THE GAS INDUSTRY IN MALAYSIA

Wan Zulkiflee Wan Ariffin

PETRONAS

GASEX 2008 Conference and Exhibition, 12-15 Nov 2008, Hanoi, Vietnam 12 Nov 2008

GASEX 2008 Vietnam November 2008

GASEX 2008 Country Report: The Gas Industry in Malaysia

CONTENTS

INTRODUCTION ............................................................................................................3 ENERGY SUPPLY AND DEMAND IN MALAYSIA ....................................................................4 GAS INDUSTRY IN MALAYSIA..........................................................................................7 GAS SUPPLY IN MALAYSIA..............................................................................................8 Domestic Supplies ......................................................................................................8 Imported/External Sources of Supplies .........................................................................9 ENHANCING THE GAS VALUE CHAIN.............................................................................. 10 Peninsular Gas Utilisation (PGU) Project ...................................................................... 10 Gas Reticulation Network in Peninsular Malaysia........................................................... 11 Gas Utilisation in East Malaysia .................................................................................. 12 THE LNG BUSINESS ..................................................................................................... 14 PETRONAS LNG Complex........................................................................................... 14 LNG Transportation .................................................................................................. 15 CREATING VALUE ALONG THE GAS CHAIN...................................................................... 16 Petrochemical Industry ............................................................................................. 16 Gas District Cooling (GDC) ........................................................................................ 18 Natural Gas for Vehicles (NGV) .................................................................................. 18 THE FUTURE OF THE GAS INDUSTRY IN MALAYSIA.......................................................... 20

INTRODUCTION

The Malaysian economy has been on a steady growth path averaging about 6% in the recent three years. According to the Central Bank of Malaysia, the economy in 2007 has expanded by 6.3% and continued to register a steady growth in the first half of 2008. This stronger growth has been achieved despite the more challenging external environment and increased uncertainties in the international financial markets. The impact of higher food and oil prices and slower global growth is expected to dampen the countrys economic growth and increase its inflation rate for the remaining part of this year and early next year. The availability and security of energy supply, especially oil and gas in the primary energy mix, will still play its major role in continuing to generate growth in the various sectors of the economy.

The gas industry is expected to continue contributing to Malaysias economic development in a number of ways, namely, fuelling the growth of industries, sustaining the exports from the Malaysia LNG (MLNG) plants and expediting gas field development to enhance the supply from new gas resources. In the domestic market, the Peninsular Gas Utilisation (PGU) pipeline network will continue to ensure the availability and security of gas supply to consumers in Peninsular Malaysia, especially the power sector. Development of the Sabah Sarawak Gas Pipeline (SSGP) project will ensure the availability of gas supply to Sabah and further boost the economic activities around that region, while sustaining liquefied natural gas (LNG) production in the Bintulu complex.

As the country progresses, Malaysia will continue to implement energy policies that will promote and support the growth of its economy. Policies to diversify Malaysias fuel sources, including the promotion of renewable energy, have been implemented by the government as the country faces the possible prospects of turning into a net oil importer by the early part of the next decade. The recent restructuring of energy prices through subsidy reduction will help correct market distortions, prevent wastage of depleting oil and gas resources, encourage industries to use alternative fuels and support renewable energy programmes.

The Ninth Malaysia Plan (9MP), currently in its implementation stage, will continue to drive Malaysias growth towards realising its vision to be a fully developed country by 2020, and natural gas is expected to play a bigger role as an efficient and clean source of energy for the key sectors of the Malaysian economy.

