This article first appeared in The Edge Malaysia Weekly on October 23, 2023 - October 29, 2023

IT has been more than three years since Malaysia opened up the domestic natural gas industry to third-party access (TPA), from the regasification terminals all the way to the gas distribution pipelines.

Since then, only two shipments of liquefied natural gas (LNG) have been brought in by third parties.

There has been little excitement in the non-power sector — which accounted for more than 59% of total consumption in 2020 — despite gas prices for that segment having tracked international prices since 2020. What happened?

The current landscape of Malaysia’s gas market only reflects “a partial liberalisation”, Khairuddin Khalik, CEO of Peninsular Malaysia’s sole gas supplier Petronas Energy and Gas Trading Sdn Bhd (PEGT), tells The Edge in an interview.

He blames the subdued participation of the non-power sector on the recent spike in global LNG prices and the long-term nature of gas supply contracts, which inadvertently hinder new entrants to the domestic market.

In his view, the price cap on gas for the power sector, which accounts for 40% of total consumption, remains the key drag in the pursuit of a vibrant open market.

However, Khairuddin believes the full potential of TPA can be truly harnessed in a market that is entirely liberalised, covering both the non-power and power sectors.

Liberalisation means there is “no longer a fixed price for natural gas and that other players can come into the market”, opines an industry player.

The liberalisation of the domestic natural gas market started amid concerns over gas supply availability, following supply shocks in the late 2000s.

To prepare the landscape for new suppliers other than national oil major Petroliam Nasional Bhd (Petronas), domestic market prices, which have been at a discount, must catch up with the higher international free market prices. Thus, regulated gas prices have been raised every six months since 2011, first by RM3 per metric million British thermal unit (MMBtu) and later by RM1.50 per MMBtu.

In between, Malaysia’s first regasification terminal in Sungai Udang, Melaka, came online in 2013, allowing Petronas and later other players to import gas into the peninsula to support demand. Another terminal was built later in Pengerang, Johor.

In 2016, the Gas Supply Act was amended to pave the way for the TPA regulatory framework. This eventually allowed other local and foreign companies to import gas into the country and use the infrastructure owned by Petronas Gas Bhd and Gas Malaysia Bhd to sell gas directly to consumers.

By 2021, prices in the non-power sector had been floated based on the Malaysia reference price (MRP) mechanism. MRP, the local benchmark, represents the weighted-average free-on-board price of exports of LNG from Malaysia, typically under the more stable pricing associated with long-term contracts.

Today, there are 17 registered companies that have the licence to import LNG through Malaysia’s regasification terminals.

However, two problems have emerged. First, gas prices in the power sector have not been fully liberalised yet. Second, gas demand across the board is still tied to long-term contracts, so new players have no volume to participate for now.

“LNG is a long-term business,” an industry player says. “If you just focus on spot purchase, you are susceptible to price fluctuations, which would make it difficult for parties that do not have long-term purchases to start selling in the domestic market.”

“So third parties must first be willing to commit to long-term purchases of LNG as well as find buyers who are willing to buy based on LNG long-term contract before they can commit to facilities to import. As long as this is not aligned, there will be no importation,” the player adds.

Khairuddin argues that even with the MRP, the weighted average selling gas price in the domestic market remains lower than that in the global market due to the spike in global LNG spot prices.

For example, the average Japan-Korea Marker (JKM) LNG spot price was equivalent to RM109.15 per MMBtu in the three months from December 2022 to February 2023, versus MRP of RM48.14 per MMBtu benchmarked against the same period. This is because MRP refers to prices for long-term contracts, which is less volatile.

In the three months before that, (September-November 2022), the JKM LNG average price was RM167.70 per MMBtu, against MRP of RM58.04 per MMBtu.

“If you were to bring in LNG at current market prices, the cost would be far higher than domestic selling prices. No one in the right frame of mind would bring in cargo and incur losses except PEGT because it is the aggregator ensuring that demand is fully met domestically,” Khairuddin says.

