Thestar: Monday March 22, 2010
Policy Perspective - By Datuk Noriyah Ahmad
Malaysia must address its energy security issue to support the economy towards a higher growth trajectory
THE domestic energy landscape has changed considerably over the years. From being an energy-rich country a decade ago, Malaysia will soon be joining other countries that have to rely on imports to meet domestic demand.
Hence, energy security is a crucial issue that needs to be addressed to support the economy towards a higher growth trajectory. A holistic approach addressing the issues of energy supply, demand and pricing needs to be undertaken.
Prior to 1970, Malaysia imported virtually all its petroleum requirement. Following the Government’s conscious effort in the 1970s to develop petroleum resources, Malaysia has become a significant player and net exporter of petroleum products.
Major discoveries made in 1970s and 1980s provided the impetus not only to develop our own resources, but also to add value to these resources. Since its inception in 1974, Petroliam Nasional Bhd (Petronas) has been entrusted with the orderly development of national petroleum resources. The Petroleum Development Act 1974 vested Petronas with the entire ownership and exclusive rights of exploring and obtaining petroleum whether onshore or offshore of Malaysia.
Since then, massive investments and re-investments have been made to develop Malaysia’s petroleum industry. These include the development of refinery complexes in Malacca, liquefied natural gas complex in Bintulu, integrated petroleum and petrochemical complexes in Kertih and Gebeng, petrochemical plants in Labuan, Bintulu and Gurun, as well as integrated development of upstream and downstream gas supply infrastructure throughout Peninsular Malaysia. These deliberate efforts were based on long-term planning.
Malaysia’s oil reserves of about 5.5 billion barrels are relatively small compared with those in Saudi Arabia (260 billion barrels), Iran (138 billion barrels) and Iraq (115 billion barrels). Likewise, Malaysia’s gas reserves of 88 trillion cu ft (tcf) are much smaller in comparison with Russia (1,680 tcf), Iran (1,046 tcf) and Qatar (900 tcf).
For the longer term, maintaining the present level of oil production of about 660,000 barrels per day could be challenging. Over the years, our geological structure has matured. All major discoveries have already been developed and in production for more than 30 years. In fact, our oil and gas reserves are now depleting. In the case of gas, production is declining at about 10% per annum.
In addition, the remaining oil and gas fields are of lower quality due to high carbon dioxide content. The development of these fields will be more challenging due to the physical nature of the fields which are relatively small in size, scattered and far away from the existing production facilities.
Therefore, the cost of developing future resources will be much higher and may not be economically feasible. Moving forward, the nation will be increasingly dependent on imported petroleum. In fact, about 25% of gas supplied to the domestic market is now imported.
Besides petroleum, Malaysia has some coal deposits, mainly in Sabah and Sarawak. However, due to remoteness and quality factors, only a small percentage of local coal is being mined while a sizeable amount is imported to meet the requirement for power generation. Large hydro resources have also been developed over the years throughout the country but there remains some potential for future development.
Renewable sources of energy are also abundant in Malaysia, the significant ones being biomass, biogas and solar. The development of mini and micro hydro still remains potentially attractive in certain parts of the country. Although renewable energy has a promising future, it requires some time before its full potential can be unleashed. Based on this scenario, Malaysia is projected to be a net importer of energy by 2019.
As in any developing nation, energy consumption per capita in Malaysia is still low but is expected to expand at a rapid rate in tandem with economic development. Energy intensity with respect to gross domestic product has over the years also shown an increasing trend.
In terms of source, petroleum products constituted about 54% of energy demand in 2008 followed by natural gas (24%), electricity (18%) and coal and coke (4%) (see Chart 1).
In terms of demand by sector, the industrial sector dominated the energy use with 43% share, followed by transport (36%), residential and commercial (14%), non-energy use (6%) and agriculture (1%) (see Chart 2). In terms of volume, consumption increased by 51.2% from 29,699 kilo tonnes of oil equivalent (ktoe) in 2000 to 44,901 ktoe in 2008.
The transport sector was the main user of energy in 2000. However, in 2008, the industrial sector accounted for 43% of the total energy consumed, surpassing the transport sector at 36%. The main types of energy consumed by the transport sector were petrol and diesel. For the industrial sector, the main forms of energy used were gas and electricity. While the growing demand by the transport sector was matched by supply, industrial sector demand for gas increased at a much faster pace compared with supply.
The situation is especially perturbing in Peninsular Malaysia as more industry players, including those producing low value-added products, are switching to gas to make quick savings from a much cheaper gas price. Should we allow this to continue? And are we being fair to those industries which do not have access to piped gas? Attempts to address the gas supply shortage by temporarily re-allocating 100 million standard cu ft per day (mmscfd) of gas from the power sector to the industrial sector in 2009 has only enabled a fraction of the new demand being met. It is projected that an additional 100-200 mmscfd of gas is required every year until 2015 if demand for gas is to be met (see Graph 1).
Energy market in Malaysia is highly distorted. While petroleum products such as petrol and diesel are linked to market prices, gas prices and electricity tariffs are regulated by the Government.
Energy prices have also been used as a means to extend assistance to selected groups and to attract foreign direct investments. This is untenable. Such practices have also led to non-optimal allocation of resources and a host of other ill effects. For instance, the capping of gas prices below market level has caused a surge in demand for gas, particularly from industries. Although gas prices have been revised twice since 2008, the substantial difference between the regulated and “market” prices remained wide.
The temporary re-allocation of additional gas (in 2009) from the power sector to the industrial sector saw industries queuing to obtain gas either for expansion of existing operations or starting new ones. By March 2010, the additional gas to the industries has been snatched up.
Efforts to bring additional gas supply from abroad may be challenging and may not be attractive to industry players. How could we attract new gas suppliers – importing at higher market prices and yet selling at subsidised prices? Hence in meeting increasing demand as well as attracting new suppliers, the gas pricing-related issues need to be addressed.
We need to remind ourselves that our oil and gas resources are finite and non-replaceable. What we inherited from the earlier generation is also meant for the generation after us as they too have equal rights to these resources.
The era of cheap oil and gas is over. We need to accord proper value to our resources. Hence, for the future, gas should be utilised by strategic industries to produce high value-added products. Our domestic resources are depleting yet we are still selling them at subsidised rates. The nation needs to wean itself from subsidies. The longer we delay the move to market-based pricing, the more profound its impact on us later.
To entice more gas supplies to Peninsular Malaysia, gas prices have to transition in such a way that it could incentivise others to import. Indeed, optimal allocation of resources is best left to market forces to determine. Nevertheless, fair competition among industry players needs to be ensured.
Assistance to target groups, especially low-income groups and highly-promoted industries, needs to be extended in other forms besides energy prices. A new mechanism should be institutionalised to ensure that only selected target groups receive this assistance. Cash rebates and other fiscal incentives are options that could be considered for this purpose.
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