Analysis: Positive as Petros takes the helm for Sarawak's gas (2024)

ByRonnie Teoon Business

Analysis: Positive as Petros takes the helm for Sarawak's gas (1)

The agreement enables Petros to conclude GPAs with all upstream producers involved in the production of natural gas in Sarawak and GSAs with all downstream buyers, foreign or domestic.

KUCHING (July 9): Analysts are upbeat on Sarawak gaining greater control of natural gas resources following an announcement on 13 May this year by the Sarawak Ministry of Utility and Telecommunication (MUT) that Petroliam Nasional Bhd (Petronas) and Petroleum Sarawak Bhd (Petros) have agreed to enter into a definitive agreement.

This formalises Petros’ take-over as the sole gas aggregator in Sarawak in line with the enactment of the state’s Distribution of Gas (Amendment) Bill 2023.

The agreement enables Petros to conclude gas purchase agreements (GPAs) with all upstream producers involved in the production of natural gas in Sarawak and gas sales agreements (GSAs) with all downstream buyers, foreign or domestic.

Consequently, Petronas will cease all buying and selling activities of the product in the state and hand over its natural gas distribution network and system to Petros.

“The role effectively empowers Petros with control over the supply and flow of natural gas produced within Sarawak, and the corresponding tariff charged to customers,” commented analysts at AmInvestment Bank Bhd (AmInvestment Bank) in an analysis today.

“Currently, only 6.7 per cent of the natural gas supply fed to the Petronas LNG Complex, Bintulu is used for domestic consumption – a significant gap from the state’s 30 per cent target.

To recap, the state government has established a 10-year Sarawak gas roadmap (SGR), which aims to use natural gas to fuel development through a hub-and-spoke model to four centres – Kuching, Bintulu, Samalaju and Miri – that are involved in power, heavy and light industrial sectors and petrochemicals.

AmInvestment Bank expect to see massive requirements for natural gas for Sarawak’s domestic consumption in the medium term.

“To illustrate, Petronas and Petros previously entered a memorandum of understanding (MOU) in 2021 to gradually increase the supply of natural gas to Sarawak for implementation of the SGR from 450 million standard cubic feet per day (MMscfd) to 1,200 MMscfd by 2030, a whopping 2.7 times increase.

“We observe the Sarawak government already making inroads with announcements of proposed combined cycle gas turbine (CCGT) power stations in Miri by Petros and Bintulu by Sarawak Energy and the announcement by Petronas Chemicals Group Bhd to conduct a joint feasibility study with Sarawak Petchem to develop a low-carbon ammonia and urea plant in Bintulu.

“To secure a competitive edge as an industrial hub, we see Sarawak holding true to its core advantage in cost competitiveness.

“As Sarawak accounts for more than 50 per cent of Malaysia and 10 per cent of Asia Pacific natural gas reserves, Petros may be able to supply gas to internal consumers at a cheap rate, in our view.

“This is broadly in tandem with its other cost offerings: electricity tariffs at US$0.05 per kilowatt hour (kWH) or 40 per cent less than in Peninsular Malaysia and water tariffs of US$0.22 to US$0.30 per 1,000 litre, the lowest in all states in Malaysia.”

On the other hand, AmInvestment Bank sees this move as a negative on Petronas’ upstream earnings if the lower price is shared with upstream operators in any way mixed with a flattish outlook on global liquefied national gas (LNG) demand, particularly from major Asia Pacific LNG customers in Japan, South Korea and Taiwan due to increasing use of nuclear and renewables in its energy mix.

Recall that Petronas reported a 1QFY24 decline of 12 per cent year on year (y-o-y) to RM19.2 billion, after accounting for net impairment and write-backs, attributable to broad-based weakness led by the gas segment by minus 28 per cent y-o-y after experiencing lower average realised prices of LNG.

For reference, the upstream segment accounted for 53 per cent of the Petronas’ profit after tax (PAT) and 68 per cent of its 2.6 million barrel of oil equivalent production per day (boepd).

“In a worst-case scenario, we are wary that this may lead to a revision in the group’s capex commitment moving forward,” the research house said.

“Petronas had previously communicated a RM300 billion capex guidance in the next five years, which translates to an annual capex of RM60 billion annually.

“We turn more cognisant over the recent shortfalls in expectations with 1QFY24 capex of RM10.7 billion which came in at only 18 per cent of full-year expectation.

“Notably, the capex spent is mainly towards the upstream segment’s ongoing investments in Argentina, Brazil and Iraq. Notably, Petronas spent RM5.5 billion domestically, which translates to an increase of 20 per cent y-o-y against the overall capex growth of two per cent y-o-y.

“The domestic capex was primarily on the near shore floating LNG facilities in Sabah, and the Kasawari carbon dioxide sequestration facilities in Sarawak.”

Analysis: Positive as Petros takes the helm for Sarawak's gas (2024)
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