igu task force 2 case study transforming energy access …

of 29

IGU TASK FORCE 2 CASE STUDY

Transforming Energy Access and the Malaysian Economy via the Peninsular Gas Utilization (PGU) Pipeline Project

30 October 2018

Prepared By Reviewed By

Name /Signature Rosli Khairon Rosman Hamzah Ahmad Johari Jaafar

Designation Manager, Technical & Projects

Secretary General Leader of Advocacy WC

Date 16 Oct 2018 16 Oct 2018 16 Oct 2018

TABLE OF CONTENTS 1. Executive Summary ............................................................................................................................ 2

2. Evolution of the Malaysian Economy................................................................................................. 3

3. The Move Towards Gas ...................................................................................................................... 4

4. Making Gas Accessible ....................................................................................................................... 8

4.1 Complementing the PGU Transmission Pipeline ........................................................................... 16

5. Benefits of Utilizing Gas ................................................................................................................... 18

5.1 Gas as a Clean Fuel ......................................................................................................................... 21

6. Challenges in Implementation ......................................................................................................... 23

7. Gas Market Reforms for Sustainability ............................................................................................ 25

7.1 Third Party Access .......................................................................................................................... 26

8. Ensuring Future Supply Security Through an Open Market ............................................................ 27

9. Conclusions ...................................................................................................................................... 28

Malaysian Gas Association (MGA) IGU TASK FORCE 2 CASE STUDY Transforming Energy Access and the Malaysian Economy via the Peninsular Gas Utilization (PGU) Pipeline Project

IGU Task Force 2 Case Study on PGU Draft RK V03 rh.docx of 29

1. EXECUTIVE SUMMARY

The country, divided by the South China Sea, consists of Peninsular Malaysia in the West and the two

states of Sabah and Sarawak in the East. The peninsula is more developed and densely populated. During

the early years, the Malaysia economy was predominantly agrarian with the role of manufacturing being

minor.

The demand for energy is highest in the west coast and the southern region of the peninsular. Gas also

has clear advantages and unique qualities that make it a highly desirable fuel in power generation and

industry. However, the gas reserves are mostly located in the east coast. Thus the idea of a Peninsular

Malaysia gas pipeline network to connect the resources to the demand areas was mooted. This

subsequently evolved into the Peninsular Gas Utilization (PGU) project. Its development hinged on the

sale of gas to large base load consumers and gas-fired power plants were selected as such anchor

customers. This base load demand facilitated the development of various natural gas utilization projects

such as fuel for industries, feedstock for petrochemical plants and fuel for transportation. In developing

the PGU project, there were several important lessons learnt in terms of effective project management;

obtaining stakeholder buy-in and avoiding Right of Way (ROW) issues.

Due to the PGU, natural gas is now the largest component of the nation’s primary energy supply and

the country’s dependence oil and refined petroleum products have been substantially reduced.

Accessibility to natural gas had promoted fuel substitution, increased national energy security,

accelerated of the industrialization and diversification of the Malaysian economy – leading to stabilized

export earnings and income, and improved Malaysia’s balance of payments position – as a result of

exporting manufactured goods and petrochemical products as well as a result of import substitutions.

Market reforms and liberalization could lead to more sustainable gas supply at competitive prices for

end-users, providing the momentum for sustainability. Additionally, supply security and reliability could

be further enhanced by providing access to the global LNG supply.



2. EVOLUTION OF THE MALAYSIAN ECONOMY

Malaysia is a country in Southeast Asia. With a population of 32.4 million1, it consists of 13 states and

three federal territories in three regions, namely Peninsular Malaysia, Sabah and Sarawak. Peninsular

Malaysia is separated by the South China Sea from Sabah and Sarawak. Peninsular Malaysia shares a

land and maritime border with Thailand in the north and maritime borders with Singapore in the south,

Vietnam in the northeast, and Indonesia in the west. Sabah and Sarawak share land and maritime

borders with Brunei and Indonesia and while Sabah shares a maritime border with the Philippines and

Vietnam. A map of Malaysia is shown in Figure 1.

Figure 1 – Map of Malaysia

Today, Malaysia is one of the most prosperous and dynamic economies in Southeast Asia, with a

burgeoning manufacturing sector, an expanding middle class, rising literacy rates, and increased life

expectancies. Its political stability, economic resilience, well-rounded progress, the creation of new

industries and improvements in the productive capacity of the economy generally are cementing the

survival of Malaysia within the context of globalization. But that has not always been the case.

Malaysia obtained its independence from Great Britain in 1957 and up until the 1970s, the Malaysian

economy was heavily dependent on primary products, specifically rubber, tin, and palm oil, to generate

growth and employment. The role of manufacturing was quite minor involving the processing of rubber,

tin, timber, foodstuff and light engineering works. Initially, Malaysia pursued a development strategy

1 Department of Statistics Malaysia



that focused on the diversification of agricultural exports as a means to stabilize its export earnings and

income. However, a downswing in the prices of these commodities has far reaching repercussions on

the economy. Thus, the country began to pursue an import substitution development strategy in

beginning in the 1960s and gradually moved toward an export-oriented industrialization strategy in

1970s. Over the next few decades, Malaysia developed rapidly and experienced a transition from

agriculture to industry. These structural adjustments occurred due to the deliberate government

policies to industrialize the economy through the import substitution and export-oriented

industrialization strategies. The changing phases of Malaysia’s economy is summarized in Figure 2. This

case study aims to show how economic transformation has been significantly facilitated by the

expansion of Malaysia’s gas industry.

