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PP16832/01/2013 (031128)

Sector Update
21 February 2012

Overweight (unchanged)

Oil & Gas

The golden age of gas?
Maintain sector Overweight. The recent talk on gas supply dynamics given by the President of the International Gas Union (IGU), Datuk (Dr) Abdul Rahim, reaffirmed our positive views of the natural gas market. Malaysia will embrace LNG imports this July to address supply bottlenecks. Against this backdrop, service providers in the gas supply chain would benefit. We are Overweight on the sector on expectations of continuous positive newsflow benefiting the service providers. Natural gas: A commodity growing in importance. Natural gas is set to overtake coal as the second-largest fuel source by 2030. Demand growth of 2% p.a. is the highest among the fuels (average: 1.2% p.a.). At this rate, gas would account for 25% of total generation energy mix by 2035 (2010: 23%). Asia, notably China, is the largest consumer of gas. Against this backdrop, LNG trade is set to expand at a rapid pace, as output grows to 594m tpa by 2020 (2008: 376m tpa). Australia will be the largest LNG supplier in future, with a forecasted production of 100m tpa, overtaking Qatars 77m tpa. Malaysia is embracing structural changes in the natural gas dynamics. Despite being a net exporter of natural gas with the 15th largest gas reservoir in the world, Malaysia will receive its first imports in 2012. Up to 3.8m tpa of gas (from the Lekas regasification plant in Melaka) will be injected into the domestic pipeline system. This would effectively lift gas supply by 24% and single-handedly address the gas curtailment issue which has plagued the power sector since 2011. Another 3.8m tpa of LNG supply will come in by 2017 as PETRONAS commercialises its RAPID project in Pengerang, Johor. Domestic gas price structure is set to transform. As gas supply from imports increases, domestic average selling prices (ASPs) for natural gas will rise as subsidies are set to fall. Malaysias current gas prices are among the lowest in Asia. Plans are in place for a systematic RM3/mmBtu adjustment in price every six months. Based on the projection, Malaysia will pay gas prices equal to market rates by 2016. Nevertheless, the price increase is not cast in stone just yet. A strong political will is required to execute this exercise. Championing the champion. The 3.8m tpa of LNG capacity from the Lekas regasification plant (from Jul 2012) would add 505mmscfd of gas into the Peninsular Gas Utilisation (PGU) system. This will effectively lift domestic gas supply by 24% (based on 2,066 mmscfd of gas transmitted for 2011). Longer-term growth will be further supported by the second and third regasification plants that will be constructed in Johor and Sabah, which would raise supply by another 3.8m tpa come 2017 (from the Johor plant alone).

Wong Chew Hann, CA (603) 2297 8688

Summary of consensus valuations (calenderised)

Mkt cap (RMm) Petronas Gas 32,530.4 PGN* 87,875.5 Source: Bloomberg; * IDR currency
Kim Eng Hong Kong is a sub sid iar y of Malayan B anking B erh ad


