Asian gas downturn has Petronas scaling back LNG Tiga project

Finalizing sales accords for Malaysia LNG Tiga, the third LNG facility at Bintulu, Sarawak, is proving difficult, and Petronas officials are already conceding privately that production will be cut back from the nameplate capacity of 6.8 million tons/year.

The two-train plant, a joint venture of Petronas 60%, Nippon Oil Co. 20%, and Shell Gas Bhd. 20%, is due to come on stream in 2001 and still has no supply contract. Bintulu's other two facilities, Malaysia LNG and Malaysian LNG Dua, all had finalized long-term sales contracts prior to construction.

According to Petronas officials, construction of LNG Tiga is on schedule, and negotiations with several potential purchasers in South Korea and Japan are continuing. While there seems scant doubt that the project will be started up on time, talks with potential purchasers clearly have become bogged down. In early 1996, the Petronas consortium signed a letter of intent with Japan Petroleum Exploration Co. (Japex) to supply up to 1.5 million metric tons/year of LNG for 20 years, beginning in 2001 and using LNG carriers owned by Petronas Tankers. But no arrangement has been concluded. Other talks, with Korea Gas Corp., are also inconclusive, and likely to remain so. South Korea's 1998 estimated gas consumption has declined from earlier projections, to 11.06 million tons from 12.2 million tons at the start of this year. Next year, projections of demand have fallen to 12.96 million tons from 14.16 million tons.

On the positive side, feedstock for the Bintulu plants is secure. Shell Malaysia Ltd. is in the midst of a $4.6 billion development program of five gas fields off Sarawak. The agreement is for 23 years, from Apr. 1, 1997, to Dec. 31, 2020.

Background

The LNG Tiga JV was established in 1996, when the Asian gas market was considerably more buoyant. Sustained economic growth appeared to be set through another generation, and gas consumption was seen as consistently on an upward trend. That is no longer the case. Both Japan and South Korea, Malaysia's principal markets, are mired in a continuing severe recession, and natural gas demand is contracting. The fact that low oil prices look to exist for the medium term is also not helping. Most gas agreements are linked to crude prices, making pricing accords difficult, at least for sellers, to agree on terms. To aggravate matters, a number of other prospective gas developments have entered the market-expansion of LNG capacity tied to Australia's North West Shelf and a grassroots project proposed in Papua New Guinea-which have transformed the regional LNG industry (see related story, p. 33).

It's all a far cry from 2 years ago, when Northeast Asian companies were desperate to lock in long-term gas contracts. "The fact is that there is a buyer's market out in Asia now, and gas is available from a number of sources," said a gas industry executive in Kuala Lumpur. "The competition for long-term gas contracts is vicious. One of these new developments is going to suffer and will fail to sign a contract. It is as simple as that."

One company that seems to have seen the writing on the wall is Occidental Petroleum Corp., which swapped its equity holding in LNG Tiga with Shell in April. Although part of a larger series of agreements between the two companies that saw Oxy exchange oil and gas interests in the Philippines and Malaysia for Shell's oil and gas holdings in Yemen and Colombia, Malaysian observers say the company was aware that Tiga would fail to provide much cash flow for the foreseeable future.

"I knew Occidental was very concerned about Tiga's viability in a business sense," said one executive in Kuala Lumpur. "As soon as I heard about the swap, I assumed they had concluded that no contracts were seriously achievable."

At present, many gas executives feel it may not provide any. "I just do not see them finalizing any contracts in this economic environment," said another executive. "There is too much gas around at too low a price. This whole Southeast Asian region is awash in it. Tiga is an unnecessary project."

Although reluctant to admit that the marketing situation is difficult, Petronas officials conceded that production at LNG Tiga will be scaled back when the project comes on stream. "We cannot say by how much, but it definitely will be reduced," said one official.