Figure 2 – The Changing Phases of the Malaysian Economy

Period Economic Phase GDP

1957 – early 1960s Agriculture and commodity-based

economy US$ 1.92 Billion (1960)

Early 1960s – mid 1960s

Diversification into secondary industries producing intermediate

goods US$ 3.0 Billion (1965)

Mid 1960s – late 1960s

Promotion of labor-intensive import substitution industries

US$ 3.7 Billion (1969)

Late 1960s – 1970s Intensifying of export-oriented

industrialization, particularly the electrical & electronics sector

US$ 21.2 Billion (1979)

1980s – 1990s Establishment of heavy

industrialization program US$ 79.1 Billion (1999)

Post 1990s

Shift towards higher technology capital-intensive industries and

development of clusters that strengthen industrial linkages

US$ 296.5 Billion (2016)

Sources: World Bank Paper by Zainal Aznam Yusof & Deepak Bhattasali and World Bank website

3. THE MOVE TOWARDS GAS

Malaysia is blessed with its own indigenous hydrocarbon reserves to meet its energy needs and to earn

export revenue. However, Malaysia's known recoverable reserves of oil are comparatively small. In the



1984, Malaysia’s oil reserves were estimated at 2.6 billion barrels.2 At the then rate of production of

about 450,000 barrels per day, the reserves would be fully depleted within 20 years.3 Fortunately,

Malaysia is also endowed with large reserves of natural gas in comparison. During the same period,

recoverable natural gas reserves were estimated at 48.6 trillion cubic feet (TCF) comprising 38.9 TCF of

non-associated gas and 9.7 TCF of associated gas.4 On an energy equivalent basis, this 48.6 TCF of gas

amounted to some 8.7 billion barrels of oil equivalent (BBOE) or more than three times Malaysia's then-

oil reserves. Out of this volume, gas reserves in Peninsular Malaysia, stood at 21.5 TCF equivalent to

some 3.8 BBOE in 1984, mostly located offshore Terengganu state, in the east coast.5

The developments of energy policies in Malaysia can be traced from the early 1970s with the

introduction of the country’s first energy-related policies. In 1973, the world witnessed the first oil shock

caused by a six-month embargo on oil supplies by the Arab members of the Organization of Petroleum

Exporting Countries (OPEC). Crude oil prices climbed four-fold overnight causing severe disruptions to

many industries. Many countries, including Malaysia, began to realize the strategic and economic

importance of having national control over its hydrocarbon resources. Accordingly, this led to the

promulgation of the Petroleum Development Act in 1974 and the incorporation the national oil

company; PETRONAS, on 17 August, 1974. According to the act, PETRONAS was given full ownership

and exclusive rights, power, liberties and privileges for the exploration and exploitation of onshore and

offshore hydrocarbon resources in the country.

In 1979 and 1980, events in Iran and Iraq led to another oil shock. The Iranian revolution in 1979 and

the invasion of Iran by Iraq resulted in a dramatic drop in oil production from both countries. These had

resulted in a global shortage of oil supplies which had caused the prices of oil to more than double from

US$ 14 in 1978 to US$ 35 per barrel in 1981. As a reaction to this, Malaysia in 1979 defined its core

energy policies through the formulation of the National Energy Policy, which was instrumental in guiding

the formulation of the nation’s subsequent five-year development plans. The National Energy Policy of

1979 had three key objectives which revolved around supply, utilization and environmental aspects,

namely:

Supply Aspect: The supply objective of the policy was meant to ensure the provision of

adequate, secure and cost-effective energy supply through developing indigenous energy

2 Malaysian Energy Information Hub 3 Malaysian Energy Information Hub 4 Malaysian Energy Information Hub 5 Malaysian Energy Information Hub



resources, both non-renewable and renewable energy sources using least-cost options. The

supply objective also advocates for the diversification of supply sources both from within and

outside the economy in order to address energy security issues in the event of supply

disruptions;

Utilization Aspect: The utilization objective was aimed at promoting the efficient use of energy

and the elimination of wasteful and non-productive patterns of energy consumption; and

Environmental Aspect: The environmental aspect of the policy objective was to minimize the

negative impacts of energy production, transportation, conversion and consumption on the

environment.

Given the supply objective of the 1979 National Energy Policy, the Malaysian government was conscious

of the importance of extending the life of its indigenous hydrocarbon reserves as well as the need for

alternative energy options for a sustainable future that that addresses the issue of energy security.

Consistent with these two goals, two policy initiatives were adopted. Firstly, the National Depletion

Policy of 1980 was formulated to manage the depletion of oil reserves by controlling the rate of crude

oil production and avoid over-exploitation.

