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Malaysia's Petronas eyes third floating LNG vessel amid upstream uncertainties

Highlights

Petronas issues FEED tender for third FLNG in Sabah: sources

Analysts unsure if current resource base justifies new FLNG

Scope to deploy new FLNG in overseas upstream assets

Malaysia's national oil company Petronas has issued a front-end engineering and design tender for a third floating liquefied natural gas or FLNG plant, for which bids are due in August from interested parties, according to sources with direct knowledge of the matter.

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The FEED study is expected to kick off before the end of 2021 and lead to a final investment decision on the unit dubbed PFLNG Tiga during the second half of 2022, sources said. Petronas declined to comment.

PFLNG Tiga is expected to have an LNG production capacity of around 2 million mt/year and be deployed near-shore in the eastern state of Sabah on the island of Borneo, according to market participants. Tiga means three in Malay.

The territorial waters of Sabah are home to Petronas' two other FLNG units currently in operation, PFLNG Satu and PFLNG Dua, or PFLNG One and Two. Petronas was the world's first oil and gas company to successfully deploy two FLNGs, which are designed to tap stranded gas fields economically instead of building expensive land-based facilities.

Some factors support the economics of a third FLNG in Southeast Asia – an FLNG can be built faster than an onshore facility, LNG prices are expected to remain high and industry upheavals in the past year led to supply-side projects being delayed or cancelled. The region is also close to gas markets in North Asia.

However, the tender raised eyebrows in oil and gas circles because Malaysia has been struggling with declining output from its upstream assets, there have been few major discoveries in recent years and it is unclear if there are enough gas reserves to necessitate a third FLNG plant.

Upstream challenges

Malaysia's hydrocarbon exploration is split across two regions, peninsular Malaysia and the eastern island of Borneo, where the states of Sabah and Sarawak together account for over two-thirds of crude and condensate output, and more than three-quarters of gas production.

Sarawak is the country's single largest gas-producing region, mainly from the nine-train Petronas LNG Complex at Bintulu with a capacity of 29.3 million mt/year.

The first two FLNGs deployed in Sabah, while still in early days of their operational lifecycles, so far validate the viability of Petronas floating liquefaction technology, and challenges have been more on the availability of gas reserves, according to several sources.

"Adding a third FLNG in Sabah's offshore looks more challenging, given the present state of discoveries," IHS Markit's managing director of Upstream Nick Sharma said. "The current resource base only meets the need for PFLNG Satu, Dua and Sabah's domestic gas requirements for the coming decade," Sharma said.

Malaysia's upstream activity visibly slowed after oil prices crashed in 2014, with large-scale projects like the Kasawari field development having experienced delays in reaching final investment decisions.

In May 2019, PFLNG Satu was first deployed in the Kanowit field off Sarawak, and then mobilized to the Kebabangan gas field off Sabah. Kebabangan was previously expected to export gas to the LNG complex in Bintulu using the Sabah-Sarawak inter-state pipeline, which saw extensive downtime prompting Petronas to mobilize PFLNG Satu to offshore Sabah.

The incident raised questions over dependency on the pipeline as a conduit to monetize Sabah's gas resources for exports through the Bintulu terminal.

Almost two years after the redeployment of PFLNG Satu, PFLNG Dua entered operation in Block H operated by Thailand's national oil company PTTEP off Sabah during the first quarter of this year.

Sharma said that while the startup of Petronas' second FLNG was held back by failure of a subsea component, both PFLNG Satu and Dua are now loading out volumes steadily. PTTEP aims to ramp up PFLNG Dua production to 270 MMcf/d, its state-owned parent group PTT said.

Malaysia LNG

Petronas will have to prioritize utilization of PFLNG Satu, Dua and Malaysia LNG, which comprises the Bintulu LNG complex and associated upstream gas production facilities, before it can deploy a third FLNG.

Platts Analytics data showed the Bintulu complex has averaged 85% utilization since 2019. "This is more than enough to meet the contractual obligations for Petronas' customers [although] the lower utilization rates would impact the NOC's exposure to the spot market," Jeff Moore, manager for Asia LNG analytics at S&P Global Platts, said.

"Petronas can also choose to deploy PFLNG Tiga in Malaysia in Brazil, Mexico and Africa where it has access to large, undeveloped gas reserves," IHS' Sharma said, adding that the exact deployment will only be clear after FID.

Some market sources linked the new FLNG tender to Sabah state government's ambition to develop an industrial park and petrochemicals hub at Sipitang, the town closest to the Sarawak border, increasing revenue from oil and gas taxes and extending economic benefits to its people.

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