ENERGY SUPPLY AND DEMAND IN MALAYSIA

The energy supply and demand in Malaysia is largely influenced by the countrys philosophy in ensuring energy security and hence the formulation of policies. To ensure the sustainable development of Malaysias energy resources, and to facilitate the implementation of the longterm national development strategy, an act of parliament and a number of policy measures and strategies were instituted, namely: The Petroleum Development Act, 1974 The National Petroleum Policy, 1975 The National Petroleum Policy, 1979 The National Depletion Policy, 1980 The Four-Fuel Diversification Strategy, 1981 The Five-Fuel Diversification Strategy, 1999 The Petroleum Development Act 1974 The Petroleum Development Act, passed by the Parliament on 1 October 1974 vested upon PETRONAS the entire ownership of the petroleum resources in Malaysia, giving it the exclusive rights and privileges of exploring and developing these resources. National Petroleum Policy (1975) The intention of this policy is mainly to initiate the exploitation of indigenous petroleum resources as a means of serving national needs by supplying adequate quantities at reasonable prices. It was emphasised that the exploitation activities should take into account the need to conserve the national resources and to avoid any environment degradation. National Petroleum Policy (1979) Four years later, the National Petroleum Policy (1979) refined the objectives of the energy policy in Malaysia. Back then, Malaysia depended heavily on oil as a source of energy. As such this policy encouraged more efficient utilisation of energy by diversification of fuel sources. This resulted in more effort being put forward such as the use of natural gas in the power sector. This was when the use of natural gas was first mentioned in Malaysias energy policy.

National Depletion Policy (1980) The following year, the National Depletion Policy (1980) was adopted with the explicit aim of prolonging the lifespan of domestic petroleum reserves. This policy has undergone a few stages of refinement on the total production of crude oil and gas. Four Fuel Diversification Strategy (1981) To ensure a cutback in the countrys dependency on oil and a more balanced mix between oil, natural gas, hydropower and coal, the Four Fuel Diversification Strategy (1981) was introduced. Subsequent to this policy, an initiative was launched in 1983 to introduce natural gas as an alternative fuel in the transportation sector. Five Fuel Diversification Strategy (1999) Like the Four Fuel Diversification Strategy (1981), this Strategy aimed for a more diverse mix of energy sources with a new addition of Renewable Energy. Since the beginning, Malaysias energy consumption has tilted toward oil until the introduction of the Four Fuel Diversification Strategy (1981). Starting in the mid-80s, oil consumption saw a considerable reduction, balanced by the use of other resources such as coal and natural gas. The table below shows a summary of the Primary Energy Demand in Malaysia in selected years:

Table 1: Malaysias Primary Energy Consumption 1995 Oil Gas Coal Hydro/RE TOTAL Energy consumption (KTOE)
Source: National Energy Balance 2006

2000 49% 42% 5% 3% 47,850

2005 45% 39% 12% 4% 58,870

2006 40% 45% 12% 3% 59,006

54% 36% 5% 5% 30,985

Use of natural gas has been steadily increasing since the 1980s, making it one of the fastest growing fuels. Increasing use of coal (especially in power generation), however has reduced the use of both oil and gas.

Although oil will continue to have a slight advantage over gas in Malaysias primary energy mix, gas is likely to sustain as a dominant source of energy in the power generation sector. The decline in use of oil for power generation stands in obvious contrast to the use of natural gas utilisation (see table below). Not only has this reflected the successful implementation of the Four Fuel Diversification Strategy (1980), but also the fact that power plants favoured the use of gas in power generation.

Table 2: Malaysias Power Generation Fuel Mix 1980 Oil Gas Coal Hydro/RE Power Generation (GWh)
Source: National Energy Balance 2006

