Easwaran Kanason

Co - founder of NrgEdge
Last Updated: March 28, 2021
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Business Trends

Malaysia is, literally, a country of two halves. In the west, there is Peninsular Malaysia, where most of the population lives and the heart of economic activity. Across a huge stretch of the South China Sea is East Malaysia, the resource-rich states of Sabah and Sarawak. This divide has coloured much of the economic development of Malaysia, since its formation in 1963 to the present day. And the clearest depiction of this is in the energy industry.

This is particularly crucial for natural gas. The huge distance between the two halves (which also run through the world’s busiest shipping lanes) means that natural gas produced in Sabah and Sarawak cannot be viably piped westward. Instead, it has to be transported as LNG. And because a lot of the LNG produced in East Malaysia is already tied up in long-term sales-and-purchase agreements with East Asian clients, there isn’t simply enough domestic production to satisfy consumption. Leading to the slightly odd situation where Malaysia is simultaneously a major exporter of LNG, as well as an increasing importer of the supercooled fuel.

This is something that Petronas, as the state oil firm that (until recently) held a monopoly over national gas supplies, can manage. Having invested in a portfolio of national and international gas resources, Petronas has distribute supplies as efficiently as it can. On the export side, there is the LNG Complex in Bintulu, Sarawak, with nine trains and total capacity for 29.3 million tons per annum. Two floating liquefaction plants (PFLNG Satu and PFLNG Dua) added to export capacity in 2017 and 2020. On the other side of the sea, the first LNG import terminal started up in Malacca in 2013, joined by a second terminal in Pengerang, Johor in 2017. These terminals were necessary, since piped natural gas supply from East Coast fields (as well as imports from Indonesia’s Natuna Block B, the Malaysia-Thailand JDA and the Malaysia-Vietnam PM3 CAA) were dwindling. The Malacca and Johor terminals take some LNG from Sarawak, but were mainly supplied by Australia and Brunei.

The situation will continue to persist. Within the first quarter of 2021 alone, two major natural gas discoveries were made in East Malaysia – PTTEP’s Lang Lebah-2 and Petronas’ Dokong-1, both in Sarawak. The PTTEP find itself is the largest the Thai company has ever found, confirming that vast unexplored flows are still to be found in East Malaysia – a discovery that Petronas is trying to accelerate by offering up 13 offshore blocks in its 2021 licensing round.

But all the new gas may not be able to make it to Peninsular Malaysia, since the subsidised nature of domestic gas prices and rocketing demand across Asia-Pacific makes it tempting to turn to lucrative exports. This has had led to an increasing reliance on coal as a power generation tool for Malaysian industries and households, which would negate Malaysia’s own pledges to reduce carbon emissions by at least 35% by 2030. So the question for Petronas – and Malaysia itself – is: should new gas been used to fulfil the nation’s own demand and its pledged move to cleaner fuels, or should it chase international profits in an arena where competition from the UAE, Australia and especially the USA is heating up tremendously?

Meanwhile, the domestic market is opening up. In January 2021, domestic player Petrolife Aero was cleared to begin importing LNG cargoes into Peninsular Malaysia. The two-year contract is the first time a third-party will gain access to the country’s LNG import and gas transmission networks under the amended Gas Supply Act 2016. Petrolife has been granted six LNG import slots per year into Petronas’ 3.8 million tpa Sungai Udang regasification terminal in Malacca, and has already locked in several contracts from existing gas consumers, liberalising the market by offering discounts on the regulated gas prices. But Petronas won’t be completely shut out; it still has full control over the 2,623km pipeline network that delivers regasified LNG across Peninsular Malaysia, earning a toll fee in the process.

