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Strategic Advisors in Global EnergyStrategic Advisors in Global EnergyStrategic Advisors in Global Energy
Regional Economic and Energy Outlook: Perspectives on Malaysia
Ben CahillSenior Manager, Markets and Country Strategies Group
12 July 2011
3rd Energy Forum | PFC Energy | Page 2
Overview: Malaysia’s Energy Challenges
Challenges: – Shallow-water production declines– Small size of recent discoveries– Difficult reserves– Growing gas demand—and subsidy burden
Proposed Solutions:– Upstream incentives for marginal field development– Increased investment by PETRONAS, especially downstream– Increase in gas prices to tackle the subsidy burden– Proposed reduction in PETRONAS dividends to the state
Will these reforms be sufficient to position Malaysia for the years ahead?
3rd Energy Forum | PFC Energy | Page 3
Emerging Markets, Especially in Asia, Still Driving Oil Demand Growth
World oil demand growth is projected to rise by close to +1.4 mmb/d in 2011, and to slow in 2012 to +1.2 mmb/d.
– OECD economies, especially Japan, are expected to return to demand contraction in 2012.
– Poor economic performance in the advanced economies will hinder global growth, limiting EM growth.
Demand in 2013 will end some 5.0 mmb/d above the pre-recession high, absorbing the bulk of the upstream capacity brought on line since 2008.Emerging Asia (with China as its core) and the Middle East are likely to remain the world’s main growth centers for oil demand in the next two years.
OECD51%
China11%
Emerging Asia11%
Middle East9%
FSU and Eastern Europe
6%
Latin America8%
Africa4%
Global Oil Demand in 2012(Total = 88.6 mmb/d)
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
4,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
mb/d
Global Demand Growth
OECD Non-OECD Total
Source: PFC Energy, Market Intelligence Service
3rd Energy Forum | PFC Energy | Page 4
Slower Growth in Asia Emerging Asia’s oil demand growth in the next few years will be weighed by higher oil prices, sluggish advanced economy growth and a maturing Chinese economy.
In the longer term, growth will slow, in particular in Southeast Asia (except for Indonesia), where countries are trying to substitute away from oil by using more natural gas and biofuels.
China will also see slower (albeit still very strong) growth, as GDP growth will probably moderate to around 9% in 2012-2013, in tandem with Beijing’s plans to shift the economy to qualitative domestic demand-fueled growth and cool off fixed asset investment.
0
200
400
600
800
1,000
1,200
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
Non-OECD Asia Demand Growth(year-on-year)
China India Indonesia Other Asiamb/d
PFC Energy expects non-OECD Asia’s oil demand to grow by 660 mb/d and 800 mb/d in 2012 and 2013 respectively.
India’s demand growth will buck the regional trend and accelerate in the next two years, likely averaging 150 mb/d and 190 mb/d in 2012 and 2013 vis-à-vis the 140 mb/d expected for 2011.
Source: PFC Energy, Market Intelligence Service
3rd Energy Forum | PFC Energy | Page 5
Malaysian Production Outlook: Shallow Water in Decline, Deepwater Growth Expected
Deepwater production is likely to grow markedly over the decade, and necessary to counterbalance shallow water decline
Deep
Malaysian Oil & Gas Reserves19.5 Billion BOE
Source: PFC Energy
3rd Energy Forum | PFC Energy | Page 6
Growing Importance of Deepwater
Deepwater production has only recently begun in Malaysia—but it will play a key role in future growth.
3rd Energy Forum | PFC Energy | Page 7
Recent Discoveries Are Smaller in Size
Oil Field Size Distribution (mmbo)
Gas Field Size Distribution (bcf)
Discoveries of oil and gas in the past decade have been significantly smaller.
