In the swirling currents and featureless expanses of the ocean, it is difficult to establish boundaries. Which is why maritime border disputes are particularly common, especially if those waters contain or are thought to contain rich hydrocarbon deposits.

Malaysia is no stranger to such a situation. With the country’s maritime borders crossing over with at least seven other countries, it has been involved with plenty of marine disputes – the Pedra Branca dispute with Singapore, the squabble over the Sipadan islands with The Philippines and, of course, the most incendiary of them all, China’s infamous nine-dashed line that claims huge portions of waters owned and administered by Malaysia. Some of these disputes have led to arbitration but most have led to bilateral agreements, which is particularly common when underwater hydrocarbons are involved. The natural world does not understand the human concept of borders, so an oil field or a gas basin could see its geological formation stretch across multiple borders. If so, who then owns the oil or gas? Who is allowed to exploit it? Which is where bilateral ties come in, the basis of which are Malaysia’s two existing joint development areas – the Malaysia-Thailand JDA and the Malaysia-Vietnam CAA.

Over in East Malaysia, a third joint development area has been in plans since 2009, involving the hydrocarbon-rich waters that flow between the Sultanate of Brunei and the state of Sabah. This led to preliminary unitisation deals agreed in 2017 for four projects – the Kinabalu West NAG, Maharaja Lela North, Gumusut-Kakap and Geronggong-Jagus East – between state oil firms Petronas and PetroleumBrunei. However, with the election of a new government in Malaysia in 2018, there were rumblings that the new administration was unhappy with the previously agreed revenue-split underpinning these unitisation deals and wanted renegotiation. That apparently fell through, and in 2020, Petronas revoked the cross-border agreement that would have tied Brunei’s Block CA-1 and CA-2 together with Sabah’s Block J and K.

However, with a new government in place since March 2020, the tides have turned again. Last week, Petronas re-started and formalised the Unitisation Agreement (UA) for Gumusut-Kakap and Geronggong-Jagus East, enabling joint development to proceed once again. This is important, since the crude output levels of both countries is in decline, but definitely pressing to Brunei, which is keen to exploit a cluster of gas-rich fields in Block CA-2 (including the promising Kelidang field) with Petronas to replenish feedstock at its Brunei LNG plant. The Gumusut-Kakap assets in Sabah are also in the focus as well, given that its position and vast platform-and-pipeline infrastructure means that remote and disparate deepwater offshore discoveries that would otherwise be uncommercial could be tied back to the platform.

You would think that the main beneficiaries of this new cooperation deal would be the countries themselves, but you could also argue that the party that will see the most benefits is Royal Dutch Shell. Present on both of the border, Shell will actually intensify its grip on the upstream industry in both Brunei and Sabah because of this. When the cross-border unitisation agreement was halted by Kuala Lumpur in 2020, the freeze temporarily disrupted a proposed sale between supermajors Total and Shell, with the French giant agreeing to sell its 86.95% operating interest in Brunei’s Block CA-1 along the maritime boundary to Shell, which would include various other offshore PSCs in the area including Total’s portion of the Gumusut-Kakap project. The deal, valued at some US$300 million, was initially expected to close by December 2019, but the government-level spat derailed the timeline. The sale concluded in April 2020, but until the unitisation question was resolved, Shell’s hands were tied to optimising its new assets.

Now that unitisation has happened, Shell is free is start stitching together its vast assets in the area. Shell’s pursuing of Total’s share of Block CA-1 had always been slightly at odds with its global strategy, where the Anglo-Dutch supermajor was attempting to sell off non-optimal assets to pay for its acquisition of gas giant BG Group in 2015. So, obviously, Shell’s assets in Malaysia and Brunei were considered strategic enough to retain and even add to. Here’s why.