As this development of two halves continues, rising supplies in East Malaysia that cannot fully satisfy rising demand in Peninsular Malaysia – one thing is clear. At some point, Malaysia will no longer be a net exporter of LNG. It has already fallen from the world’s second largest LNG exporter to the fifth (though largely because it has been overtaken by other larger countries). This is inevitable, given growing consumption and the inevitable decline of current fields that cannot be fully offset by new discoveries. How soon that switch comes will depend on how Petronas and the Malaysian government choose to direct the industry.

Market Outlook:

  • Crude price trading range: Brent – US$63-65/b, WTI – US$60-62/b
  • A resurgence of Covid-19 infections across Europe that are prompting renewed lockdowns knocked crude prices from their recent peak, with the IEA forecasting that fuels consumption will not return to pre-pandemic levels until 2023 and growth will remain subdued after
  • Against that backdrop is chatter regarding OPEC+’s next move in its supply agreement, which is due early April and could trigger another recalibration in global crude prices
  • Propping up the market, however, is the supply risk factor, with Yemeni rebels making a third attack on Saudi oil infrastructure in a month; the Saudi navy has now begun naval exercises in its portion of the Persian Gulf to foil future terrorist attacks on its vital installations and fields that is key to the Kingdom’s ability to act as swing producer

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April, 19 2021
Grass pellet machine is good for environmental protection

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April, 16 2021
Enter The Hydrogen Era

And then, there was hydrogen. Soon after the universe was formed through the Big Bang, the vast expanse of heat that sent time and space hurtling in infinite directions started to cool down. When this happened, the first nuclei began capturing electrons, forming the first two elements: hydrogen and helium. The lightest of all the gases, hydrogen is the first element in the periodic table – with only one proton and one electron – and the most abundant element in the universe. High school textbook facts aside, hydrogen is now a word buzzing with charisma in the energy industry as it could be the answer to decarbonising the world’s industries and spearheading a renewable future.

A quick primer on hydrogen. Current global demand stands at about 75 million metric tonnes, more than three times higher than equivalent consumption in 1975. About 40 million tonnes, or 53%, of this hydrogen is used in oil and natural gas refining – in processes such as hydrocracking or hydrotreating – while most of the remainder is used in the fertiliser industry to produce ammonia. Only a scant amount – 0.5% - is used in other applications.

But it isn’t about where hydrogen has been, but where it could go that has the world – energy and otherwise – excited. Over the past decade, many leading nation have started policies researching and supporting investment in hydrogen technologies, with at least 50 targets, mandates and policy incentives in place, and more arriving. There is a North-South divide in this, since hydrogen technology is being pursued by the likes of the European Union and Japan in their quest for a low or net-zero carbon future, while hydrogen is not mentioned at all in the most recent energy plans of countries such as Indonesia, Thailand, Pakistan or Nigeria. But the potential for hydrogen are a low-carbon replacement for heavy-carbon sources such as coal and fossil fuels is vast. In industry, where most of today’s hydrogen is used, hydrogen could increasingly be used in methanol and steel production, replacing the pollutant-heavy coal that coal, for example, plays in steel-making. In transport, hydrogen fuel cells are the future of road transportation, with alternatives also being developed for aviation and shipping. Hydrogen could also be blended in with existing natural gas networks without any major change in infrastructure for heating and cooling, while hydrogen-linked battery technologies are also the leading options for storing renewable energy from sources such as solar and wind farms. It could also be directly burnt in gas turbines as power generation; or more accurately, hydrogen-based ammonia could plan that role. With all these options in place – and the government backing to make it happen – it is not inconceivable that hydrogen demand could triple again over the next 30 years to over 200 million tonnes by 2050.

The problem is supply. Hydrogen is almost entirely supplied through fossil fuels, with an estimated 6% of global natural gas and 2% of coal dedicated solely to hydrogen production. So while hydrogen can be the replacement for carbon-intensive industries and fuels, the production of it is already carbon-heavy, with hydrogen production releasing some 830 million tonnes of carbon dioxide annually, more than the UK and Indonesia combined. Renewable hydrogen production is possible – mainly through water electrolysis – but infrastructure is scant because costs can be three times higher. This is why it is much cheaper to produce hydrogen in regions like the Middle East, Russia and North America - because natural gas is the largest component of production cost at between 45-75% - while the likes of Japan, China, India and South Korea have to import expensive natural gas to make even more expensive hydrogen.

