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Malaysia: The Rise of Downstream

04.02.2015 / Energyboardroom

“The downstream part of the oil and gas industry is far more important than the upstream in terms of future perspective,” Tun Dr Mahathir Mohamad told EnergyBoardroom at the 2015 International Energy Week in Kuching Sarawak. This sentiment is reflected in the upswing in downstream developments in Malaysia after quiet first decade of the twenty-first century. Not only Tun Dr. Mahathir, but also Malaysia’s current Prime Minster Dato’ Sri Haji Mohammad Najib bin Tun Haji Abdul Razak has stressed the importance of downstream developments to Malaysia’s oil and gas future. His government has designated increasing downstream capacity as one of one of the key entry point projects of the country’s Economic Transformation Program. Adding value to the country’s resource wealth is seen as an essential step in propelling the nation to the high-income nation status by 2020.

“The downstream part of the oil and gas industry is far more important than the upstream in terms of future perspective,” – Tun Dr Mahathir Mohamad

Malaysia currently boats two major integrated petrochemical zones, one in Kerteh and another in Gebeng, as well as refineries in Kerteh, Sungai Udang, and Port Dickson. The next stages of the country’s downstream developments, however, are centred around the country’s Southern-most state, Johor, and are to be spearheaded by the Johor Petroleum Development Corporation (JPDC). The JPDC’s staed mission is to transform the region, particularly the area known as Pengerang, into a world-class downstream hub.

Johor was chosen as the epicentre of Malaysia’s downstream capacity for a number of reasons. Only a stone’s throw away from the region’s currently leading downstream hub, Singapore, “Johor and more specifically Pengerang are hidden treasures for the moment,” according to Yazid Ja’afar, Chief Executive of the JPDC, told EnergyBoardroom. He continues, “Situated at the tip of the Southeast of Johor, Pengerang is located along major international shipping lanes and is the only location in peninsular Malaysia that can accommodate very large crude carriers (VLCCs).”

The Johor developments are meant to complement, but also compete with, Singapore’s current downstream offering. “Pengerang’s proximity to Singapore, an already established hub, also serves as an advantage since Johor can match and in some instances exceed Singapore,” according to Yazid Ja’afar. The developers of Johor’s downstream capacity hope that the combined capacities and synergies between Johor and Singapore will propel the larger region into the role of Southeast Asia’s Amsterdam-Rotterdam-Antwerp (ARA) Zone.

To achieve such a lofty goal, the JPDC is charged with developing the Pengerang Integrated Petroleum Complex (PIPC), a 20,000 acre development that will include oil refineries, naphtha crackers, petrochemical plants, LNG import terminals and a regasification plant. Ambition is not lacking, as the PIPC development currently stands as the largest green field investment in the Asia-Pacific. PIPC’s two flagship developments are the DIALOG-Vopak Pengerang Independent Deepwater Petroleum Terminal (PIDPT) and the PETRONAS PIPC or RAPID project.

Operations at the $1.5 billion dollar PIDPT were launched in April, 2014. VLCCs and ULCCs will are set to arrive early this year once the terminal’s crude oil tanks are fully complete. Phase Two and Three of the project are also underway, with DIALOG Group, Vopak and SSI are now developing a LNG terminal in Pengerang.

The cornerstone of the PIPC is the PETRONAS PIPC or RAPID, a massive integrated refinery and petrochemical development complex that will cover approximately 7,000 acre and entail an investment of approximately $25.5 billion investment. Md Arif Mahmood told Focus Reports in December that “to my knowledge, no other company has ever undertaken a project of this size in one go. PETRONAS has thus decided to take on this challenge of constructing this one-of-a-kind integrated complex.”

Even given the recent drop in oil price, PETRONAS has affirmed its commitment to the project, which is now slated for commissioning in 2019. At the outset, the project was set to be operational in 2016/2017, but several delays were incurred and a final investment decision was reached in April, 2014. Six EPCC contracts for the refinery and stream cracker, as well as a PMC contract, were awarded in August to consortiums of large multinationals.

“Not many Malaysian companies have the technical ability and experience to comply with the strict requirements set by PETRONAS, as well as cope with the initial outlay and commercial risks associated with such a large undertaking” – Rashid Sidek, President of the Malaysian Oil & Gas Engineering Council

“Not many Malaysian companies have the technical ability and experience to comply with the strict requirements set by PETRONAS, as well as cope with the initial outlay and commercial risks associated with such a large undertaking,” as Rashid Sidek, President of the Malaysian Oil & Gas Engineering Council, told EnergyBoardroom. Nonetheless, ensuring local content in building downstream capacity is a key goal and the EPCC contract winners are obliged to take on local partners. The JPDC and industry groupings are also examining solutions to increase capacities and financing opportunities for Malaysian SMEs to take advantage of RAPID project opportunities in the coming years. “We expect and welcome more Malaysian SME involvement in PIPC in the years to come,” according to Yazid Ja’afar, Chief Executive of the JPDC. Even the large multinationals involved stress that it is not simply their size and track record that prepare them to complete project work. Instead, “working on a mega-project such as RAPID requires keen understanding of local specificities, which Technip can provide, being firmly established in Malaysia,” KK Lim, Senior Vice President Asia Pacific at Technip, told EnergyBoardroom last year.

Although it may be most remarkable for its massive size, PIPC is not the only downstream development in Johor, as both the Tanjung Langsat industrial complex and the Tanjung Bin Petrochemical and Maritime Industrial Centre are already in operation. The Tanjung Bin Petrochemical and Maritime Industrial Centre is a petrochemical and maritime park for the storage, blending and transit of petroleum products owned by MMC Corp BHD with partners Vitol and MISC. The Tanjung Langsat industrial complex and port is owned by Johor Corp and operated with Trafigura, Technip and MISC.

Furthermore, the downstream flurry of activity in Malaysia does not stop at Johor’s borders. A LNG regasification terminal was launched in Sungai Udang Melaka in 2013. PETRONAS will also be launching its first Floating LNG facility for the Kanowit field in offshore Sarawak later this year, and the Malaysia’s internationalizing NOC is also set to rejuvenate its Bintulu LNG terminal in Sarawak in the coming years. The regional government of Sarawak has also shown interest in adding on downstream capacity locally, but concrete plans have not yet been announced. All of these projects will contribute to the Malaysian government and PETRONAS’s have stated objective of turning Malaysia into a regional oil and gas hub. Nonetheless, the outcome Pengerang’s ambitious downstream expansion will weigh heavily on the success or failure of such lofty ambitions, and all eyes are now turned to Johor to gage project delivery.

Article written by Marie Kummerlowe

To read more articles and interviews from Malaysia, and to download the latest free report on the country, click here.

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