Price (RM) 16.44 3,625

EPS (sen) 12F 13F 72.4 72.7 282.0 310.7

EPS Grth (%) 12F 13F 0.0 0.5 6.3 10.2

PE (x) 12F 13F 22.7 22.6 12.9 11.7

DPS (sen) 12F 13F 50.0 50.0 151.5 162.8

Div Yield (%) 12F 13F 3.0 3.0 4.2 4.5


Oil & Gas

Lets talk about gas

We recently hosted a Gas Sector Outlook session with Datuk (Dr) Abdul Rahim Hashim, President of the International Gas Union (IGU) and Malaysian Gas Association, as the keynote speaker. The topic of the presentation was The transformation of the global gas market and the emerging gas scenarios in Malaysia. Key highlights are as follows. Demand for natural gas is strong. Natural gas is set to grow nearly twice as fast relative to the total global energy mix. The 2.0% p.a. growth up to 2035 will be the strongest among other energy sources (i.e. oil, coal, biomass, nuclear, hydro; total energy growth: 1.2% p.a.). It is estimated that natural gas should overtake coal as the second-largest energy fuel after oil by 2030. Against this backdrop, natural gas share of the total energy mix will rise to 25% by 2035 (from 23% in 2010). The key drivers to higher gas demand. The appetite for gas from th Asia, notably China, is strong. Under its 12 Five-Year Plan, the China market alone will make up nearly 30% of global gas growth. The recent nuclear energy crisis in Fukushima, Japan also expedited natural gas as a preferred substitute. Global LNG trade is also developing rapidly, as trade volume grows and becomes more flexible (i.e. more short- to medium-term contracts vs. long-term trades). The widespread development of unconventional gas (i.e. coal-bed methane, shale) as well as the lower cost of production (i.e.USD3-9/mmBtu) also aided growth. The global LNG outlook. The share of LNG in global energy markets is set to grow from 31% in 2008 to 42% by 2035, as volume traded more than doubles over the projection period. On the supply side, global LNG output is set to grow by 55% from 376m tpa in 2010 to 594m tpa in 2020. Australia is well placed to become the LNG leader by 2020, overtaking Qatar as the largest producer.
World primary energy demand by fuel
5,000 4,000 Oil Gas Coal Biomass Nuclear Other renewables
OECD total Middle East India

Natural gas consumption by region


Latin America

2,000 1,000

Russia Africa Rest of the world

0 1980
Source: IGC












600 (bcm)

Sources: IEA, OECD

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Oil & Gas Global LNG supply-demand outlook


Sources: BP Statistical Review 2011, EIA, GIINGL, Booz & Company

Rising LNG share in the world gas trade


Pipelines (LHS)


Share of LNG (RHS)










0 2000
Source: IGU

10 2008 2020 2035

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Oil & Gas

Malaysias natural gas and LNG perspective

Reserves. Malaysias geological gas reserves stood at about 82 trillion th cubic feet (tcf) in 2011 and the country is reputed to have the 15 largest reservoir in the world, amounting to 1.3% of global reserves. Approximately 63% of the gas reserves are located offshore Sabah (15%) and Sarawak (48%), with offshore Peninsular Malaysia (primarily Terengganu) accounting for the remaining 38%. Production. Malaysias natural gas production stood at 2.0 tcf (7,021 mmscfd Sabah: 422mmscfd (6%), Sarawak: 3,904mmscfd (56%), Peninsular Malaysia: 2,695mmscfd (38%)) in 2011, delivering about 2% of global natural gas production. Based on these statistics, Malaysias production life cycle is theoretically 34 years.
Malaysias natural gas reserves (tcf)
82 81 81.4 81.3 80.6 80.6

Malaysias natural gas production (tcf)

2.0 1.92 1.9 1.97 1.97






80 79
78 77


1.5 1.4


76 75
2004 2005 2006 2007 2008 2009 2010 2011









Sources: PETRONAS, Maybank-IB

Sources: Department of Statistics, Maybank-IB

Consumption. 2,066 mmscfd of gas (38% of production) was injected into Petronas Gas PGU system in 2011, of which 672 mmscfd of the gas flow was delivered from the Malaysia-Thailand Joint Development Area {JDA} (373mmscfd), West Natuna (211mmscfd) and PM3 CAA (88mmscfd) fields. Of the total injected into the PGU, the power sector (TNB and IPPs) consumed 1,054 mmscfd of gas 124 mmscfd of gas was exported to Singapore 888 mmscfd of gas was allocated to the non-power industry Gas Malaysias portion totaled 346 mmscfd PETRONAS clients and its internal consumption took up the remaining 542 mmscfd

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Oil & Gas Natural gas supply chain in Peninsular Malaysia (in mmscfd)
Offshore Peninsular
2 ,023 T NB TN B 3 6 9 (35%)

Power s ector
1 ,054 (51%)

Imports PM3 CAA


6 8 5 (65%)

PETRONAS (Gas wholesaler)

Petronas Gas (through PGU system)

(Processing and transmission)

Export to Singapore
1 2 4 (6%)

PETRONAS P E TRONAS c us tomers customers

(including internal consumption) 5 4 2 (61%) G a s Malaysia
3 4 6 (39%)

Wes t N atuna

2 ,066

N on-power Non-power s ec tor se ctor

8 8 8 (43%)

