CONNECTING PENINSULAR GAS UTILIZATION PIPELINE TO YUNNAN, CHINA

On July 5, 2002, ASEAN Council On Petroleum (ASCOPE) initiated Trans ASEAN Gas Pipeline (TAGP) Project to ensure secure and sustainable energy supply by undertaking multi border gas pipeline projects. However, to date, compared to Europe which has already established seamless gas networks, ASEAN cross border pipelines are bilateral in nature. 

Similar to China’s One Belt One Road (OBOR) initiative on railway projects from Kunming, Yunnan to Singapore for connectivity of transporting goods and people, it would be for mutual benefits of ASEAN and China to connect Malaysia’s Peninsular Gas Utilization (PGU) pipeline to Yunnan in transporting gas. Possibly, parallel to the railway tracks. For China, it would be good to have another source of gas supply other than from Central Asia, Russia and their LNG terminals. 

This initiative would be similar in concept to the 3,500 km Southern Gas Corridor project which connect Azerbaijan’s Shah Deniz II gas into Europe via existing Azerbaijan/Georgia South Caucus Pipeline (SCP) to the Turkish Trans Anatolia Natural Gas Pipeline Project (TANAP) and continue flowing to Italy via Trans Adriatic Pipeline (TAP).

The PGU/Yunnan gas pipeline initiative would also have minimal challenges from security perspective compared to the USD 10 billion Turkmenistan-Afghanistan-Pakistan-India (TAPI) 1,800 km gas pipeline project (operational in 2019) where the pipeline is exposed to attacks from Taliban.

Leveraging on strategic location and good relationship with China, Malaysia could be transformed into a LNG Hub where different market players will compete for a piece of the market. By utilizing the Re-Gasification Terminals (RGT) in Sungai Udang, Melaka and Pengerang, Johor (2017), LNG suppliers from Middle East, Australia and ASEAN would have the options to deliver LNG into the RGTs. These suppliers would be able to save their freight costs by reducing sailing times instead of delivering the LNG to East China. In other words, they are also bypassing the territorial disputes in South China Sea. 

Economic activities could be generated along the entire value chain starting from the construction of the pipelines, gas distribution and local industries. Malaysian companies such as Gas Malaysia Berhad would have the opportunities to participate in the initiative. Malaysia, Thailand and Laos would also earn pipeline transit fees from the distribution of gas. Secured energy supplies could also attract FDIs in various industries leading to jobs creation.

Creating new outlets would change the landscape of LNG play in Asia Pacific. LNG suppliers such as PETRONAS and Brunei LNG could diversify from their traditional markets (Japan, Korea, Taiwan and East China). Possibly, achieving better margins. It would generate flurry of activities as the Hub will attract various LNG producers, traders, brokers, shippers and storage players. US LNG could even end up in Malaysia when arbitrage is open. In some regions, air quality could be improved as better access to gas supplies may reduce consumption of coal in some industries and power generation.

Malaysia LNG Hub would present an opportunity to establish LNG/Gas exchange where the traded price could be the price reference or benchmark for Asia Pacific LNG/Gas. Similar concept could be adopted from Henry Hub (US) and UK’s National Balance Point (NBP). The exchange would also spur the development of financial services and promote international brand awareness for Malaysia.

The PGU pipeline connection to Yunnan will not only be a game changer for LNG in Asia Pacific but also elevate Malaysia's strategic importance in the region by becoming a gateway for gas supply to continental ASEAN and Yunnan. However, a joint effort between relevant countries is vital to realize this initiative similar to Southern Gas Corridor as mentioned above.

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ASIA PACIFIC CRUDE OIL EXCHANGE IN MALAYSIA

In US, Europe and Middle East, crude oil benchmarks are traded on futures exchange such as West Texas Intermediate Crude on New York Mercantile Exchange (NYMEX), Brent Crude on InterContinental Exchange (ICE) and Oman Crude on Dubai Mercantile Exchange (DME). Surprisingly, Asia Pacific which is a booming oil market has no international crude oil futures exchange. 

After abandoning the Asia Pacific Petroleum Index (APPI) pricing in 2010 and 2011, ASEAN (except for Indonesia) and Australia crude oil producers migrated to price their crude against Dated Brent which is derived from four North Sea crude (Brent, Fortis, Oseberg and Ekofisk). However, from the perspective of Asia Pacific crude market, Brent pricing doesn’t reflect the regional crude market fundamentals. Example: European refineries are increasingly being closed as they are not as competitive as the newer, bigger and more complex Asian refineries such as in Middle East, China and India. 

Since the last few years, the regional oil industry players have been raising the issue of suitability of Brent pricing for regional crude. Discussions among the industry's players have started since 2013 to look for viable options. However, there was not much concerted effort to come up with the alternative solution.

As the biggest exporter of oil in the region, Malaysia could take on the leadership role to establish the crude oil futures exchange based on some of the Malaysian Crude Oil (MCO) benchmark such as Kikeh and Kimanis crude. Regional crude from Indonesia, Vietnam, Brunei and Australia and even the growing volumes of imported West African crude could also be traded based on the futures exchange. It will open up to a universe of new market such as pension funds, banks and even to the retail investors. As such, it will increase the asset value of the MCO as it is not purely valued from oil refining perspective. “Futures premium” will also increase the value of the exchange crude as experienced by the Omani crude in DME.

Futures exchange is regulated and transparent where the transacted price is considered credible and fair. Similar to the Omani crude oil Official Selling Price (OSP) which is derived from the monthly settlement price, there will be minimal complaints on the MCO OSP. 

Due to the fluidity and speed of the oil market movement, it is always advisable and preferable to hedge close to when the physical deal is done. However, due to the time difference between Asia Pacific and London, this is not fully possible. As such, managing the exposure could be done more effectively in hedging exercise as it will be based on regional time instead of London time. Regional upstream players could also manage their activities risk exposure better by hedging against the futures exchange.

As the trading activities increase, it will spur the demand for crude tankage, shipping and other FDIs in refining and petrochemical. Inadvertently, this will also increase the development of the financial services and international brand awareness of Malaysia. As such, the futures exchange could help to transform Malaysia into a regional oil trading and storage hub inline with government initiative.

How to make this happen? 

Dubai Mercantile Exchange which is based in Dubai has been in operation since 2007. It is a partnership of three core shareholders and several strategic partners. The three core shareholders are Chicago Mercantile Exchange (CME) Group (50%), Oman Investment Fund (29%) and Dubai Holding (9%). The balance of 12% is owned by various companies including Shell, Vitol, Morgan Stanley, JPMorgan Chase and Goldman Sachs. In other words, DME is a well established crude oil futures exchange in Middle East using Omani sour crude for delivery of DME contracts. Riding on the success of DME and in tapping their expertise in managing crude oil futures exchange, Malaysian entity(ies) could work with DME to establish a futures exchange for sweet crude oil to be based in Malaysia. 

Malaysia always strive to achieve high income nation status via Knowledge-Economy. This could serve to be a successful model if it is well implemented and managed professionally. And this could also be the game changer to the crude oil market in Asia Pacific.

Aside from exploring for crude oil, building refineries and petrochemical plants, we should learn to connect the dots like our neighboring country which has no natural resources. We need to be bold to make that leap of faith. 

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