1985 62% 13% 0% 25% 14,855

1995 21% 59% 6% 14% 45,190

2000 5% 75% 10% 10% 68,842

2005 0% 60% 30% 8% 89,531

2006 4% 60% 8% 29% 92,453

85% 1% 0% 14% 9,988

GAS INDUSTRY IN MALAYSIA

In 1974, the government of Malaysia established PETRONAS to ensure the proper control and systematic development and management of the countrys oil and gas resources. Since then, PETRONAS has grown into a fully integrated multinational petroleum corporation, involved in a broad spectrum of oil, gas and petrochemical operations in more than 30 countries worldwide and operating alongside other multinational companies in a keenly competitive environment. It has played a pivotal role in transforming the countrys petroleum sector into a dynamic, fast-growing and integrated industry over the last three decades or so. As the regulator and manager of Malaysias petroleum resources, PETRONAS focus in its early years in the 1970s was on developing these resources by promoting petroleum exploration, development and production activities in the country through production sharing contracts (PSCs) with various multinational petroleum corporations. As a further catalyst, it has also established a whollyowned upstream subsidiary, PETRONAS Carigali Sendirian Berhad in 1978 to participate directly in the petroleum exploration, development and production activities in the country. PETRONAS Carigali became an operator of oil and gas fields in the 1980s. The decade also ushered in the gas era in Malaysia, with the successful development of the Malaysia LNG (MLNG) and Peninsular Gas Utilisation (PGU) projects in Bintulu, Sarawak and Peninsular Malaysia respectively. The PGU system actively promoted wider utilisation of natural gas in various sectors of the economy, especially the power sector. With deliveries of piped gas to Singapore, it has also contributed to export earnings for the country. Natural gas export was further increased significantly with the export of LNG from Bintulu. Greater accessibility to gas feedstock through the PGU system paved the way for the development of the Malaysian petrochemical industry in the 1990s. Ethane, propane and butane extracted from gas were used as feedstock to produce petrochemical products. The availability of this feedstock has been the source of our competitive advantage in attracting foreign direct investment and creating a petrochemical hub in the country.

GAS SUPPLY IN MALAYSIA

Domestic Supplies

As at 1 January 2008, the natural gas reserves in Malaysia stood at 88.0 trillion standard cubic feet (tscf) or 14.67 billion barrels of oil equivalent, approximately three times the size of crude oil reserves of 5.46 billion barrels. Of this, 33.5 trillion standard cubic feet (tscf) or 38% is found off the East Coast of Peninsular Malaysia, 41.8 tscf (48%) offshore Sarawak and the remaining 12.7 tscf (14%) offshore Sabah. At the current rate of production, Malaysias gas reserves are expected to last another 36 years.

In 2007, Malaysias production of natural gas averaged 7.01 bscf per day. As at 31 March 2008, Malaysia had 88 producing fields of which 61 were oil fields and 27 gas fields. About 50% of these producing fields are solely operated by PETRONAS subsidiary, PETRONAS Carigali.

The high potential of Malaysias acreages especially the frontier areas is reflected in the signing of new PSCs in 2007. Four new PSCs were awarded during the year, namely for Block SB312, Block SK333, the Kebabangan Cluster Fields and the Kinabalu Deep & East Gas Fields. Block SK333 is located onshore Sarawak, which could signal the possible revival of active onshore exploration activities in Malaysia.

The first deepwater field, Kikeh, was brought on stream on 17 August 2007, increasing the total number of producing gas fields in Malaysia to 27. Apart from being the first deepwater development in Malaysia, the Kikeh project is also the first to apply the use of a turret-moored Floating Production, Storage & Offloading (FPSO) vessel with a Truss Spar floating facility, the first to be installed outside of the Gulf of Mexico. The FPSO, converted from a super tanker, was the first such conversion done in Malaysia.

PETRONAS and its PSC partners are embarking on a Sabah Oil and Gas Terminal (SOGT) integrated project, involving the construction of a pipeline from offshore Sabah to an onshore oil and gas processing terminal in Kimanis Bay, Sabah with facilities to receive, process, store, meter and export the oil and gas produced by the offshore fields in Sabah. The processed gas from the terminal will be transported via the SSGP, a 500-km gas pipeline to be constructed from Kimanis in Sabah to the PETRONAS MLNG Complex in Bintulu, Sarawak. Receiving of first oil and gas is targeted for Q2 2012 and Q4 2011 respectively.

Imported/External Sources of Supplies

The completion of the PGU system in December 1997 has set the stage for Malaysia to provide a solid foundation for the development of the Trans-ASEAN Gas Pipeline (TAGP) system to ensure the security of energy supply in the region by 2020. With the completion of the project to link the 360 km Trans Thailand-Malaysia (TTM) Gas Pipeline system to the PGU pipeline to transport gas from the Malaysia-Thailand Joint Development Area (MTJDA) to Changlun in the northern part of Peninsular Malaysia, an average of 330 million standard cubic feet per day (mmscfd) of sales gas from Phase 1 of MTJDA is being transmitted through the PGU system since 20 February 2005.