Following the Total sale, Shell is now in control of all four quadrants of the Gumusut-Kakap resource – the two quadrants on the Malaysian side and the two quadrants on the Bruneian side. This makes Shell the most important player in the development of the resource, since it has very deep ties with Brunei and a healthy working relationship with Petronas. Not to mention, it is also in the best position to understand the true geology and ultimate potential of the Gumusut-Kakap basin across both borders. As a quick primer, the Gumusut-Kakap, was Shell’s first deepwater project in Malaysia, producing some 148,000 b/d of crude oil or nearly 20% of Malaysia’s overall crude output. Output from the same formation on the Bruneian side is smaller – at around 5,000 b/d – but there is still potential there. Of particular focus is Shell’s own deepwater Jagus East discovery in Block CA-1, which geology suggests is connected to the Gumusut-Kakap structure that lies within Malaysian territorial waters. This would necessitate bilateral cooperation, which has now been provided by the unitisation deal. Also on the radar is Shell’s Geronggong oilfield – Brunei’s deepest and most remote offshore discovery to date – which would be challenging to integrate into existing domestic infrastructure, but relatively facile to exploit as a tie-back to the Gumusut-Kakap platform.

Cooperation is better than consternation, it is said. And now that Malaysia and Brunei have put their differences aside, and agreed on the money that underpins the deal, joint development can proceed. Malaysia will benefit, Brunei will benefit and Royal Dutch Shell will definitely benefit, since there seems to still be plenty of jewels to be found in the South China Sea. At least, until China decides to change its position on its nine-dashed line from rhetoric to action. Which will hopefully never happen.

Market Outlook:

• Crude price trading range: Brent – US$61-63/b, WTI – US$58-60/b
• With the OPEC+ club announcing plans to gradually relax oil production quotas from May to July, responding to expectations of increased demand from economic recovery and also declining oversupply in the market
• Saudi Arabia will also begin phasing out its own voluntary 1 mmb/d supply cut, in parallel with the club’s own supply easing, which has caused crude oil prices to retreat back towards the US$60/b gravitational point

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So, after a week where more than 10% of global trade had to be halted, re-routed or completely disrupted, the 400m long Ever Given cargo ship that was wedged diagonally in the Suez Canal in Egypt has been unstuck. Nearly two dozen tugboats and assistance ships, along with many land salvage vehicles digging up sand, freed the massive ship after a six-day ordeal. The world cheered. Global trade was restored. About US$10 billion per day of trade, to be precise.

The Ever Given – operated by Taiwan’s Evergreen Marine – was carrying cargo as varied as tracksuits, electrical equipment and ginger when a sandstorm reduced visibility and strong winds blew the ship off course, such that its bow and stern were wedged on opposite sides of the Canal. The blockage, which happens at one of the narrowest areas of the Canal from its southern entry point from the Gulf of Suez, prevented over 300 vessels (including 24 crude oil tankers) from navigating one of the most important maritime arteries – the shortcut between Asia and Europe that shaves at least two weeks off the alternative journey through the Indian Ocean, past the Cape of Good Hope and up the coast of West Africa. When news of the Canal blockage first broke, crude oil prices jumped, although that rise was tempered by fears over fuel consumption growth as a result of new Covid-19 accelerating infections in Europe. When the Ever Given was finally freed, crude prices immediately fell by 2%.

The sensitivity of crude prices to the temporary crisis in the Suez does illustrate the hazards of maritime trade. For most part, shipping – which is the most efficient way of transporting huge amounts of cargo worldwide – travels on open seas. But it is not always smooth sailing. There are several maritime chokepoints in the world where a crisis like this can erupt. Blockage at any one of these is a tremendous disruptor, but in the world of energy trading and transport, it takes on a different dimensions because of complex geopolitics.

The EIA estimates that some 5.5 million b/d of crude oil is transported through the Suez Canal annually, mainly bringing crude oil and LNG from the Middle East to energy-hungry markets in Europe. That’s roughly 10% of global maritime oil trade, which makes the Suez the fourth busiest chokepoint for oil transit. The Ever Given crisis lasted for 6 days, but it could have easily been six weeks if it wasn’t for a favourable combination of high tides and specialist salvagers. If that happened, then the entire maritime supply chain would be chaos. Ships would have to be re-routed through the treacherous waters around South Africa, maritime brokering and insurance would be in a frenzy and onshore supply chains from High Street clothing stores to ingredients for restaurants could be affected. And it has happened before. The Six Day War between Israel and Egypt in 1967 resulted in the entire canal being closed for eight years, with both entrances littered with bombed shrapnel and ocean mines. Egypt and Israel have settled their differences since, but there is no guarantee that this can’t happen again.