Ms ia Thai Joint Dev. Area


Sources: Various, Maybank-IB

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Oil & Gas

Malaysias natural gas demand-supply outlook

Diminishing: Domestic natural gas production. Production growth has been relatively flat over the past five years, owing to maturing reserves and the absence of new gas field discoveries offshore Peninsular Malaysia. Based on Wood Mackenzies findings, gas supply from Peninsular Malaysias fields (which supplies to domestic needs) is anticipated to plateau from 2015-17, and drop sharply from 2019-21. Rising: Domestic natural gas consumption. At the same time, domestic daily consumption of natural gas has been rising, by 1% p.a. over the last four years, owing to it being the more efficient and affordable source of energy relative to oil and biomass. However, growth has been constrained by the limited availability of supply.
Malaysias gas production forecast (2010-25) mmscfd
7.0 6.0 5.0 4.0 3.0 5.9 5.9 5.8 5.7 5.6 5.4 5.3





3.5 2.9 2 1.7

2.0 1.0 0.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022





Sources: Wood Mackenzie, Maybank-IB


LNG regas is a game-changer for long-term supply

LNG imports should address gas shortage concerns. The import of LNG is touted as the long-term solution to feeding Malaysias growing gas demand. The first LNG imports amounting to 3.8m tpa will be injected into the system by Jul 2012, and up to 7.6m tpa of LNG will flow into the PGU by 2017.
Peninsular Malaysias average gas production & total curtailment days
(mmscfd) 2,500 2,193 2,000 1,500 1,000

Kerteh- ave.production (LHS)

2,099 2,012 2,058

JDA- ave.production (LHS)

Curtailment days (RHS)

2,200 2,212 1,999

2,124 2,146 2,140 2,109

(days) 35 30

1,923 2,005 1,936 1,908 1,946 1,892 1,899 1,929 1,979 1,953 1,846 1,785 1,807

25 20 15

0 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11

5 0

Sources: Energy Commission, Maybank-IB

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Oil & Gas Malaysias generation fuel mix

(%) 100 90 80 70 32.6 41.2 45.2 42.4 38.8

7.1 6.3

1.4 4.7

0.2 4.0


0.4 3.3

0.3 3.9

0.1 4.9




Oil & Distillates

1.2 6.7 1.0 5.9
4.6 7.3

1.9 7.5 6.5 7.5 6.4 10.5 6.9

0.9 11.6 4.6

0.1 6.6 4.4

0.6 9.9 4.4

8.1 4.5

8.1 5.4

6.4 6.0

0.6 5.9 6.5






41.7 49.8



50 40 30 20 10 0 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11



46.8 42.8 45.9

































Sources: Energy Commission, Maybank-IB

Malaysia is committed to 7.6m tpa of additional LNG by 2017. 7.6m tpa of LNG equates to 1,011 mmscfd of natural gas, or 40% of the gas supply injected into the PGU system in 2010. This should offset the fall in domestic fields gas up to 2017 while maintaining Malaysias gas supply level at 5,977 mmscfd. LNG supply commitment is already underway. We understand that PETRONAS is already working towards ensuring availability of LNG supply from various suppliers (i.e. Australia, Europe and Middle East), both on short and long-term contracts.
PETRONAS LNG import commitments Seller (Country) Scheduled delivery date
GDF Suez (France) Qatargas(Qatar) Gladstone LNG (Australia) Total Sources: Various, Maybank-IB Aug 2012 2013 2014

Duration (year)
2.5 20 20

Quantity (m tpa)
2.5 1.5 3.5 7.5

Malaysia is set to embrace third-party gas importation by Jul 2012. The first LNG import will be injected into the system by Jul 2012. In order to receive LNG that is required to be subsequently regassed for transmission through the PGU system, a regasification plant and receiving terminal (i.e. floating storage units, subsea and onshore pipelines) is required. First regas project being built in Melaka with a 3.8m tpa capacity. Construction of the regas facilities aka Project Lekas, developed by Petronas Gas at Sungai Udang, Melaka is in progress. Based on the LNG delivery schedule, Melakas regas plant should hit its maximum capacity in 2012. South Johor has been identified to be the second regas base. We reckon the planned regas plant, which will be larger in size than the one in Melaka, will support PETRONAS USD20b Refinery and Petrochemical Industrial Development (RAPID) and the Iskandar Development Region (IDR) programmes.