To complement the National Depletion Policy, the Four-Fuel Diversification Policy was introduced in

1981 to ensure reliability and security of energy supply by reducing over-dependency on crude oil by

way of diversifying the supply to include natural gas, coal and hydroelectric power. It envisioned a future

where the country’s energy needs are met from a variety of sources as opposed to being solely

dependent on oil. In line with this, the highlight of the Sixth Malaysia Plan (1990–1995) and the Seventh

Malaysia Plan (1996–2000) for the energy sector was primarily to increase the role of natural gas in the

country’s energy mix. The relatively more industrialized and populated west coast and southern region

of Peninsular Malaysia relied heavily on refined petroleum products for its energy needs and

represented a significant potential market for natural gas. Thus, concerted measures were introduced

to ensure that the use of gas as an energy source, particularly for power generation, was significantly

increased. Apart from this, efforts were undertaken to increase the use of gas by the industrial sector.

In addition, natural gas could potentially be exported to neighboring Singapore. The objectives of these

measures were:

Improving Energy Security: Diversify the sources of primary energy supply based on available

indigenous resources;



Import Substitution: Replace imported fuel oil for power generation and hence save on foreign

exchange;

Provide a Stable Supply of Fuel and Feedstock for Industries: The First Industrial Master Plan

(IMP1) provided the framework for the development of a broad-based manufacturing sector.

The IMP1 outlines the transition from an agriculture and primary product-based economy to

one that was to be led by the manufacturing sector. To make the IMP1 a success, a reliable

energy supply would have to be made accessible for industries; and

Increase Revenue from Oil Exports: Through fuel substitution, the increased domestic usage of

more gas allowed the country to export its crude oil which was increasingly being discovered

in Malaysia

The policies that have shaped the Malaysian energy landscape up to the present day are summarized

in are shown in Figure 3 below:

Figure 3 – Malaysia’s Major Energy Policies to Date

Energy Policy Description

Petroleum Development Act, 1974

Provides the legal basis for the incorporation of the national oil company; PETRONAS. According to the act, PETRONAS is given full ownership and exclusive rights, power, liberties and privileges for the exploration and exploitation of onshore and offshore hydrocarbon resources in the country.

National Petroleum Policy, 1975

Initiated the exploitation of indigenous hydrocarbon resources as a mean of serving national needs by supplying adequate quantities at reasonable prices. Exploitation activities take into account the need to conserve the national resources and to avoid any environmental degradation.

National Energy Policy, 1979

To ensure the provision of adequate, secure and cost-effective energy supply through developing indigenous



Energy Policy Description

energy resources. Advocates for the diversification of supply sources in order to address energy security issues in the event of supply disruptions.

National Depletion Policy, 1980

Initially to manage the depletion of oil reserves by controlling the rate of crude oil production and avoid over-exploitation. But subsequently revised to encompass all hydrocarbons.

Four-Fuel Diversification Policy, 1981

To ensure reliability and security of energy supply by reducing over-dependency on crude oil and refined petroleum products by way of diversifying supply to include natural gas, coal and hydroelectric power.

Five-Fuel Diversification Policy, 1999

This strategy is an enhancement to the Four-Fuel Diversification Strategy of diversifying the energy mix. Renewable energy was added to the fuel mix in line with this strategy.

4. MAKING GAS ACCESSIBLE

Transportation of natural gas via pipelines is one the most effective transportation methods, especially

for long distance transmission. Typically, natural gas is transported from the gas reservoir to the

consumer through transmission and distribution pipelines. A transmission pipeline transports the

natural gas from the Gas Processing Plant (GPP) to the distribution center known as the city gate and

directly to larger volume customers. This transmission pipeline ends at the city gate. A distribution

pipeline supplies and distributes the natural gas from the city gate station to other the end-users. Such

a natural gas transmission and distribution system is illustrated in Figure 4.



Figure 4 – Schematic of a Typical Gas Transmission and Distribution System

The idea of a Peninsular Malaysia gas pipeline network was first mooted by PETRONAS in the 1970s,

after the first large discoveries of gas in offshore Terengganu. This subsequently evolved into the

Peninsular Gas Utilization (PGU) pipeline project. Additionally, it was also one of the recommendations

of the Gas Utilization Master Plan study prepared by an international consultancy engaged by PETRONAS

in 1981. This study was to become the roadmap for the development of the natural gas industry in

Malaysia.

The national oil and gas company initiated the PGU project in 1982. Subsequently, PETRONAS Gas was

established by PETRONAS in 1983 as a wholly-owned subsidiary to implement the project. Under the

PGU, gas from the offshore fields off the east coast of Peninsular Malaysia is treated and processed at

GPPs. Here, the gas is separated into its main components, namely sales gas, ethane, propane, butane,

and condensate. The sales gas; which comprises mostly methane, is supplied to the power and non-

power sectors while ethane, butane and propane are supplied to petrochemical plants as feedstock.