In July 2005, the Gas Separation Plant owned and operated by Trans Thailand-Malaysia (Thailand) Ltd. 50:50 joint ventures between PETRONAS and the Petroleum Authority of Thailand commenced operation. With this commissioning, additional gas supply from the MTJDA is made available into the PGU system, hence enhancing the security of gas supply to Peninsular Malaysia in addition to existing supply from Kertih, Terengganu. At the same time, the additional gas supply provides a significant fit to the forthcoming TAGP network. The supply for Peninsular Malaysia is also complemented by the gas from the Indonesian West Natuna B and the PM3 fields (Commercial Allocation Arrangement between PETRONAS Carigali Sendirian Berhad, Talisman and PETROVIETNAM) at the current average rate of 245 mmscfd and 120 mmscfd respectively.

ENHANCING THE GAS VALUE CHAIN

Peninsular Gas Utilisation (PGU) Project The PGU project was an outcome of Malaysias Gas Masterplan study conducted in 1981. PETRONAS Gas Sendirian Berhad, now public-listed as PETRONAS Gas Berhad, was incorporated as a subsidiary of PETRONAS in May 1983 to undertake the project. Started in 1984, the PGU project was implemented in three stages, with the final stage of the network completed in 1997. The project involved the following developments: Development of gas fields and sub sea pipeline. Construction of six gas processing plants (GPPs) with a combined sales gas capacity of 2,060 mmscfd. A pipeline grid spanning 2,505 km. Extraction facilities for ethane, propane and butane from the gas stream to provide feedstock for the petrochemical industry. As at 31 March 2008, the PGU pipeline transported an average of approximately 2,170 mmscfd of gas. The power sector remained the largest gas consumer, accounting for 60.4% of total gas sales, followed by industrial, petrochemical and other users at 32.4%. remaining 7.2% was exported to Singapore. The PGU pipeline also transports imported gas into Peninsular Malaysia. In August 2002, the PGU system was connected offshore to West Natuna B of Indonesia via PETRONAS Duyong platform. In 2003, gas from the PM3 area (collaboration between Vietnam and Malaysia) entered the PGU line, and in February 2005 the PGU system was connected to the TTM gas pipeline to transport gas from the Joint Development Area (JDA) collaboration between Thailand and Malaysia. In 2007 about 575 mmscfd of JDA/West Natuna B gas was supplied through the PGU system. Within the PGU system, the GPPs and transmission pipeline have achieved world-class performance with a reliability rate of slightly above 99%. In addition to Singapores Senoko Power Station, the PGU network has also started delivering natural gas to Singapores Keppel Energy Pte Ltd on 1 November 2007 upon completion of gas pipeline tie-in connections to Keppel Energys power plant. The

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Gas Reticulation Network in Peninsular Malaysia The gas reticulation network in Peninsular Malaysia is a natural gas distribution system developed and operated by Gas Malaysia Sdn Bhd (GMSB). Currently, the reticulation network spans more than 1400 km around Peninsular Malaysia. The shareholders of GMSB are MMC Shapadu Holdings Sdn Bhd (55%), Tokyo Gas Mitsui & Co (Holdings) Sdn Bhd (25%) and PETRONAS Gas Berhad (20%). As at financial year ended 31 December 2007, GMSB supplied 106.5 TBtu (~286 mmscfd) of natural gas and liquefied petroleum gas (LPG) to industries such as food & beverages (27%), rubber (19%), non-metallic mineral (12%), glass (9%), fabricated & basic metal (11%), chemical (9%), electrical & electronics (3%), paper, printing and publishing (3%), textiles (5%) and others (2%). In terms of sales volume, the central region of Peninsular Malaysia is the biggest consumer (39%), followed by the southern region (34%), northern region (21%) and eastern region (6%). GMSBs customer base comprised more than 600 industrial customers, over 800 commercial customers and over 33,000 residential customers.

