Refiners are planning increases in capacity to match growing demand for transport fuels, while retailers are engaged in a battle for market share.
While the country's oil and gas industry is closely regulated by government, there are thought to be openings for new market entrants, and deregulation is expected in the medium term.
Economic development
Malaysian government's Vision 2020 plan for economic development is based on forecast growth in gross domestic product (GDP) of 7-8%/year to 2020 (see Watching the World, p. 38).
Inflation is expected to remain below 4%/year despite this high economic growth. Manufacturing industry will be the economic driver, expected to contribute 37.5% to GDP in 2000 compared with 33.1% today.
Minerals production, including oil and gas, contributes 7.4% to GDP now and is expected to contribute only 5.7% in 2000.
GDP totaled 120.3 billion Malaysian ringgits ($48.1 billion) in 1995, calculated at 1978 prices, and is expected to reach 176.6 billion ringgits ($70.6 billion) in 2000.
Tan Beng Hock, general manager of supply and trading at Shell Malaysia Ltd., said Malaysia's passenger car population is expected to grow sixfold in the next 20 years, reaching 12 million by 2020.
The commercial vehicle population is expected to grow sevenfold to 8.5 million vehicles by 2020.
Tan said Malaysia's energy intensity is still low compared with developed countries but is expected to exceed 10,000 bbl of oil equivalent/year/1,000 people by 2020.
"Oil will continue to feature prominently in Malaysia's energy demand mix," said Tan, "but will fall away from 67% of primary energy demand in 1990 to 43% in 2020.
"Power generation and industrial use are expected to take gas from 5% of primary energy demand in 1990 to 27% in 2020. Malaysia has no plans to supply natural gas to houses."
Gas is expected to take market share from oil for power generation, but use of fuels and lubricants in transport and use of lubricants in industry are expected to grow.
Refining status
Malaysia is a net exporter of oil, with a national depletion policy that caps oil production at 650,000 b/d.
Exports currently stand at about 350,000 b/d but are expected to fall to 300,000 b/d by 2000 as domestic demand grows.
The domestic oil products demand barrel is expected to become whiter with the growth in transport fuel demand. Refiners are already preparing to increase capacity.
Shell plans to boost capacity at Port Dickson, and state firm Petroliam Nasional Bhd. (Petronas) is building a new train at Melaka, but combined capacity will still fall short of the country's oil production rate.
Brian Buckley, general manager of Shell Refining Co. (FOM) Bhd., a Shell unit owned 25% by Malaysian shareholders, said debottlenecking and installation of a 6,000 b/d long-residue catalytic cracking unit are planned at Port Dickson refinery.
"The money is in complex refineries these days," said Buckley. "We could not maintain our current dividend flow of $32 million/year beyond 2000 without upgrading the plant."
A result of the expansion will be an increase in feedstock flexibility, said Buckley. Beyond 2000, the refinery will be able to handle feedstock containing as much as 65% imported Middle Eastern crudes, with the rest produced locally or imported from other Far Eastern producers.
Construction is to begin in the third quarter for start-up in mid-1999. The refinery license requires that, with the increased capacity, Shell's shareholding must be reduced to 60% from 75%.
"The upgrade is intended to make the unit competitive with any refinery in the region," said Buckley. "It will increase our refining margin from $1.20/bbl to $3.80/bbl."
The upgrade will also include installation of a power plant, so the refinery is self-sufficient, along with steam treatment and hydrodesulfurization facilities.
Tan said Malaysia's current requirement is for about 400,000 b/d refining capacity, so the country is short of capacity, while the region as a whole has excess capacity.
Peninsular Malaysia refineries at Port Dickson and Melaka meet 83% of the country's products demand, with the shortfall imported from Singapore.
Products are delivered by ship, with about 1,000 shipments/year. There are also about 60 crude oil import shipments each year.
About 35% of oil refined in Malaysia comes from the Middle East. Malaysia's crude oil is too light to meet the country's demand for bitumen production, so heavier crudes are used for blending feedstocks.
Tan said Shell is considering the long term future of its Lutong refinery, which is old and small and not logistically well-placed compared with Singapore.
Marketing strategies
Malaysia's products retailing players are Shell with 35% of the market; Petronas with 30%; and Esso Malaysia Bhd., Caltex Oil Malaysia Ltd., BP Malaysia Sd. Bhd., and Mobil Corp. each with 15% or less.
"Government is talking about deregulating the retail sector," said Tan, "but not in the near future. Regulation is through setting of a maximum retail price and an agreed formula to allow for operating costs."
Tan said Shell is market leader in fuel and lubricants. The company sold 60 million bbl of products in Malaysia in 1996. But Caltex, BP, and Mobil recently gained market share at the expense of Shell and Petronas.
"So 2 years ago, Shell started a transformation to reverse this trend," said Tan. "The process is almost complete. We now have new operating structures and new ways of working."
One change has been to relocate all retail customer service operations to an information technology based center in Kuala Lumpur: "Previously they were all over the place."
Marketing partnership
Another drive was for cost efficiency, which Tan said is taking a quantum leap through a collaboration with Petronas to share products distribution facilities.
"Shell and Petronas depots are next to each other at many locations," said Tan. "There are many opportunities for depot network rationalization. Why operate two, when we only need one at a site between us?"
Also, product movement paths criss-cross each other, said Tan, so there must be a way to cooperate simply to reduce delivery mileage: "Talks have started with Petronas for joint distribution and freighting."
While Shell and Petronas will remain retail competitors, the logistics partnership has started with operation of a 50-50 owned depot at Tawau. At least seven more joint depots will be established by 1999.
Shell and Petronas are also building a 140-km, 16-in. multi-product pipe- line, as a 50-50 joint venture, to take products from Shell's Port Dickson and Petronas' Melaka refineries to a point near Kuala Lumpur.
About 60% of Malaysia's growing products demand is expected to come from the area between Kuala Lumpur and a new airport, currently under construction.
The products pipeline is expected to cost $140 million to build and is due to be commissioned in June. It is designed to meet the partners' products transportation needs in the area at least until 2020.
Mohzani Wahab, senior manager of Shell Malaysia's retail network, said Shell has 836 retail outlets while Petronas has 479.
"All the international players are investing in re-imaging," said Wahab. "Shell has now upgraded 50% of its sites, and by the end of the year, we expect to have done 75%.
"Petronas has come a long way from owning two retail outlets in 1981, but it is now losing market share because its stations are looking tired."
Shell intends to invest 200 million ringgits/year ($80 million/year) in its retail chain during the next 3 years.
New players
The new 100,000 b/d refinery train being built at Petronas' Melaka site has Conoco Inc. and Den norske stats oljeselskap AS of Norway as joint-venture partners.
The new capacity is expected on stream late this year or early next year and is expected to herald the entry of at least one new player to the Malaysian retail market.
"Market talk is that Conoco is trying to do local business," said Tan. "We expect the company to get a license to operate soon."
Copyright 1997 Oil & Gas Journal. All Rights Reserved.
![How Malaysia's refining outlook is changing [30897 bytes]](http://images.pennwellnet.com/ogj/images/ogj2/95203701.gif){kind=link}