Which is why the world is now no longer just talking about hydrogen, but an entire rainbow of hydrogen colours. There is brown hydrogen – directly extracted from coal using gasification. Then there is white hydrogen that is a by-product of industrial processes or black/grey hydrogen that is produced from natural gas using steam-methane reforming. Yellow hydrogen is produced through solar grid electricity via electrolysis while pink/red/purple hydrogen is a carbon-free option created through nuclear power that is politically-unfriendly. But the colours that are getting everyone the most excited are in the green-blue spectrum: turquoise hydrogen produced through the thermal splitting of methane that leaves solid carbon rather than carbon dioxide as a by-product; green hydrogen formed through water electrolysis with zero carbon emissions; and then blue hydrogen that is conventional black/grey or brown hydrogen but with all carbon dioxide emitted sequestered through Carbon Capture and Storage (CCS) technology.

The ideal solution is green hydrogen, but costs and infrastructure may prevent this from ever being the only solution. The same caveat applies to turquoise hydrogen. Like it or not, blue hydrogen – which the probably the cheapest of the low/zero-carbon solutions but has opposition from certain quarters – will still play a major role in satisfying future hydrogen demand, which in itself should start a virtuous loop of reducing carbon emissions in industries where hydrogen as a fuel can take hold. The world’s leading energy supermajors and majors are already preparing for this. BP has announced plans to build the largest blue hydrogen production facility in the UK by 2030, while the US climate envoy for the Biden administration John Kerry is calling on the US oil and gas industry to embrace ‘huge opportunities’ in hydrogen. Shell has invested in a tech start-up developing a hydrogen-based zero-emissions aviation engine, while even state oil firms are making moves: Malaysia’s Petronas is expanding its investment into green and blue hydrogen along with advanced CCS projects, while the ever-vigilant Equinor is already part of the EU’s largest green hydrogen project that expects to have 10 GW of capacity by 2040 using renewable offshore wind farms. Crude oil giant Saudi Arabia has plans to become the world’s largest hydrogen exporter through a combination of blue hydrogen from its natural gas reserves and green/yellow hydrogen from solar power plants being built at the city of Neom along the Red Sea by 2025. And Hyundai Oilbank has a unique solution as well: it has signed up to import LPG from Saudi Aramco and convert that into blue hydrogen onsite at its Daesan refinery complex in South Korea’s Seosan province, which could be a model that proves that clean hydrogen does not necessarily have to be produced where the source fuel originates to make the best commercial sense.

If the buzzword for the 2000s and 2010s in the energy industry were LNG and shale, respectively, then the buzzword for the 2020s is likely to be hydrogen. Too many moves are being made by governments and too many investments approved by industry titans for this to be ignored. After all, a net-zero world will benefit everyone. And it seems that the first ever element to be create in this universe is the key to creating that future.

Market Outlook:

  • Crude price trading range: Brent – US$63-65/b, WTI – US$60-62/b
  • Global crude oil benchmarks edged up on a cocktail of opposing-factors, including fears of supply disruptions as Yemeni Houthi militants launched a fifth recent attack on Saudi Arabian oil infrastructure in Jubail and renewed fear of demand weakness as Covid infections rises alarmingly in certain regions, especially Europe, Brazil and India
  • The likelihood of prices returning to the US$70/b level is also unlikely, given that OPEC+ has signalled that it will begin easing supply quotas from May onwards – a decision supported by kingpin Saudi Arabia – but could be timely given recent fuels demand recovery in the US, UK, China and India, the latter having posted its stronger oil consumption figures in 15 months
April, 15 2021