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Gas Utilisation in East Malaysia Sarawak As previously mentioned, Sarawak has the largest gas reserves in Malaysia with 41.8 tscf. The gas reserves are developed primarily for LNG exports. Realisation of the first LNG project in Bintulu (Malaysia LNG or MLNG) was made possible not only by the significant gas reserves discovered offshore Sarawak in the Central Luconia Province in 1971 but also the commitment of Japanese buyers, Tokyo Gas and Tokyo Electric to long term supply contracts. The LNG project was undertaken on an integrated basis, which required careful planning. It involved the development of offshore fields in the Central Luconia and Balingian areas, construction of subsea pipelines to land the gas in Bintulu, construction of liquefaction plants, construction of ships to transport the LNG produced and construction of LNG terminals and regasification plants at the buyers end. The first LNG plant started operations in 1983. Today, Malaysia has three LNG plants at a single complex in Bintulu with a capacity of 23 million tonnes per annum (mtpa), making it one of the largest LNG producers in the world. LNG has contributed significantly to the foreign exchange earnings of the country (more details on LNG in the next section). Besides LNG, gas in Sarawak is also used for the production of ammonia [400,000 tonnes per annum (tpa)] and urea [600,000 tpa]. The ASEAN Bintulu Fertilizer plant came on-stream in 1985. It is a joint venture under the ASEAN initiative with PETRONAS representing Malaysia holding the majority share of 63.5%. The other partners are Indonesia (13%), Philippines (9.5%), Thailand (13%) and Singapore (1%). Gas in Sarawak is also used as feedstock for the Shell Middle Distillate Synthesis plant which came on-stream in 1993. This is the largest pilot plant in the world that converts gas (100 mmscfd) into ultra-clean fuel (470,000 tpa) such as diesel, kerosene, naphtha and specialty products (detergent feedstock and special grade waxes). PETRONAS is embarking on the SSGP project which consists of 500 km horizontal length pipeline from the SOGT in Kimanis, Sabah to PETRONAS MLNG in Bintulu Sarawak, designed to transport 500-750 mmscfd of gas by end 2011 in order to boost current LNG production in Bintulu.

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Sabah As of 1 January 2008, the gas reserves in Sabah stood at 12.72 tscf. Historically, the petroleum industry in Sabah was centred in Labuan. Gas development in Sabah is rather limited due to relatively small gas demand. The upstream development of the oil and gas industry in Sabah began in the early 1970s with the first discoveries of oil fields namely Erb West in 1971, followed by Samarang in 1973. There are two gas terminals located in Federal Territory of Labuan (Labuan Onshore Gas Terminal LGAST) and in Kampung Gayang, Sabah (Sabah Gas Terminal - SBGAST). LGASTs throughput capacity is 115 mmscfd whilst SBGAST is 150 mmscfd. PETRONAS is currently embarking on an integrated oil and gas infrastructure project in Sabah and Sarawak in order to evacuate the oil and gas from the fields in deep waters offshore Sabah for sale and export. The project will be carried out in an integrated manner covering upstream platforms in offshore Sabah, offshore pipelines, an onshore oil and gas terminal in Sabah (SOGT) and onshore gas transmission pipeline (SSGP) linking the terminal to the PETRONASs Malaysia LNG Complex in Bintulu, Sarawak. The oil and gas fields will be developed in several phases in meeting the demand and production requirement, with the first oil and gas production targeted by early 2012 and end 2011 respectively. The methanol plant in Labuan, which is wholly owned by PETRONAS, is presently the biggest gas consumer in Sabah. It has been in operation since 1984 and was acquired by PETRONAS in 1992. About 55 mmscfd of gas is needed by the plant as feedstock to produce 660,000 tpa for export to Asian countries such as South Korea, Thailand, Japan, Indonesia and China. About 300,000 tpa is being used in PETRONAS MTBE and acetic acid plants in Kuantan, Pahang on the East Coast of Peninsular Malaysia. PETRONAS methanol business continues to expand with the construction of its mega methanol project in Labuan progressing as scheduled and is expected to be operational by Q4 2008. The project is expected to consume about 150 mmscfd of gas and will produce 1.7 mtpa of methanol.

