mida.gov.my
Ministry of Foreign Affairs – www.kln.gov.my
Ministry of Trade and Industry (MITI) – www.miti.gov.my
OECD – www.oecd.org/countries/malaysia/
Royal Malaysian Customs Department – www.customs.gov.my

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