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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The New Wave of Renewable Fuels

In 2021, the makeup of renewables has also changed drastically. Technologies such as solar and wind are no longer novel, as is the idea of blending vegetable oils into road fuels or switching to electric-based vehicles. Such ideas are now entrenched and are not considered enough to shift the world into a carbon neutral future. The new wave of renewables focus on converting by-products from other carbon-intensive industries into usable fuels. Research into such technologies has been pioneered in universities and start-ups over the past two decades, but the impetus of global climate goals is now seeing an incredible amount of money being poured into them as oil & gas giants seek to rebalance their portfolios away from pure hydrocarbons with a goal of balancing their total carbon emissions in aggregate to zero.

Traditionally, the European players have led this drive. Which is unsurprising, since the EU has been the most driven in this acceleration. But even the US giants are following suit. In the past year, Chevron has poured an incredible amount of cash and effort in pioneering renewables. Its motives might be less than altruistic, shareholders across America have been particularly vocal about driving this transformation but the net results will be positive for all.

Chevron’s recent efforts have focused on biomethane, through a partnership with global waste solutions company Brightmark. The joint venture Brightmark RNG Holdings operations focused on convert cow manure to renewable natural gas, which are then converted into fuel for long-haul trucks, the very kind that criss-cross the vast highways of the US delivering goods from coast to coast. Launched in October 2020, the joint venture was extended and expanded in August, now encompassing 38 biomethane plants in seven US states, with first production set to begin later in 2021. The targeting of livestock waste is particularly crucial: methane emissions from farms is the second-largest contributor to climate change emissions globally. The technology to capture methane from manure (as well as landfills and other waste sites) has existed for years, but has only recently been commercialised to convert methane emissions from decomposition to useful products.

This is an arena that another supermajor – BP – has also made a recent significant investment in. BP signed a 15-year agreement with CleanBay Renewables to purchase the latter’s renewable natural gas (RNG) to be mixed and sold into select US state markets. Beginning with California, which has one of the strictest fuel standards in the US and provides incentives under the Low Carbon Fuel Standard to reduce carbon intensity – CleanBay’s RNG is derived not from cows, but from poultry. Chicken manure, feathers and bedding are all converted into RNG using anaerobic digesters, providing a carbon intensity that is said to be 95% less than the lifecycle greenhouse gas emissions of pure fossil fuels and non-conversion of poultry waste matter. BP also has an agreement with Gevo Inc in Iowa to purchase RNG produced from cow manure, also for sale in California.

But road fuels aren’t the only avenue for large-scale embracing of renewables. It could take to the air, literally. After all, the global commercial airline fleet currently stands at over 25,000 aircraft and is expected to grow to over 35,000 by 2030. All those planes will burn a lot of fuel. With the airline industry embracing the idea of AAF (or Alternative Aviation Fuels), developments into renewable jet fuels have been striking, from traditional bio-sources such as palm or soybean oil to advanced organic matter conversion from agricultural waste and manure. Chevron, again, has signed a landmark deal to advance the commercialisation. Together with Delta Airlines and Google, Chevron will be producing a batch of sustainable aviation fuel at its El Segundo refinery in California. Delta will then use the fuel, with Google providing a cloud-based framework to analyse the data. That data will then allow for a transparent analysis into carbon emissions from the use of sustainable aviation fuel, as benchmark for others to follow. The analysis should be able to confirm whether or not the International Air Transport Association (IATA)’s estimates that renewable jet fuel can reduce lifecycle carbon intensity by up to 80%. And to strengthen the measure, Delta has pledged to replace 10% of its jet fuel with sustainable aviation fuel by 2030.

In a parallel, but no less pioneering lane, France’s TotalEnergies has announced that it is developing a 100% renewable fuel for use in motorsports, using bioethanol sourced from residues produced by the French wine industry (among others) at its Feyzin refinery in Lyon. This, it believes, will reduce the racing sports’ carbon emissions by an immediate 65%. The fuel, named Excellium Racing 100, is set to debut at the next season of the FIA World Endurance Championship, which includes the iconic 24 Hours of Le Mans 2022 race.

But Chevron isn’t done yet. It is also falling back on the long-standing use of vegetable oils blended into US transport fuels by signing a wide-ranging agreement with commodity giant Bunge. Called a ‘farmer-to-fuelling station’ solution, Bunge’s soybean processing facilities in Louisiana and Illinois will be the source of meal and oil that will be converted by Chevron into diesel and jet fuel. With an investment of US$600 million, Chevron will assist Bunge in doubling the combined capacity of both plants by 2024, in line with anticipated increases in the US biofuels blending mandates.

Even ExxonMobil, one of the most reticent of the supermajors to embrace renewables wholesale, is getting in on the action. Its Imperial Oil subsidiary in Canada has announced plans to commercialise renewable diesel at a new facility near Edmonton using plant-based feedstock and hydrogen. The venture does only target the Canadian market – where political will to drive renewable adoption is far higher than in the US – but similar moves have already been adopted by other refiners for the US market, including major investments by Phillips 66 and Valero.

Ultimately, these recent moves are driven out of necessity. This is the way the industry is moving and anyone stubborn enough to ignore it will be left behind. Combined with other major investments driven by European supermajors over the past five years, this wider and wider adoption of renewable can only be better for the planet and, eventually, individual bottom lines. The renewables ball is rolling fast and is only gaining momentum.

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Market Outlook:

  • Crude price trading range: Brent – US$71-73/b, WTI – US$68-70/b
  • Global crude benchmarks have stayed steady, even as OPEC+ sticks to its plans to ease supply quotas against the uncertainty of rising Covid-19 cases worldwide
  • However, the success of vaccination drives has kindled hope that the effect of lockdowns – if any – will be mild, with pockets of demand resurgence in Europe; in China, where there has been a zero-tolerance drive to stamp out Covid outbreaks, fuel consumption is strengthening again, possibly tightening fuel balances in Q4
  • Meanwhile, much of the US Gulf of Mexico crude production remains hampered by the effects of Hurricane Ida, providing a counter-balance on the supply side

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