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Oil & Gas

A third regas terminal in Tawau? This would support a gas-fired power plant there. In terms of size, we reckon the regas terminal would be the smallest when compared against the Melaka and Johor facilities.
Planned regas terminals capacity


3.0 5.0


6.0 7.6 10.5

Malaysia Indonesia

Source: Petronas








New field, new gas, new growth

Malaysia to get additional gas from new fields by 2013. Notwithstanding the regas programmes and new plants in Melaka, Johor and Sabah which involve LNG imports, PETRONAS and its Production Sharing Contract (PSC) partners will spend about RM15b to develop a cluster of gas fields offshore Peninsular Malaysia. Gas projects will be on an accelerated basis. PETRONAS expects the first delivery of 100 mmscfd of gas by early 2013, and 250 mmscfd by 2015 (3-9% of domestic consumption), from these new fields.
Malaysias gas production forecast (2010-25) mmscfd
6.0 5.0 5.9 5.9 6.1 6.3 0.1 0.3 0.5 6.2 0.1 0.5

Gas supply from PM fields

6.2 0.3 0.5

LNG Imports 6.4

0.3 0.3 1.0 6.0

New PM fields 5.6

5.2 4.8 4.2

0.3 0.5






0.3 1.0 1.0 0.3 1.0 0.3 1.0 2.9 0.3 1.0 1.7 2024F

5.9 3.0 2.0 1.0 2010 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 5.9 5.8











1.5 2025F

2020F 2021F 2022F 2023F

Sources: Wood Mackenzie, Maybank-IB

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Oil & Gas Peninsular Malaysia gas supply outlook


Malaysias natural gas market reform

From a regulated to an open market. Malaysia is in the process of a structural transformation as it takes in LNG imports. An operating framework has been mooted to reform the domestic market. With the: (i) gas supply, (ii) transmission pipeline and regasification facilities, and (iii) third-party access transportation tariff already in place, the natural gas pricing mechanism is the next item to be addressed. Gas subsidy will be gradually removed over the next five years. The proposed reform by the Economic Planning Unit (EPU) will result in natural gas prices being systematically increased by RM3.00/mmBtu every six months until it meets market prices by 2016. The systematic lift in ASP is aimed at eliminating the potential effect of demand destruction for gas. However, execution will be a challenge. While the proposal is ideal, implementation is a challenge, for it requires strong political will as it would impact the socio-economic outlook. As it is, it has already experienced hiccups. The second planned price hike has missed the Dec 2011 deadline, and the next revision in Jun 2012 too is likely to face delays. The last revision was undertaken in Jun 2011. Two-tier natural gas pricing? One option, we reckon, is for the natural gas resources from Peninsular Malaysia fields to be subjected to the EPU price structure, while the LNG import could be immediately priced at market rates (i.e. two-tier pricing). The other likely scenarios would be to have single-tier pricing for both sources of supply (i.e. Peninsular Malaysia fields and LNG import), together with either adoption of the EPU pricing structure or an entirely new tariff. Of these scenarios, we think the two-tier gas price structure is more likely to be implemented.

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Oil & Gas Gas subsidy rationalization reform

Sources: EPU, PMs Department, PETRONAS

The original schedule for Msia to get to market pricing by 2016

(RM/ mmbtu) 50 42.35 40 33.35 39.35 36.35 35.05 32.05 34.70 31.70 28.70 25.70 22.70 19.70 16.70 13.70 10.70 6.4 0 Mar-03 Aug-08 Mar-09 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 38.05 40.70 Power Sector Gas M'sia Non-power sector 45.35

South East Asia end-user gas price Country Vietnam Malaysia Indonesia Thailand Singapore Power 3.38 4.57 5.67 7.71 17.99 Industry (USD/ mmBtu) 8.31 6.12 6.50 13.24 18.46 4.93 1.55 0.83 5.53 0.47 Spread


30 23.88 20 11.32 10 9.40 14.31 17.99 15.35 11.05 18.35 14.05 24.35 21.35 17.05 20.05 27.35 23.05 26.05



Sources: PETRONAS, Maybank-IB

Sources: Various

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Oil & Gas

Definition of Ratings
Maybank Investment Bank Research uses the following rating system: BUY HOLD SELL Total return is expected to be above 15% in the next 12 months Total return is expected to be between -15% to 15% in the next 12 months Total return is expected to be below -15% in the next 12 months

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Oil & Gas

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21 February 2012

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