The development of a Peninsular Malaysia natural gas pipeline grid hinged on the sale of gas to large

base load consumers. This base load demand would in turn facilitate the development of various natural

gas utilization projects such as fuel for industries, feedstock for petrochemical plants and fuel for

transportation. In the case of the PGU, gas-fired power plants were selected as anchors that provide

base load demand for natural gas in order to make the project feasible.

Based on the expected demand profile, PETRONAS Gas divided the development of the PGU into several

phases, as shown in Figure 5 below:



Figure 5 – Phases of Development of the PGU

Phase Transmission Pipeline

Infrastructure Built Complementary Facilities Year Completed

Phase 1

32-km 36-inch high pressure sales gas pipeline to

o Sultan Ismail Power Station, Paka

o Perwaja Steel Mill, Kemaman

o Distribution pipeline in Kertih

8-inch propane pipeline to Export Terminal in Telok Kalong

8-inch butane pipeline to Export Terminal in Telok Kalong

GPP 1 with 250 MMSCFD capacity

Export Terminal (for propane & butane) in Telok Kalong

Sultan Ismail Power Station, Paka served as anchor

1984

Phase 2

685-km trans-peninsula pipeline connecting to southern and western regions

8-inch propane pipeline from Telok Kalong to Gebeng

8-inch butane pipeline from Telok Kalong to Gebeng

GPPs 2, 3 & 4 with 750 MMSCFD total capacity

Kapar & Connaught Bridge Power Stations served as anchors for western branch

Senoko Power Station served as anchor for southern branch

1991

Phase 3

450-km pipeline extension to Thai border

GPPs 5 & 6 with 1000 MMSCFD total capacity

Dew Point Control Unit with 500 MMSCFD capacity

Connected to Trans Thailand–Malaysia Gas Pipeline (TTM) pipeline

Prai Power Station served as anchor

1998

Loop 1

265-km pipeline redundancy link between Kertih and Segamat

1999

Loop 2

226-km pipeline redundancy link between Segamat and Meru

2000



Source: PETRONAS Gas Berhad

The various phases of implementation of the project is depicted in Figure 6 below:

Figure 6 – Map Showing the Phases of the PGU


The first phase of the PGU was completed in 1984. It comprises a Gas Processing Plant (GPP 1) at Kertih,

Terengganu; an export terminal for propane and butane; and a 32-km main sales gas pipeline from the

GPP to power and industrial end-users in the East Coast of Peninsular Malaysia as well as a gas

reticulation system in Kertih. The Sultan Ismail power plant in Paka, Terengganu served as the anchor

that generated the base load demand for the gas from the PGU.

The second phase of the PGU was completed in 1991, comprising three additional GPPs – GPP 2, GPP 3

and GPP 4; a 685-km trans-peninsular main pipeline connecting to the western and southern regions of

Peninsular Malaysia as well as Singapore; and related supporting facilities. The Kapar and Connaught

Bridge power stations in Selangor state served as the anchors for the western branch of the second



phase pipeline extension while a gas sales agreement with Singapore’s Public Utilities Board (PUB) for

its Senoko power station served to anchor for the southern branch.

The final phase of the PGU was completed in 1998 and extends the pipeline northwards along the west

coast of Peninsular Malaysia to the Malaysia-Thai border, where it meets the Trans Thailand–Malaysia

Gas Pipeline (TTM) pipeline grid from Thailand. A 450-km main transmission pipeline; two new GPPs

(GPP 5 and GPP 6); a Dew Point Control Unit (DPCU); and related facilities were constructed. The Prai

power station in Penang state served as the anchors for this phase of the pipeline extension. The Trans

Thailand–Malaysia Gas Pipeline (TTM) pipeline was built to transport natural gas from the gas reserves

in the Malaysia-Thai joint development area (JDA). The JDA is approximately 255km east of Songkhla

Province in the Gulf of Thailand and covers an area of 7,250 square km. Gas from the JDA is landed at

Songkhla and subsequently piped into Malaysia, thus providing additional security of gas supply to

Peninsular Malaysia.

To ensure security of gas supply to the high demand highly industrialized Klang Valley by enhancing

transmission capacity, the PGU system was further reinforced by the PGU Loops 1 and 2 projects. Laid

in parallel to the existing PGU pipelines, PGU Loop 1, a 265-km natural gas pipeline from Kertih to

Segamat was completed in 1999. Another 226-km of pipelines under PGU Loop 2 from Segamat to Meru

was completed in 2000.

The GPP complexes, located in Kertih and Santong, Terengganu (and known as Gas Processing Kertih

and Gas Processing Santong respectively), have a capacity to produce a total of 2,060 MMSCFD of sales

gas. In addition, the Dew Point Control Unit (DPCU) constructed under the third phase of the PGU has

the capacity to produce 500 MMSCFD of gas and serves as a standby facility for GPPs 5 and 6. The GPPs

of the PGU are summarized in Figure 7 below:



Figure 7 – The Gas Processing Plants of the PGU

Complex GPP Capacity (MMSCFD)

Gas Processing Kertih

1 310


2 250


3 250


4 250

Gas Processing Santong

5 500

Gas Processing Santong

6 500

Total 2,060




The PGU system as it stands today is shown in Figure 6 below:

Figure 8 – The Current PGU Infrastructure in Peninsular Malaysia


4.1 Complementing the PGU Transmission Pipeline

To further expand the usage of gas, a city gate and distribution pipeline study was carried out in 1986.