And what about the 3 other maritime chokepoints, which rank above the Suez in oil transit volumes? Right at the top of the list is the Strait of Hormuz, the narrow sliver of waterway that connects the Persian Gulf to the Indian Ocean. Just 33km at its narrowest, this is the riskiest maritime chokepoint in the world in terms of crude trading. On opposites ends of the Strait are enemies – Iran on the north, and Saudi Arabia and its allies on the south. Nearly 33% of the world’s maritime oil trade passes through this small channel, making it particularly vulnerable to disruption. And it has been disrupted. Many times before. Even the threat of disruption – as Iran has wielded recently in its squabbles with Donald Trump’s USA – can send crude prices soaring. Because of that warships from the USA, UK and France are a regular presence in Hormuz, attempting to act as a deterrent if the always-volatile situation in the Middle East does flare up. It has not fully yet, but if it does, the consequences are devastating.

In second place is the Straits of Malacca. Though much wider than Hormuz, the Straits of Malacca is also far busier, since its traffic is not only focused on energy, but almost any cargo that is traded by East Asia westwards. In oil terms, about 30% of global maritime volumes pass through the Straits, which is controlled by Malaysia on one side and Indonesia on the other. And like Hormuz, there is no real alternative to the Straits of Malacca is terms of shipping traffic; alternative routes through the Indonesian archipelago are simply too narrow or too hazardous. Which is why there have been several ideas floated to reduce the risk of disruption here: slicing a canal through the Isthmus of Kra in Thailand, and perhaps (in oil terms) building oil pipelines cutting across Thailand to bypass the Strait or winding pipeline systems starting in Myanmar snaking up to China’s interior. Because the risk is there. In the 1960s, the Konfrontasi between Indonesia and Malaysia led the Straits to be used as a battleground, both weaponised and full of weapons. If that ever repeats, then more than oil is at stake.

The Cape of Good Hope in Africa is the third largest chokepoint for maritime oil trade (roughly 10%), but it is the fifth that is more risky – the Bab el-Mandab Strait between Yemen and Eriteria/Djibouti, that is the entrance to the Red Sea and the Suez Canal beyond. Any ship that passes through the Suez is most likely to pass through Bab el-Mandab, making it an equally risky flashpoint for any disruption in global oil trade. And given the instability in Yemen that has been egged on in proxy by Iran and Saudi Arabia, that conflict has occasionally spilled offshore. Not to mention the threat of pirates based in Somali that prowl these waters. 

Other marine chokepoints have a lower risk factor, though the risk is never zero. The important ones for energy are the Turkish Straits (connecting Black Sea oil to the wider world, 5% of global maritime oil trade) and the Panama Canal (increasingly important given the USA’s accelerating role in crude and LNG exports, 2%). The others – the Danish Straits and the Straits of Gibraltar – are, currently at least, quite safe. But, as the Ever Given crisis proves, disruption could occur at any time. A single ship caused a global tidal wave of interruption, heightened by increasingly complex and interlinked global supply chain. That thought will be on the minds of the entire maritime industry – and on crude oil trading – as key players start looking at ways and methods to prevent such a disaster from happening again. Hopefully.

Market Outlook:

• Crude price trading range: Brent – US$63-65/b, WTI – US$60-62/b
• Global crude benchmarks wobbled in the face of two opposing developments: the blockage of the Suez Canal for nearly a week due to a grounded super cargo ship, and Europe entering into a new series of lockdowns as Covid infections surge
• However, some bullishness may be coming from OPEC+, as reports suggest that the group is likely to roll over its existing level of supply curbs from April to May, a cautious approach taken as OPEC analysis shows that oil demand recovery has slowed down and will only begin reviving after Q2 2021

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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