Upstream project delays hurt Malaysia's Bintulu LNG exports

Malaysian national oil company Petronas' attempts to bolster LNG exports at its nine-train Bintulu LNG complex in Sarawak have been hampered by delays in bringing new gas fields into production, sustained outage at a key gas pipeline and legacy reserves depleting rapidly.

These issues have prevented Malaysia, the world's fifth largest LNG producer in 2020, from maximizing LNG exports despite expanding production capacity, even as upstream developments in Southeast Asia risk further delays due to the need for additional investments in carbon capture.

Petronas has been forced to exercise downward quantity tolerances in LNG contracts with North Asian offtakers in recent months and many of the affected cargoes were scheduled for delivery during this winter, forcing customers to look for alternatives amid record high spot LNG prices.

The flagship Bintulu LNG was expanded to almost 30 million mt/year capacity in recent years, but it has been operating under 80% of its designed capacity for most of 2021, and at around 85% since 2019, due to insufficient gas supply, according to S&P Global Platts Analytics.

Malaysia's overall gas production stagnated at 72-76 Bcm/year since 2010, after rising nearly 6% per year the decade before, according to upstream consultancy, Rystad Energy. It estimated that Malaysian gas production will remain largely flat through 2028 and decline to around 65 Bcm by 2030, and keep falling to 39 Bcm by 2040 as new developments will not be able to offset declines at existing fields.

Sarawak state, where Bintulu is located, accounts for more than half of the country's gas production and reserves. Rystad Energy projected Sarawak's offshore fields will produce 39.75 Bcm of gas for the whole of 2021, falling short of some 42 Bcm required to lift Bintulu LNG's capacity utilization to over 95%.

Petronas has sought to stem production declines by fast-tracking new projects, including fields operated with Vietnam and Thailand under the Malaysia-Vietnam Commercial Arrangement Area (CAA) since 2003, and the Malaysia-Thailand Joint Development Area (MTJDA) since 2005.

Some of these included production from Sabah state in the northeast, at fields operated along with Thailand's exploration company PTTEP. The feedgas was meant to be transported through the Sabah–Sarawak Gas Pipeline or SSGP to Bintulu LNG.

However, SSGP -- designed to transport a sizeable 750 million cu ft/d of feedgas -- has been out of operation, factoring in damages from at least three reported gas leaks, two leading to explosions since it first began operation in 2014.

Petronas has attempted to ramp up enhanced oil and gas recovery projects to boost output at existing fields, which may yield cost and time savings, but upstream analysts suggested that developments of large but mostly sour discoveries still hold the key to maintaining feedgas supplies to Bintulu LNG.

New projects in limbo

Petronas is relying on commercializing a laundry list of new gas discoveries around Sarawak to boost LNG exports -- mainly Pegaga, Kasawari, Jerun and Lang Lebah, all in offshore waters, over the next three to five years.

The Pegaga gas project in Block SK320 was expected to start production and feed Bintulu LNG's Tiga plant from the last quarter of 2021, but has been delayed due to the discovery of mercury contaminants, according to notifications received by offtakers who said the field's output could be delayed as far out as the end of 2022.

Out of Bintulu LNG's liquefaction nine trains spread across three plants MLNG Satu, Dua and Tiga, only one is built to handle sour gas with contaminants, and the setting up of new mercury removal units to draw gas from a field offshore would mean additional cost and delays.

Petronas has not commented on delays at Pegaga and Pegaga project operator, Mubadala Petroleum has said the project is progressing as planned. On Mubadala's website, however, Pegaga's production start-up has been revised to the first quarter of 2022, six months behind the third quarter of 2021 previously guided in a 2018 press release.

Rystad Energy estimated that adding the mercury removal unit will drive up costs by $20 million-$25 million. While mercury is one of three contaminants complicating the extraction of sizeable, undeveloped gas resources off Malaysia, Rystad Energy estimated around 40% of resources due to be sanctioned for developments off Malaysia by 2025 also hold excessive carbon dioxide and sulfur.

This is problematic because Malaysia has prioritized the development of sweet gas discoveries to supply Bintulu LNG in the past five years, and costly plant upgrades will be needed to handle sulfur.

Another major field designed to feed Bintulu is the giant Kasawari discovery in Block SK316 that holds up to 35% CO2, which is significantly higher than average and could push up development costs as Petronas aims to introduce Kasawari CCS by 2025.

The success at piloting the Kasawari CCS holds the key to the development of another multi-Tcf discovery, Lang Lebah, in the neighbouring PTTEP-operated Block SK410B, and other sour gas fields in Malaysia. Rystad warned that any delays can bring forward a decline in Sarawak as well as Malaysia's overall gas production by about five years to 2022-2023.

Kasawari and Lang Lebah can potentially pump up to 900 mmcf/d and 1,000 mmcf/d of gas, respectively, nearly doubling the designed 550 mmcf/d and 600 mmcf/d capacities for Pegaga and the combined development of NC3 and NC8 in Block SK 316, according to data released by project operators and their contracted oilfield services providers.

Petronas didn't respond to enquiries about production declines and the impact of upstream issues on LNG output.