This led to the development of a system of city gates and distribution pipelines in Peninsular Malaysia.

The Klang Valley was selected to house the first distribution pipeline in Peninsular Malaysia, linking the



high demand areas of Shah Alam, Segambut, and the Kuala Lumpur City Center (KLCC). Today, there are

2,235-km of these Natural Gas Distribution System (NGDS) pipelines that are connected by 39 city gates

to the PGU. The NGDS is operated by Gas Malaysia Berhad, which was established as a distributor and

retailer for natural gas made available by the PGU.

The increased availability of gas and byproducts from gas processing at the GPPs as a result of the PGU

led PETRONAS in 1993 to commission another study, this time on developing the petrochemical industry

to add value to gas resources of the country. The production of petrochemicals has been stimulated by

the ease of use of natural gas as feedstock for the industry that has acted as a catalyst for the

development of a gas-based petrochemical industry.6 Its development has been in great progress since

the early 1990s, based on government planning supported by an attractive environment and well-

established infrastructure, with the growth of ethylene-based petrochemical production in Kertih,

Terengganu, and propylene-based petrochemical production in Gebeng, Pahang.7 Using primarily

ethane as feedstock, plants in the Kertih Integrated Petrochemical Complex (KIPC) produce ammonia,

acetic acid, polyethylene (PE), ethanolamines, ethoxylates, glycol ethers, butanol, butyl acetate,

ethylene oxide (EO), ethylene glycol (EG), and vinyl chloride monomer and polyvinyl chloride (PVC).

Meanwhile, plants at the Gebeng Integrated Petrochemical Complex (GIPC) utilize propane as the

primary feedstock and produce polypropylene (PP), acrylic acid and esters, butyl acetate, oxo-alcohols,

pthalic anhydride and plasticisers, butanediol, tetrahydrofurane, gamma-butyrolactone, polyester

copolymers, (PETG), purified terephthalic acid, dispersion PVC (DPVC), methyl metacrylate copolymers,

methyl tertiary butyl ether (MTBE) ,and polyacetals.

6 PETRONAS Prospectus, 1 November 2010 7 PETRONAS Prospectus, 1 November 2010



5. BENEFITS OF UTILIZING GAS

In 2016, natural gas commanded the largest share of Malaysia’s primary energy supply at 43.6 percent

as shown in Figure 9. It also shows that gas component of primary energy supply has generally kept pace

with GDP growth since 1980. Of this gas component, Peninsular Malaysia’s total gas consumption in

2016 stood at 736,011 MMSCF, compared to Sabah’s consumption of 161,942 MMSCF and that of

Sarawak at 123,161 MMSCF – thus making the peninsula the region with the highest gas consumption

in Malaysia.8

Figure 9 – Trends in GDP and Primary Energy Supply

Source: Malaysian Energy Information Hub

8 National Energy Balance 2016

-120

0

120

240

360

480

600

720

840

960

1080

1200

-5000

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

19

801

981

19

821

983

19

841

985

19

861

987

19

881

989

19

901

991

19

921

993

19

941

995

19

961

997

19

981

999

20

002

001

20

022

003

20

042

005

20

062

007

20

082

009

20

102

011

20

122

013

20

142

015

20

16

ktoeGDP (at 2010 Prices) Crude Oil

Petroleum Products Natural Gas

Coal and Coke Hydropower

Biodiesel Solar

Biomass Biogas

RM Billion



The consumption of gas by sector in Malaysia is shown in Figure 10 below:

Figure 10 – Natural Gas Consumption by Sector

Source: Malaysia Energy Statistics Handbook 2017, Energy Commission of Malaysia

Just as it is true for Malaysia in general, the power sector is also the largest consumer of gas in Peninsular

Malaysia, consuming 56.2 percent in 2016 and accounting for a daily average volume of 1,128 MMSCF

in 2016.9,10 This is because gas-fired power made up a sizeable 45.2 percent of the generation mix in

Peninsular Malaysia for the year.11 In 2016, there was 11,888.2 MW of installed gas-fired power

generation capacity in Peninsular Malaysia, representing 46.8 percent of total capacity.12

The industrial and non-energy sectors have been increasing their share of gas consumption over the

years. This coincides with the industrialization of Malaysia in the 1990s when the government pushed

for a change from an agricultural-based economy to an industrial one. During the 2000-2005 period,

Integrated Petrochemical Complexes (IPCs) in Kerteh and Gebeng were established. These IPCs

produced feedstock for the petrochemical industry and petrochemical-based derivatives products

required by local industries. The availability of petrochemical derivatives served as a catalyst for further

downstream investment, particularly in the manufacturing of industrial and consumer products.