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THE LNG BUSINESS

PETRONAS LNG Complex

The LNG business encompasses the liquefaction of natural gas and the sale of LNG. Malaysia is one of the largest LNG exporting countries in the world in an industry where key players include Algeria, Qatar and Indonesia. Last year Malaysia was the second largest LNG exporter after Qatar.

The PETRONAS Malaysia LNG Complex in Bintulu, Sarawak remains as one of the worlds largest LNG production facility at a single location with a combined capacity of about 23 mtpa. During Financial Year 2007/08, the Complex produced 21.5 million tonnes of LNG. Of this, 12.7 million tonnes or 59% was exported to Japan, 6.0 million tonnes or 28% to South Korea and 2.8 million tonnes or 13% to Taiwan.

With over 20 years of experience in the LNG business, Malaysia has earned a solid reputation as a stable and highly reliable supplier of LNG to its customers in Japan, Korea and Taiwan. PETRONAS has increased its market share in Japan and South Korea to 20% and 24% respectively, while in Taiwan, its market share declined from 43% to 35% due to lower offtakes. Two new long term contracts were signed with Japanese buyers in the 2007/08 financial year, one with Osaka Gas Co. Ltd and the other with Shikoku Electric Power Co. A short term supply agreement with Shanghai Gas (group) Company Ltd was also signed during the year.

PETRONAS is currently de-bottlenecking its second joint venture LNG plant to increase its production capacity by 1.2 mtpa, thereby increasing the combined production capacity of the PETRONAS LNG Complex to about 24 mtpa. The de-bottlenecking project is scheduled for completion in 2009.

Going forward, LNG is expected to continue to be at the forefront to drive the further development of Malaysias gas resources in the future, in line with the projected increase in the worlds LNG demand. With the customers shift towards more flexible terms in the LNG supply contracts and the projected excess of world LNG supplies, PETRONAS is already moving towards diversifying its customer base from its traditional markets of Japan, Korea and Taiwan to new markets, as well as entering the trading and spot markets.

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LNG Transportation

The LNG exports are shipped to the overseas customers by custom-made LNG tankers owned and operated by MISC Berhad. A majority owned subsidiary of PETRONAS, MISC continues to strengthen its global market position as the largest owner/operator of LNG tankers through the delivery of three new tankers, Seri Bakti, Seri Ayu and Seri Begawan, increasing the size of its LNG fleet to 26 tankers as at 31 March 2008. Seri Bakti was contracted to BG Group on a medium term charter from August 2007. Seri Ayu was contracted to ALTCO on a 30-year term charter beginning October 2007, while Seri Begawan to MLNG on a short-term charter.

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CREATING VALUE ALONG THE GAS CHAIN

Petrochemical Industry

The development of the gas industry and PGU system has spawned the rapid development of the petrochemical industry in Malaysia. PETRONAS has actively pursued on a joint venture basis the development of an ethylene-based integrated petrochemical complex (IPC) in Kertih, Terengganu and a propylene-based IPC in Gebeng, Pahang, both in the East Coast of Peninsular Malaysia. PETRONAS also owns and operates a urea plant in the northern part of the peninsula. This, coupled with the development of the petrochemical industry in East Malaysia as mentioned earlier, has enabled PETRONAS to position Malaysia to be a competitive petrochemical hub. With the objective to maximise returns from the nations hydrocarbon resources, the challenge is not just in terms of equity fund commitment but also to attract into the country major foreign investors with the right expertise. Among the major companies investing in the petrochemical industry in Malaysia are Dow Chemicals, BASF, BP, Sasol, Mitsubishi, and Idemitsu. BASF of Germany has decided to make Gebeng as one of its major integrated petrochemical production centres in Asia. BASF also has another integrated petrochemical plant in Nanjing China. Below is the list of all active petrochemical plants in Peninsular Malaysia, Sabah and Sarawak which have benefited directly or indirectly from the growth of the gas business in the country.
Plant Peninsular Malaysia Ethylene Malaysia Sdn Bhd Ethylene Optimal Olefins (M) Sdn Bhd Ethylene Propylene Vinyl Chloride (M) Sdn Bhd VCM Polyvinyl Chloride PVC Optimal Gylcols (M) Sdn Bhd Ethylene Oxide Ethylene Glycols 140,000 385,000 2002 150,000 2001 400,000 2001 600,000 95,000 2000 400,000 1985 Capacity (tonnes/yr) On-stream date

