Malaysia’s Petronas faces gas test in move to net zero

Malaysia's state-owned Petronas' decision about how to move forward with its gas supplies after announcing a 2050 net-zero target has been complicated by current high spot LNG prices.

The firm's net-zero plan includes hydrogen as a crucial step. It said blue hydrogen offers a way to monetise the 1.5 trillion m³ of shale gas reserves it owns as part of a joint venture in Canada. But current "spectacular" LNG prices are complicating the picture. "There's this energy transition going on… but now LNG is looking beautiful. The price is spectacular," Petronas' hydrogen business head Adlan Ahmad said.

This has left the firm facing a tricky decision about what to do with its gas supplies. "Do you convert the gas to LNG where all our plants are ready, or do you convert it to ‘blue' [hydrogen]? Is the value better if you convert it to hydrogen?" Adlan said. "Or since … the demand for LNG is still there and the plants are already there, maybe we should just continue to provide the gas to feed our LNG plants."

Petronas is a major LNG exporter and has access to supplies such as from its 30mn t/yr Bintulu LNG project and 1.2mn t/yr Petronas Floating LNG 1 (PFLNG 1) and 1.5mn t/yr Petronas Floating LNG 2 (PFLNG 2) terminals in Malaysia. It holds a 27.5pc equity stake in Australia's 7.8mn t/yr Gladstone LNG (GLNG) plant, with which it has an agreement to receive 3.5mn t/yr on a fob basis during 2015-35. It also has a term agreement to receive 900,000 t/yr from the 7.2mn t/yr Brunei LNG project on a des basis from 2013-23.

The firm's gas supplies in Malaysia mainly come from offshore fields, including Pegaga , which is meant to send feedstock gas to the Bintulu plant and where high mercury levels detected in early September forced Petronas to delay and cancel term LNG deliveries from November until at least May 2022. Around 7-8 cargoes for delivery each month during January-February and 5-6 cargoes for delivery each month during March-May are expected to be cancelled, market participants said.

But Petronas has been increasing spot offers on current high spot LNG prices. It has issued around nine tenders to sell 11 spot cargoes since early September, up from the seven tenders it issued to sell 10 cargoes from May-August.

"It [Petronas] decreased the volume to long-term contract buyers; on the other hand, they sold spot to the market," a Japanese term offtaker at Bintulu LNG said, referring to Petronas' activities following the Pegaga upstream production issue. Japanese buyers such as Tokyo Gas, Jera and Japex form the bulk of term offtakers at Bintulu.

Asian spot LNG prices have refreshed highs from two months earlier , pulled up by a surge in European gas hub prices. The ANEA price, the Argus assessment for spot LNG deliveries to northeast Asia, for the front half-month rose to an all-time high of $44.980/mn Btu for second-half January deliveries on 22 December, up by $8.995/mn Btu, or 25pc, from $35.985/mn Btu for first-half January deliveries on 1 December. It surpassed the previous high of $42.095/mn Btu by $2.885/mn Btu for first-half November deliveries on 6 October. The ANEA price has since eased, tracking losses in European gas hub prices, but cold weather in northeast Asia has led to expectations that further downside may be limited.

Creating value Maximising the value of existing resources and infrastructure is likely the most effective approach for national oil companies like Petronas with financial obligations to the government, while adapting to a low-carbon future.

Petronas must make dividend payments to the Malaysian government — amounting to 25bn ringgit ($6bn) for this year — while shepherding clean energy investments and collaborations including in hydrogen, to meet its net-zero goal .

The high cost of such investments like for carbon capture and storage for blue hydrogen and a lack of long-term contracts to get green hydrogen projects off the ground are adding to the difficulty in deciding where to place its gas supplies.

"The question becomes… what can create the most value for Malaysia?" Adlan said.

By Reena Nathan and Joey Chua

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