9 National Energy Balance 2016 10 TNB Analyst Briefing Presentation – 2016 – Q4 11 TNB Analyst Briefing Presentation – 2016 – Q4 12 National Energy Balance 2016

0

5,000

10,000

15,000

20,000

25,000

30,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

ktoePower Station Non Energy

Industry Commercial

Residential Transport

Self Generation



The rubber products manufacturing sector – the largest industrial user of gas, is today well-known for

its high quality and competitively priced rubber products. Malaysia’s exports of rubber products reached

RM 26.3 billion (approximately US$ 6.6 billion) in 2017 – making up 2.8 percent of the country’s exports.

Malaysia is the world's leading supplier for latex medical gloves, satisfying more than 50 percent of

global demand.13 A lot this has to do with accessibility to a clean burning fuel that the PGU provided.

By providing access to feedstock, the PGU also enabled the chemical and petrochemical sector is the

second largest contributor to Malaysia’s total exports of manufactured goods. From being an importer

of petrochemicals, Malaysia is today an exporter of major petrochemical products, with exports in 2017

amounting to RM 68.6 billion (approximately US$ 17.2 billion), representing 7.3 percent of Malaysia’s

total exports.14 The industry is linked to almost every other sector of the economy such as the

agricultural, automotive, electrical and electronics, pharmaceuticals, textile and construction sectors.

For example, in the agricultural sector, fertilizers such as urea and ammonia are made from

petrochemicals and in the textile industry, resins made from petrochemicals are used as the raw

materials. In addition, PETRONAS Chemicals Group – a subsidiary of PETRONAS, has become one of

South East Asia’s largest integrated gas-based petrochemicals producers.15 The long term reliability and

security of gas supply ensures the sustainable development of the country's gas-based petrochemical

industry and a viable petrochemical hub in the ASEAN region that is attracting investments from leading

petrochemical and chemical manufacturers.

Thus, the PGU project has achieved its objectives of making gas the leading fuel in terms primary energy

supply and to spur the development of a petrochemical industry by ensuring a secure and stable supply

of gas-based feedstock.

As a result, the profile of the Malaysian economy has changed radically since the 1970s. It is no longer

dependent on a few primary commodities. Its production base has broadened, with manufacturing

accounting for a growing share of national output and employment. Malaysia’s track record in terms of

economic development is very impressive. Malaysia’s GDP in 1980, before the PGU was implemented,

stood at just US$ 24.5 billion. In 2016, the country’s GDP has grown to an impressive US$ 296.5 billion

13 Malaysian Rubber Export Promotion Council website 14 eStatistik website, Department of Statistics Malaysia 15 PETRONAS Chemicals Group Corporate Presentation September 2016



in the span of just 26 years16. Correspondingly, its per capita income increased from US$ 1,790 in 1980

to US$ 9,860 in 201617.

5.1 Gas as a Clean Fuel

The availability of gas in the high demand areas in the west coast and the southern region enabled the

implementation of the NGDS which makes gas available to the non-power sector grid, to the road

transportation sector in the form of compressed natural gas (CNG) and for gas district cooling.

The PGU and the complementary NGDS have made it possible for the road transportation to utilize

compressed natural gas (CNG) as fuel by making it available at selected refueling stations. Currently,

there are 101 CNG refueling stations are in operation serving approximately 70,000 natural gas vehicles

(NGV) on the road.18

Figure 11 – NGV Vehicles in Peninsular Malaysia

Source: PETRONAS NGV Sdn. Bhd.

Accessibility to gas has also made it possible to implement gas district cooling (GDC) projects. GDC uses

natural gas as an energy source to produce chilled water for air-conditioning together with co-

generation in an integrated energy system. The environmentally-friendly GDC system uses water instead

16 World Bank website 17 World Bank website 18 PETRONAS NGV Sdn. Bhd.



of harmful chlorofluorocarbons as a refrigerant. The GDC and co-generation system has been

successfully implemented in three major projects sites in the west coast of the peninsula, namely:

The Kuala Lumpur International Airport

The Federal Government’s administrative centre in Putrajaya

Universiti Teknologi PETRONAS

In addition, gas also has clear advantages and unique qualities that make it a highly desirable fuel in

power generation and industry:

In the power sector, gas-fired turbines have quick start-up and ramp-up times, enabling a faster

response to fluctuations in demand. This flexibility that natural gas brings also makes it a good

complement for variable renewables such as wind and solar.

In the rubber products industry, natural gas is used as the main energy source used for heating

in the leaching process, which uses hot oil or steam. For the drying and curing processes, natural

gas-powered infrared burners are used to enable direct heating. It is also used in the steam and

oil heating processes, as the high combustion ratio for natural gas eliminates the problem of

soot formation on the heat transfer tubing thus increasing the thermal efficiency and prolonging

the equipment lifespan.

In high-end glass manufacturing, the easy controllability of natural gas combustion in the

floating bath process creates a steady temperature profile to produce high quality sheet glass.

In mould-making, the clean combustion of natural gas ensures that the mould surface remains

clean at all times, resulting in higher yields and efficiencies.