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Plant Optimal Chemicals (M) Sdn Bhd Ethoxylates, Ethanol Amines, Glycol Ether, Butyl Acrylate, Butanol PETLIN Sdn Bhd LDPE PETRONAS Ammonia Sdn Bhd Ammonia Syngas Oxogas Second Propane Dehydrogenation plant Propylene Idemitsu SM Malaysia Sdn Bhd Ethylbenzene Styrene Monomer MTBE Malaysia Sdn Bhd MTBE Propylene Polyethylene Malaysia Sdn Bhd HDPE/LLDPE Polypropylene Malaysia Sdn Bhd Polypropylene BASF PETRONAS Chemicals Sdn Bhd Acrylic Acids complex Oxo Alcohol complex BP PETRONAS Acetyls Sdn Bhd Acetic Acid PETRONAS Fertilizer Kedah Sdn Bhd Granular Urea Ammonia Methanol Sarawak Asean Bintulu Fertilizer Sdn Bhd Urea Ammonia Shell MDS (Malaysia) Sdn Bhd Naphtha, Kerosene, Diesel Sabah PETRONAS Methanol Labuan Sdn Bhd Methanol Mega Methanol Project

Capacity (tonnes/yr) 388,000

On-stream date 1998* (incorporation date)

255,000

1999* (incorporation date)

450,000 325,000 428,000 2000 (syngas) 2001 (ammonia)

300,000 215,000 200,000 300,000 80,00 250,000 80,000 340,000 519,000 400,000 600,000 375,000 66,000

2000 1997

1992

1995 1992 2000 - 2002

2000

1999

600,000 400,000 470,000

1985

1993

660,000 1.7 million

1985 End 2008

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Gas District Cooling (GDC) Gas District Cooling Holdings Sdn Bhd (GDCHSB), a subsidiary of PETRONAS, was incorporated on 19 July 1993 as a utility company. GDC uses natural gas as an energy source to produce chilled water for air-conditioning together with co-generation in an integrated energy system.

The environment-friendly GDC system uses water instead of the harmful chlorofluorocarbon as refrigerant. The GDC and co-generation system has been successfully implemented in four of Malaysias major projects namely the Kuala Lumpur City Centre, the Kuala Lumpur International Airport, the Federal Governments administrative centre in Putrajaya and Universiti Teknologi PETRONAS.

GDCHSB is currently the main player in the field of GDC and co-generation in Malaysia. As at end 2005, GDCHSB uses approximately 17 mmscfd of gas for its operations.

Natural Gas for Vehicles (NGV) The primary motivation for NGV is to encourage the use of environment friendly fuel - as motor vehicles are the major source of air pollution. The use of NGV will reduce NOx and SOx by 76% and 99% respectively when compared to diesel. To lead and organise the promotion and development of the industry, PETRONAS NGV Sdn Bhd was incorporated in 1995. However, the gas for transportation programme was started by PETRONAS as early as 1983 when it conducted a study on the usage of natural gas as a transportation fuel. Various government incentives have been introduced such as the reduction in road tax (25% for dual fuel vehicles; 50% for monogas vehicles), import duty and sales tax exemption on conversion kits for taxis, and accelerated capital allowance (60% in YR1, 20% in YR2 and YR 3) to encourage the use of natural gas in the transportation sector.

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In the 2006 Budget, the Government provided additional incentives for NGV use: Exemption of import duty for conversion equipment and NGV monogas engines for buses and motor vehicles for transportation of goods. Grant of RM 50,000 for each monogas bus acquired by end of 2008. PETRONAS will be administering the disbursement of the grant. PETRONAS has also contributed to the development of the industry by: Providing rebates (from 2000 to 2004) for conversion kits for taxis amounting to a total of RM 7.8 million. Providing gas at subsidized prices. Introducing the Enviro 2000 taxis to serve as a platform for NGV development in Malaysia and building the technical capabilities in resolving issues related to NGV (low mileage, storage constraints and weight of cylinders). As of June 2008, the number of NGV vehicles is more than 34,000 which mainly consists of light vehicles such as taxis and private vehicles, and about 80 NGV filling stations are currently in operation in the central region.

