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An Analysis Of The Energy Sector In Malaysia
Malaysia Perspective | 09 February 2012

By Joshua Lim

In my article titled, A Case of Sharing the “Burden” published in Issue 55 (January 2012 issue) of Shares Investment, I highlighted Tenaga Nasional’s (TNB) (SYM: 5347) FY-2011 profit reduction and the justification behind it. It was reported that TNB’s net profits plunged to RM499.5 million in FY-2011 from RM3.2 billion in FY-2010, largely due to higher fuel costs.

I also wrote about the gas shortage scenario and what Petronas (SYM: 5681) was doing to resolve this matter. In this issue, I will highlight more on Petronas’ point of view as well as that of Petronas Gas (P Gas) (SYM: 6033), to get a more holistic view on the matter. However to analyse the matter with more clarity, we need to first understand how the situation became so dire in Malaysia, a country which is a net gas producer and exporter.

A Brief History

The core of the gas shortage and pricing problems can be traced back to the heavily subsidised gas supply by Petronas over the last few decades to support the gas needs of the country, as well as the sustainability of the Independent Power Producers (IPPs) ability to compete effectively. Therefore Petronas and P Gas are not the cause of the current shortage. Cheap prices and increased demand eventually led to reduced supplies.

Those who read my article from the previous issue would probably remember what the President and CEO of Petronas, Datuk Shamsul Azhar Abbas had said about this issue. For those who did not have an opportunity to read it, let me explain it once again. In his statement, Datuk Shamsul believed that TNB should find cheaper alternatives to generate power, besides gas. He is also of the opinion that the current subsidised gas situation has created massive distortions in the country. As a result of this, he believes that TNB has been encouraged to be inefficient with Petronas forced to fund the inefficiencies of TNB. However, he insists that Petronas would not be doing community service for TNB in future.

His statement is not just a representation of Petronas’ assistance to TNB alone. The same applies to TNB’s agreements with the Independent Power Producers (IPPs) as well. For years, companies such as YTL Power (SYM: 6742), Malakoff Corp and Tanjong Power have benefited from “cheap” power purchase agreements (PPAs) signed more than 20 years ago and not changed to reflect the times and current pricing of gas. TNB recently indicated that it was not in favour of extending these lopsided PPAs, although most analysts expect the IPPs’ contracts to be renewed, albeit at less lucrative rates.

However as the Sun Daily reported recently, gas in Malaysia is sold at a subsidised price of RM13.70 per mmbtu, or million metric British thermal units. This is way below the market price of RM55 per mmbtu. Malaysia’s ultra-low gas price has resulted in Petronas forking out some RM136 billion in subsidies to TNB, the IPPs and the industrial sector since 1997. Petronas’ subsidy bill for gas amounted to a whopping RM20 billion in 2011 alone.

The Ball Is On P Gas’ Court Now

As demand increased, Petronas reached a situation where it could not meet the needs of some of its primary customers. The shortage of local supply of gas meant that TNB had to import more expensive gas from aboard. This severely affected TNB’s bottom line and led to the hike in TNB’s rate to consumers last year.
The gas shortage problems is likely to continue play out right into 2012 as Petronas’ Gas’ regasification (regas) terminal in Malacca will only begin operations in August. In a regas terminal, liquefied natural gas is returned to its initial gaseous state before being fed into the transmission and distribution networks.

Therefore P Gas is best positioned to take advantage of the gas shortage in Malaysia, moving forward. In August 2011, Petronas announced that the group and its partners planned to invest RM15 billion to find new gas supplies to meet rising demand in Peninsular Malaysia. The project comprises nine discovered gas fields located in Blocks PM301 and PM302, and in the Bergading contract area about 300km off the coast of Peninsular Malaysia.

Petronas and its production sharing contract partners will undertake the project on an accelerated basis, with first delivery of 100 mmscfd expected by early 2013, and ramping up to 250 mmscfd by 2015. Not only will the new gas boost P Gas’ PGU pipeline volume, the project will also involve the development of a new 200km pipeline to transport gas from the fields to Kerteh, Terengganu. The gas will land at P Gas’ onshore gas terminal in Kerteh before being piped to its gas processing plants and onward into the PGU pipeline network for distribution to customers, comprising of the power and non-power sectors.

Petronas will be investing in the second regas plant at Pengerang in Johor, to be completed by 2015. It will comprise a crude oil refinery, a naphtha cracker and a petrochemicals and polymer complex that will produce differentiated and highly-specialised chemicals. The regas plant will provide the much needed gas supply to these facilities. P Gas is the front- runner for this regas plant given its involvement in the Melaka plant, and because the Pengerang plant would have to be connected to the main PGU pipeline network. It is expected that the second regas plant will enjoy at least 10% IRR with no fuel risk and stable return mainly from reservation charges.

Meanwhile, Petronas is reportedly considering building a third regas plant in Lumut, Perak, to address the supply shortage faced by the power sector and industry users in Peninsular Malaysia. The project is still in the planning stage. Petronas sees the need for another LNG terminal due to the increasing demand for gas in Peninsular Malaysia. The new regas plants and continued gas-related Capex by Petronas will be the key re-rating catalysts for P Gas.

Therefore in the medium to long-term, P Gas in particular and Petronas in general seem to be the beneficiary of the current problems facing the energy sector. In the meantime, TNB is likely to continue to be pressured to raise its tariffs once again in 2012. While the IPP’s were not affected by the last hike, the situation might change when TNB decides to raise its tariffs this time around. TNB knows it has to come up with a policy that will not burden the consumers especially in an election year, as any hikes in basic utilities will have severe repercussions on the consumer and business sectors. It therefore will not surprise analysts if the IPP’s are finally made to pay closer to market rates for their energy needs, rather than the current subsidised rates they are enjoying from TNB.

Temporarily though, TNB has managed a breather as it recently announced its 1Q-2012 unit sales growth of 3.7% Y-O-Y, supported by demand growth from both the industrial (growth of 4.4%) and commercial (growth of 3.9%) segments with improvement from steel and cement plants, and recovery in demand from petrochemical plants. Its 1Q-2012 revenue came in much stronger at 12.5% after the 7% average tariff hike effective 1 June 2011. TNB’s 1Q-2012 core net profit, after excluding forex losses of RM419.1 million, amounted to RM194.4 million. For Petronas and P Gas, it would seem an excellent time to enforce its market force regime on its customers, now more than ever.

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