6. CHALLENGES IN IMPLEMENTATION

Undertaking the first gas transmission grid development in Malaysia was very challenging. It was one of

the largest development projects in the country at the time, involving technology which was then new

in the country and region. Thus, there were a lot of unchartered territories and new engineering

challenges in implementing the project. In addition, procurement and contracting work was being

carried out on a global scale in a multitude of places. In overcoming these challenges, effective project

management was key. There were synergistic efforts between PETRONAS Gas and its contractors in the

sharing of best practices and knowledge. This includes a small team approach in which team members

are self-managing and empowered but at the same time have accountability. This minimizes

bureaucratic inefficiencies and allows for timely decision making.19

Another challenge was in stakeholder management. Obtaining stakeholder buy-in was key to successful

completion of the PGU. However, in a project of this nature, there were many stakeholders that needed

to be consulted. In overcoming this challenge, PETRONAS relied on a centralized stakeholder

management communications plan that is constantly updated and disseminated to its key personnel.20

Obtaining the right-of-way (ROW) for the PGU pipeline was another major challenge as it needed to be

accomplished in a timely manner so as not to delay the project. As land was a state matter and in some

instances private land needed to be acquired, managing the ROW issue was a complex challenge that

involved many parties. This was one of the instances where excellence in stakeholder management paid

off. However, as there were multiple interested parties for some of the pieces of land which the pipeline

was to be built on, in the end, some compromises had to be made. The final alignment of the PGU

pipeline is a reflection of these compromises.21

Other than the major power plants and petrochemical hubs, most of the other consumers of gas were

widely dispersed geographically and tended to purchase gas in relatively small volumes. This has made

providing gas supply to them a challenge. This challenge has been met to some extent by appointing

Gas Malaysia Berhad to manage gas distribution to consumers using less than 2 MMSCFD (this was later

revised to 5 MMSCFD). It accomplishes this through the low pressure 12-inch Natural Gas Distribution

19 Interview with Akmal Hisham Tak, formerly a PGU Project Engineer 20 Interview with Akmal Hisham Tak, formerly a PGU Project Engineer 21 Interview with Akmal Hisham Tak, formerly a PGU Project Engineer



System (NGDS) distribution pipeline network that is able to reach more gas consumers than the PGU

could on its own.22

Figure 12 – Supply Areas of the NGDS Operated by Gas Malaysia Berhad

Source: Gas Malaysia Berhad

22 Interview with Akmal Hisham Tak, formerly a PGU Project Engineer



7. GAS MARKET REFORMS FOR SUSTAINABILITY

In the past, Malaysia’s gas market was characterized by its subsidized, relatively inexpensive gas with a

single player on the supply side, i.e. PETRONAS. The low price of gas had encouraged the inefficient use

of this precious resource. This has led to an unbalanced market in which demand has rapidly outstripped

supply. The imbalance was unsustainable and the government has embarked on gas market reforms to

ensure the long term sustainable development of the Malaysian gas industry.

Prior to the Asian Financial Crisis of 1997-98, the gas price to downstream consumers in Malaysia was

based on market value. Contractually, gas prices were linked to a substitute petroleum product. As part

of the overall stimulus and recovery package implemented by the Government, domestic gas prices

were subsequently regulated.

In May 1997, the Government began regulating gas price for the power sector, essentially creating a

fixed price of gas. In October 2002, the regulated gas pricing was extended to the non-power sector,

including reticulation. The gas prices to the power and non-power sectors were lower than the formula-

based contracted prices that had been signed between the end-users and the supplier of the gas,

PETRONAS. The regulated gas prices, implemented in 1997 and 2002, were essentially subsidies given

to these two sectors.

Under the 10th Malaysian Plan & New Energy Policy, it is envisioned that under the strategy of

elimination or rationalization of subsidies, the gas prices for the power and non-power sectors will

reflect market parity by 2016. A gradual elimination strategy is proposed and it is envisioned that the

gas prices will be increased by RM3.00 per MMBTU every 6 months to the power and non-power sectors.

However this happened only once. This was later revised to RM 1.50/MMBTU every 6 months in 2014.

To provide a legal basis for the market reforms, the Gas Supply (Amendment) Bill 2016 came into force

on 16 January 2017. The main objectives of the amendments are:

To allow third parties to access gas infrastructure for the supply of gas to consumers;

To promote healthy competition in the gas supply industry; and

To enable gas consumers to benefit from competitive prices, better services and enhance

sustainability and security of supply



The Act provides for the expansion of the Energy Commission’s (ST) regulatory scope from gas

distribution and reticulation previously to also include LNG storage and regasification as well as

transportation of natural gas through onshore gas transmission pipelines. Activities related to gas

shipper, importer, transporter, regasification facilities, distributor and retailer will also fall under the

purview of ST.

The amended Act promotes market liberalization by enhancing competition in the gas market by

enabling the participation of third parties in the gas supply industry, via the third party access (TPA) –

which is one of the key gas market reforms.

In addition, the government has also prescribed the Incentive Based Regulation (IBR) framework which

sets the base tariff for use of gas facilities for a regulatory period of three years from January 2017 and

allows changes in the gas costs to be passed through via the Gas Cost Pass Through (GCPT) mechanism

every six months. Under the IBR framework, the base tariff will be set for a regulatory period of three

years since January 2017 which will allow changes in the gas costs to be passed through using the CGPT

mechanism every six months until market parity is achieved.

