Petronas’ LNG strategy is reflected in an HOA agreement with China’s Shenergy, under which the Malaysian oil and gas company will supply mid-sized LNG cargoes for 12 years
One of the world’s largest producers of LNG, Petronas plans to spend 5% of its capex on renewable energy in 2020, signaling the Malaysian oil and gas company’s intent to remain a relevant player in the global energy transition.
Speaking to Bloomberg TV during the World Economic Forum in Davos, Switzerland, Petronas president and chief executive Tan Sri Wan Zulkiflee Wan Ariffin said: “Energy demand is growing. In my view, we should develop all forms of energy.” Mr Zulkiflee said that Petronas will invest in renewable energy, namely solar and wind. “It’s about future-proofing the company,” he said, adding that the investment in renewable energy is also in line with the company’s statement of purpose to be ‘a progressive energy and solutions partner enriching lives for a sustainable future.’
Petronas expects demand for energy in Asia to grow by 3.5 to 4% annually over the next five years, led by China, with LNG supplies meeting part of the region’s needs. Malaysia supplies about 12% of China’s LNG.
“As an abundant fuel, LNG is well-positioned to play an important role to meet the global aspiration for secure, affordable and sustainable energy,” said Mr Zulkiflee speaking at the the LNG Producer-Consumer Conference in Tokyo last September. He emphasised the importance of advocating LNG and creating new demand: “As each demand centre, particularly emerging markets, has its own unique criteria, industry players should collaborate with all stakeholders in developing fit-for-purpose solutions, reflecting shared responsibility in making LNG more available and accessible.”
This ‘fit-for-purpose” concept is reflected in the recent heads of agreement (HOA) Petronas LNG Ltd, a subsidiary of Petronas, inked with China’s state-owned Shenergy Group. Under the deal, Petronas LNG will deliver custom mid-sized cargoes totaling approximately 1.5 mta of LNG to its Wuhaogou receiving terminal in China.
The LNG supply agreement is for a 12-year term starting from 2022 and also involves a shipping collaboration to construct and charter new mid-sized LNG vessels for the cargo delivery.
The HOA builds on a long-standing relationship between Shenergy and Petronas. Petronas has been a major LNG supplier to Shenergy’s subsidiary, Shanghai LNG Co, Ltd, since 2006.
Petronas executive vice president and chief executive of gas and new energy Adnan Zainal Abidin said the long-term LNG deal involves the delivery of mid-sized cargoes to ‘unique’ LNG receiving terminals. “This could only be achieved through Petronas’ business model, where we customise our solutions according to our customers’ needs and requirements, especially when the market is moving towards mid-sized cargo requirements or smaller parcels of LNG.”
Inroads into China
To support the contract, Petronas has reportedly signed a charter agreement for two 79,000-m3 LNG carriers under construction at China’s Hudong Zhonghua Shipbuilding.
LNG under the HOA would be sourced from the Malaysia LNG project, which has nine trains with a total nameplate capacity of 29.3 mta, making it the largest single LNG production site in the world.
Malaysia LNG is fed by natural gas resources from offshore of Sarawak, Malaysia, selling LNG to power and gas companies in Asia including Japan, South Korea, Taiwan, and China.
Malaysia LNG accounts for 13% of Japan’s total LNG imports, making it second only to Australia in supplying the chilled cargo in 2018. During 2018, Australia delivered 28.45M tonnes of LNG, Malaysia 11.29M tonnes and Qatar 10.03M tonnes, according to GIIGNL. Over 30 years, Petronas has delivered more than 8,700 LNG cargoes to Japan, providing reliable LNG supply to 30 Japanese terminals.
Petronas would like to make more inroads into China, where it supplied 5.99M tonnes of LNG in 2018, well behind Australia’s 23.14M tonnes and Qatar’s 9.29M tonnes, according to GIIGNL. With US LNG suffering under the burden of the 25% tariffs imposed by Beijing, LNG exports from Malaysia to China rose 23% in the first 10 months of 2019.
However, a glut of gas and a balmy winter season has resulted in a slow start for 2020. UK maritime research firm Drewry says Asian LNG prices in January were below US$5 per MMBtu and are projected to fall further, with additional liquefaction capacity coming online in 2020.
On the demand side, a mild winter and weakness in the global economy impacted LNG imports in Asian countries such as China, Japan and South Korea, resulting in a lower-than-expected demand growth.
Drewry says China imported an estimated 68% of its LNG from Australia, Qatar and Malaysia in Q4 2019, and has also been active in securing spot supplies, especially since the US-China trade dispute escalated in 2018.
To ease trade tensions between the two countries, China and the US signed a Phase 1 trade agreement deal in December. Under the deal, China agreed to purchase US$200Bn worth of US goods, including US$52Bn in energy, over the course of two years, from 1 January 2020 to 31 December 2021. The Phase-1 agreement does not lift the 25% tariff imposed on US LNG.
Rapidly expanding US LNG export capacity allowed it to pass Malaysia to become the world’s third largest LNG exporter and an increase in American LNG exports to China would impede Petronas’ growth plans.
However, Drewry says it believes the “Phase-1 deal will not be enough to bring any significant change in China’s LNG import portfolio, with Australia, Qatar, Malaysia and Russia being the preferred options for the country currently.” China has not imported US LNG since April 2019, according to the US Energy Information Administration.
In the years ahead, Drewry does see the US emerging as more of a competitor for the Chinese market. “We estimate that China will require another 15 to 20 mtpa of LNG imports by 2024 in order to cater to its growing LNG demand, for which the US can play a major role, provided the tariffs are lifted. This scenario will be mutually beneficial for both countries as China is projected to become the world’s largest LNG importer by 2022-23, while the US is also on the road to becoming one of the largest LNG exporters in the world after Qatar.”
That’s not the best of news for Petronas, but it does have its sights set on growth in other Asian and Southeast Asia markets, namely Japan, South Korea, Taiwan, Thailand, India, Singapore, Bangladesh and Pakistan. Petronas is also increasing its services across the LNG value chain.
Besides its two floating LNG (FLNG) vessels, PFLNG Satu and PFLNG Dua, Petronas has begun break-bulking ship-to-ship (STS) transfers and is pursuing smaller-scale LNG solutions, such as LNG bunkering and Virtual Pipeline Systems via ISO-tanks to transport LNG.
In collaboration with MISC Bhd, Petronas inked a time-charter agreement with Avenir LNG for a 7,500-m3 LNG bunker vessel (LNGBV) newbuild. MISC Bhd is 62.67% owned by Petronas.
Avenir LNG (a joint venture of Stolt-Nielsen, Höegh LNG and Golar LNG) is building four such LNGBVs, two with Keppel Singmarine and two with Nantong CIMC Sinopacific Offshore & Engineering Co.
Under the charter agreement, the LNGBV will bunker LNG-fuelled vessels across Malaysia and serve small-scale terminals in the region.
Petronas has set up infrastructure for LNG bunkering services at Pengerang, Johor and Sungai Udang, Melaka.
To cater to mid-sized cargo requirements and smaller parcels of LNG, Petronas began conducting breakbulk LNG STS transfers in 2018. In October, MISC’s 157,000-m3 Seri Bijaksana conducted an LNG breakbulk STS transfer at Brunei Bay, port of Sabah, transferring 80,000 m3 of LNG to Teekay’s Polar Spirit and 62,000 m3 to LNG Shipping’s Lerici. Following the transfers, the LNG carriers offloaded their cargoes at two separate import terminals in China.
Petronas subsidiary Petronas LNG is also trying to develop small-scale LNG solutions as a means to supply its LNG, and to capture market opportunities in road transport, such as LNG trucking.