3rd Energy Forum | PFC Energy | Page 8
Distribution of High CO2 Gas Fields by Country
5 Dev.3 Undev.
4 Dev.1 Undev.
1 Dev.4 Undev.
6 Dev.4 Undev.
1 Dev.2 Undev.
0 Dev.1 Undev.
1 Dev.1 Undev.
1 Dev.0 Undev.
Natuna D Alpha
3rd Energy Forum | PFC Energy | Page 9
MLNG Accounts for 10% of Global LNG Supply
Malaysia is a major world exporter of LNG
But 60% of existing MLNG contracts expire between 2015 and 2019
New sources of gas will be needed to extend these contracts
Source: PFC Energy
3rd Energy Forum | PFC Energy | Page 10
Shallow Water Fields Feeding MLNG Likely to Decline After 2015
MLNG Satu & Dua Fields
MLNG Complex
Kebabangan Gas Project
KinabaluGas Project
Kumang ClusterProject (Phase 1)
MLNG Dua Fields
MLNG Dua Fields
Sabah
Sarawak
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2000 2002 2004 2006 2008 2010 2012 2014 2016
bcf/d Sabah and Sarawak ProductionForecast
3rd Energy Forum | PFC Energy | Page 11
Deepwater Sabah is Key for Future Production
New deepwater developments Shell Kakap Gumusut, Shell Malikaiand KPOC Kebabangan Cluster will boost production post 2012
O p e n B l o c k s
PETRONAS
Open BlocksNewfield
PETRONAS
PETRONAS
Shell
BHP Billiton
BHP Billiton
Murphy
Murphy
Murphy
Shell
Jangas
Pisagan
Kakap-GumusutLimbayong
Kikeh
Kerisi
Senangin
SiakapKikeh Kecil
Open Block
Kebabangan
Kamansu EastKamansu EastUpthrown
Kamansu EastUpthrown Canyon
Malikai Kinarut
Sabah
Sarawak
3rd Energy Forum | PFC Energy | Page 12
Malaysian Deepwater Discoveries Have Continued
PausMalaysia (Newfield)
~ 2,500 ft WD
JangkrikIndonesia (Eni)
1,312 ft WD
Siakap NorthMalaysia (Murphy)
4,386 ft WD
Babendil-1Philippines (XOM)
4,409 ft WD
DolfinMalaysia (Murphy)
2,588 ft WD
Palendag-1Philippines (XOM)
6,362 ft WD
GeronggongBrunei (Shell)
2,923 ft WD
Dabakan-1Philippines (XOM)
5,905 ft WD
Most deepwater exploration has been in Sabah-Baram Delta
Resolution of Malaysia-Brunei disputed area opens way for Brunei deepwater
Southeast Asia Announced Discoveries 2009 Onwards(not all will be commercial)
3rd Energy Forum | PFC Energy | Page 13
Offshore Drilling is Expected to Grow
Shallow water drilling to remain relatively steady, then slow decline
Deepwater drilling to increase throughout the decade
Deep
Source: PFC Energy
3rd Energy Forum | PFC Energy | Page 14
The "Malaysian Petroleum Resources Center" Would Foster Local Content and Attract Investment
New government Malaysian Petroleum Resources Center (formerly OFSU) is being set up to create a more competitive service sector.
MPRC will– Restructure industry to
improve competitiveness– Attract foreign
businesses to partner– Promote Malaysian
companies
Proposed as both a Policy Maker and Regulator
EnergySector Structure
PolicyPM’s Office, Economic Planning Unit
Ministry of Energy, Green Technology and Water
PETRONAS & PM
MPRC (proposed)
OperatorRegulatorPETRONAS Petroleum Management Unit (Upstream)
Ministry of Trade and Industry (Downstream)
Ministry of Domestic Trade and Consumer Affairs
MPRC (proposed)
Source: PFC Energy
3rd Energy Forum | PFC Energy | Page 15
Active and Expanding Local Service SectorMISC : MSE and MMHE
– Engineering and Fabrication– FPSO/FSO construction– Marine conversions
Kencana Petroleum– Engineering, fabrication,
installation services– Drilling services– Marine vessel conversions
SapuraCrest Petroleum– Installation of pipelines & facilities– Support vessels and services– Tender drilling rigs
Sime Darby– Engineering– Construction
Kikeh FPSO
Sapura 3000Newfield W. Belumut
Pasir Gudang
3rd Energy Forum | PFC Energy | Page 16
PETRONAS: Large Capex IncreasesPETRONAS recently announced a massive increase in capex for the next five years, reaching RM300 bn (~US$100 bn) over the period. This is double what it spent in the last five years, and more than double what it spent the five years prior to that.
The increase in capex is needed given the large number of capital-intensive projects to which PETRONAS is committed. The composition will also likely look different from previous years, with a greater capexshare directed to downstream, including PETRONAS’s commitment to the RAPID project.
In the domestic upstream, PETRONAS will look to increase spending on exploration, EOR for mature fields, as well as deepwater projects.
3rd Energy Forum | PFC Energy | Page 17
Gas Subsidies: Tackling a Growing BurdenRising gas subsidies, borne by PETRONAS, have been a challenge for some time. The recent announcement of a subsidy reduction reflects gas supply challenges.
Gas prices will rise by 28% for the power sector and 7% for the industrial sector, and continue to increase by RM3 every six months until market prices are reached (by 2015).
This increase in gas prices will improve the economics of PETRONAS’s domestic E&P developments serving Peninsular Malaysia, as well as the two regasification projects under consideration in Melaka and Pengerang, Johor (as part of the RAPID project).
Without the price changes, the commercial case for increased supply to the domestic market is weak, incentivizing PETRONAS to focus on higher value export markets.
3rd Energy Forum | PFC Energy | Page 18
PETRONAS: Change to Dividend System to Free Up Cash for Investment
PETRONAS is a key contributor to government revenues in the form of taxes, royalties and dividends, which together account for more than 40% of government revenues.
Dividends account for about half the total payout to the government. Since FY2008, PETRONAS has paid a fixed RM30 bn ($10 bn) of dividends annually to the state, even when profits fell sharply in FY2010. The proposed change, which appears to have state approval, will peg dividend payout at 30% of net income.
This will further improve PETRONAS’s financial position and give it flexibility to grow its capex as announced.
If PETRONAS is able to translate the increased retained earnings into growth in domestic investments, the change will be beneficial for the overall economy.
3rd Energy Forum | PFC Energy | Page 19
Key Conclusions
Progress toward addressing upstream challenges:– Increased capex– Focus on challenging reserves and play types– New incentives
But other challenges remain:– Gas pricing – lack of incentives for deepwater gas– Small contribution of marginal field developments
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