It is envisioned that with the reforms in place, the highly regulated and subsidized gas market would

evolve towards a multiple supplier and multiple buyer model, ultimately leading to more sustainable

gas supply at competitive prices for end-users.

7.1 Third Party Access

As part of its gas market reforms, Malaysia has implemented third party access (TPA) when the Gas

Supply (Amendment) Act 2016 came into force on 16 January 2017. As its name suggests, the TPA allows

third parties to access the gas infrastructure such as the RGTs as well as the transmission and distribution

pipelines. Under the TPA, new gas suppliers can bring LNG into the country via the RGT and ship their

gas to their buyers using the existing PGU transmission and NGDS distribution pipelines. Similarly, the

TPA would also allow large gas users to purchase their own LNG from any source and subsequently use

the same gas infrastructure to bring the gas to their facilities.



The TPA will enhance gas supply industry competitiveness as well as optimize development costs and

gas infrastructure utilization, in line with the government’s effort to liberalize the gas market. Market

liberalization will not only facilitate entry of new industry players but also encourage energy efficiency

and benefit consumers through competitive gas pricing. The TPA will contribute towards the country’s

stronger foundations for energy security fostering economic security, prosperity and well-being.

8. ENSURING FUTURE SUPPLY SECURITY THROUGH AN OPEN MARKET

In December 2010, a fire incident at the Bekok C gas platform in offshore Terengganu caused significant

curtailment to gas supply via the PGU. The power sector in Peninsular Malaysia was faced with an acute

curtailment of its gas supply which could have threatened the reliability and security of the electricity

supply system were it not for the closely coordinated actions by all key stakeholders related to that

sector. Thus, the commencement of operations of Malaysia’s first LNG regasification terminal (RGT) in

Sungai Udang, Melaka, in May 2013, marks a significant milestone in Malaysia’s gas supply security. The

commissioning of the 3.8 MTPA RGT Sungai Udang and its operationalization enables the importation

of LNG that will boost the supply capacity into the PGU system by another 500 MMSCFD, gas consumers

in Peninsular Malaysia from shortages and curtailments. Further down in the south eastern corner of

Peninsular Malaysia, the operationalization of the RGT Pengerang with an initial capacity of 3.5 MTPA

that was commissioned in the third quarter of 2017, will provide redundancy and further enhance the

gas supply security of the peninsula.

Figure 5 – The Regasification Terminal in Sungai Udang, Melaka

Source: PETRONAS



9. CONCLUSIONS

This case study has identified key details and drivers of the PGU project. The need for energy security

and the need for energy to drive economic growth were major drivers that led to a shift in the national

policies towards the country’s hydrocarbon resources. The rapid developments of Malaysia’s energy

landscape were made possible with the introduction of various energy policies which in the later years

had resulted in a more diversified energy base.

The completion of the PGU project in the late 1990s has since propelled natural gas to become an

important source of energy for Malaysia, reshaping the country’s energy and economic landscape, while

at the same time paving the way for the nation to embark on the path towards industrialization.

The feasibility of developing of a natural gas utilization grid such as the PGU hinges on the sale of gas to

large base load consumers. In the case of the PGU, the use of natural gas for power generation

represents the crucial component of the master plan for gas utilization due to the significant volumes

required for this application. This base load demand would in turn facilitate the development of various

natural gas utilization projects such as feedstock for petrochemical plants and fuel for the industrial and

transportation sectors.

In developing the PGU project, there were several important lessons learnt, namely:

Effective project management was the key factor in the successful implementation of the

project;

Obtaining stakeholder buy-in was important in ensuring the sooth execution of the project,

which entailed a rigorous stakeholder management plan;

Planning and a commitment to avoid ROW issues would significantly contribute towards rapid

project completion ; and

A complementing distribution pipeline network is able to reach more gas consumers than a

transmission grid could on its own

Due to the PGU, natural gas is now the largest component of the nation’s primary energy supply and

the country’s dependence oil and refined petroleum products have been substantially reduced. There

are several noteworthy benefits of implementing the PGU, including:



Increased accessibility to natural gas and hence promoting fuel substitution;

The improvement of Malaysia’s balance of payments position, as a result of exporting

manufactured goods and petrochemical products as well as a result of import substitutions;

An increase in national energy security arising from a more diversified energy supply based;

Being a catalyst for the acceleration of the industrialization and diversification of the Malaysian

economy, leading to stabilized export earnings and income; and

The Malaysian gas industry has since evolved profoundly leading to the creation of a thriving

industry throughout the entire value chain, from upstream production all the way to

downstream retail business; and

The utilization and value creation of an available domestic energy resource

It was further realized that gas market reforms and liberalization could lead to more sustainable gas

supply at competitive prices for end-users, improving the outlook for market sustainability. Additionally,

supply security and reliability could be further enhanced by opening the market to global LNG supply.

igu task force 2 case study transforming energy access …

Documents