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THE FUTURE OF THE GAS INDUSTRY IN MALAYSIA

It is envisaged that the two key gas utilisation drivers will continue to play the same role well into the future: Gas utilisation through the Peninsular Gas Utilisation (PGU) network in Peninsular Malaysia by the power sector, industrial and commercial users, and export to Singapore LNG export from the Bintulu LNG complex, mostly to the customers in Japan, Korea and Taiwan. The strategic thrusts of the Malaysian oil and gas industry were explicitly mentioned in the Ninth Malaysia Plan (9MP), a comprehensive blueprint prepared by Malaysias Economic Planning Unit of the Prime Ministers Department and the Finance Ministry on the national budget allocation from the years 2006 to 2010. highlighted in the 9MP: Intensify the development of domestic resources and secure overseas resources to sustain long-term supply of natural gas. Additional 54 NGV stations to be constructed including development of dedicated NGV stations. Review further incentives to encourage NGV conversions. Review energy (including gas) prices so as to ensure more market-reflective prices. Undertake review to gradually reduce subsidies. Reconsider other energy sources for power generation. Support ASEAN efforts in energy cooperation. In relation to gas, the following were

Enhancing security and sustainability of gas supply Production of gas from indigenous sources is expected to decline in a decade, based on current reserves. To sustain long term energy supplies, more reserves will be developed in phases to replace gas volume from the depleted fields. Future gas development from domestic reserves will be more challenging. The future reserve fields have the following characteristics: High CO2 content ranging from 12% to 40%. Smaller fields and fields that are scattered far from existing developed fields. High cost of development.

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To meet demand, Malaysia also imports gas from the neighbouring countries West Natuna B (Indonesia) and JDA. To date about 20% of Peninsular Malaysias gas demand is met by import sources. This is expected to increase when the volume from West Natuna B and JDA increases to 250 mmscfd and 390 mmscfd respectively. PETRONAS also plans to introduce various measures such as capping the demand (in the short term), assessing potential import sources and doubling efforts to monetise gas from high CO2 and small gas fields.

The expansion of reticulation system As the reticulation system is targeted for expansion, a significant effort would be needed to ensure more efficient integration of the PGU network and the distribution system (GMSB) to provide more efficient services to customers. This will support a more robust growth in gas utilisation by the non-power sector, including GMSBs current aspiration to increase the number of its industrial customers.

Natural Gas for Vehicle (NGV) Supporting the governments vision for the NGV project, PETRONAS will continue to develop the NGV station network. To ensure the success of NGV, PETRONAS will continue to focus on building a critical mass in strategic locations. New stations will have higher compression capacity and hoses while existing facilities will be upgraded. In continuing efforts to develop its NGV station network, PETRONAS plans to bring another 200 stations into operation by 2010 which will have the capacity to supply for 67,000 vehicles per day.

Energy prices In relation to the energy prices, the Malaysian government has recently introduced a new gas price structure with reduced subsidies. This would lead to positive developments in terms of enhancing cost competitiveness, improving economic efficiency, promoting price transparency and attracting new investments. Under the new structure, the industrial and power sectors are getting a 70% discount on the market price of gas starting from July 2008 and the discount will be gradually reduced until the gas price reflects the actual market value.

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Fuel Mix for Electricity Generation In line with the governments move to encourage the consideration of other energy sources for power generation, it is expected that the gas share in power generation will reduce to give way to the increase in the share of coal (See Table 4).

Table 4: Electricity Generation Fuel Mix (%) 2002 Coal Oil Gas Hydro Other Source: APERC Analysis 6 9 74 11 2010 36 1 56 7 1 2020 45 1 48 6 1 2030 50 0 45 4 1

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