The gap is wider in the power sector, which provides a more stable, long-term demand. While piped gas prices from PEGT now float along international prices, a price cap of RM30 per MMBtu is imposed on power sector consumption for the first 800 million standard cubic feet per day (mmscfd).

With MRP prices having traded above RM30 per MMBtu since 1Q2022, a large portion of gas to the power sector is sold at a discount to market prices.

“For the power sector, [prices are] fully regulated, whereby the pricing is determined by the Cabinet regardless of the negotiation that has taken place between PEGT and TNB ­(Tenaga Nasional Bhd),” Khairuddin says.

Only when power sector usage exceeds the capped volume will the selling price be “close to market price”, he notes. Indeed, gas reference market price in the power sector averaged RM51.7 per MMBtu for the additional volume in 2Q2023 compared with MRP of RM48.14 per MMBtu in the same period.

PEGT welcomes the liberalisation of the gas market.

Despite Petronas being ranked as the world’s top five LNG producers, only about 70% of local demand for gas is being met in Peninsular Malaysia. The remaining 30% is being sourced externally, including from Malaysia-Thailand Joint Development Area (JDA), and LNG imports from Petronas and third parties at prevailing market prices.

Khairuddin blames the price disparity for why PEGT recorded a net loss of RM4.63 billion for the financial year ended Dec 31, 2022 (FY2022), compared with a net profit of RM697.19 million in FY2021.

He says the losses included the provision for the company’s contracted commitment to supply gas to the power sector at below cost until 2026 under the Gas Framework Agreement.

“On top of this, recent geopolitical events have significantly impacted global gas prices, exacerbating the gap between procurement costs and regulated selling prices in the power sector.

“This has resulted in a challenging financial scenario where PEGT is selling gas to the power sector at below cost while acquiring piped gas and LNG at prevailing market prices,” Khairuddin adds.

Industry observers say the Malaysian government had missed a recent window to adjust its regulated gas prices, when MRP hovered around RM30 per MMBtu in 2019-2021 and even slipped to a low of RM16.72 per MMBtu in 1Q2021.

In comparison, MRP averaged RM48.14 per MMBtu in 2Q2023, or 60% higher than the RM30 per MMBtu price cap in the power sector.

The International Energy Agency forecasts spot gas prices to East Asia — Petronas’ key market — to oscillate between US$14 per MMBtu and US$15 per MMBtu in 2024 and remain elevated at US$13 per MMBtu in 2025 and 2026.

On top of the discounted gas prices, Malaysia’s electricity tariff to consumers is also still partly subsidised. Gradual adjustment to electricity tariffs started this year, and a complete pass-through of gas prices to consumers will inevitably shock the 10.6 million electricity customers in Peninsular Malaysia and Sabah.

A further mismatch is seen in Malaysia’s 2022-2024 electricity base tariff determination, where the determination of gas price (what regulators expect prices would be in the power sector) is RM26 per MMBtu — lower than the RM27.20 per MMBtu benchmark set in 2018-2021.

The Energy Commission is expected to update the TPA regulatory framework later this year, S&P Global Commodity Insights reported in July.

The access arrangement document of the TPA framework is in the process of being updated with the new mechanism to be tested in Sungai Udang before the same is implemented in Pengerang in 2024.

The Ministry of Economy also said in August that it is in the midst of developing the Natural Gas Roadmap (NGR) to enhance security of supply and access to cost-competitive natural gas, and position natural gas to support Malaysia’s energy transition, among others.

Khairuddin also points to rising cost challenges to produce gas domestically.

“It is becoming more challenging and costly to produce domestic gas due to higher carbon dioxide (CO2) emissions and the prevalence of small and marginal fields.

“As we acquire LNG at prevailing market prices, this underlines the importance of a fully liberalised market to ensure an uninterrupted gas supply that ensures energy security for the country,” he says.

“While our sources are primarily our own, we do explore other potential channels to supplement our gas supply and maintain a balanced portfolio. These measures collectively contribute to securing a sustainable and reliable source of gas for our domestic market,” he adds. 

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