Pengerang – fishing village turns oil town

By Khairul Khalid

The massive Pengerang project aims to lift Malaysia to regional prominence for downstream oil and gas activities. KiniBiz looks at the main players, key components of Pengerang and how recent developments could shape the future of this massive project.

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Johor has arguably been the nation’s darling among foreign investors in the past 2-3 years, especially after the deemed success of Iskandar Malaysia, the Special Economic Zone (SEZ) that that has seen foreign funds pouring into the state for development projects in the area.

With the Prime Minister Najib Abdul Razak’s announcement in 2011 of transforming another sleepy town in Pengerang, Johor into a major petroleum hub, the stakes are now even higher in the southern region given the oil & gas industry’s strategic importance in Malaysia’s economic progress.

The oil and gas sector makes up approximately 40% of Malaysia’s total revenues.

The Pengerang Blueprint

The Pengerang Project or PIPC (Pengerang Integrated Petroleum Complex) is part of Najib’s much-touted ETP (Economic Transformation Plan) where oil and gas is one of 12 NKRAs (National Key Economic Areas). Pengerang is also envisioned to be a direct challenger to Singapore’s eminence as the leading hub in the Southeast Asian region for downstream petroleum activities.

“I expect significant multiplier effects from the Pengerang project to cascade to the entire economy and under the ETP. It is expected to generate RM1.6 billion in gross national income by 2020,” Najib said.

Despite Petronas’ (Petroleum Nasional Bhd) financial clout and global standing as a major petroleum producer, Malaysia has not fully translated its success in producing oil into other equally lucrative commercial downstream ventures.

Singapore has positioned itself as an undisputed regional leader in oil and gas downstream activities ranging from refining, storage, trading, petrochemical manufacturing and even bunkering (supplying fuel to ships).

Catalytic projects

Central to this massive project is the PIPC masterplan that will spread over 22,500 acres. Similar to Iskandar, PIPC is essentially a designated economic zone that is being developed to spur growth in the nation’s downstream oil and gas industry.

Currently, the two catalytic projects located in PIPC are  the centerpiece RM60 billion Refinery and Petrochemical Integrated Development (RAPID) project by Petronas (Petroliam Nasional Bhd) and Dialog Group Bhd’s RM5billion deep-water oil terminal PIDPT (Pengerang Independent Deepwater Petroleum Terminal) project.

Other than RAPID and PIDPT, Taiwan’s Kuokuang Petrochemical Technology Co (KPTC) had also expressed keen interest to invest in a refinery and petrochemical development project within the complex, although that project’s future has been thrown into doubt if news of its latest developments are any indication.

RAPID uncertainty

At the heart of the Pengerang’s PIPC blueprint is the RM60 billion Refinery And Petrochemical Integrated Development (RAPID) mega-project by Petronas which includes plans for 300,000 bpd (barrels per day) refining capacity with other additional petrochemical plants expected to generate value to products generated in RAPID.

The success of RAPID is deeply intertwined with the whole Pengerang / PIPC blueprint because RAPID is expected to be key to the survival of the whole ecosystem in Pengerang – “feeding” other supporting projects such as PIDPT.

The future of the project was cast into serious doubt when Petronas’ CEO Shamsul Zahar Abbas announced last September that the oil company was delaying the RAPID project from 2017 to 2018 and could possible review the project or even terminate it altogether.

“We would scrap the RAPID project if the numbers are not right.  It would be silly of us to proceed if there’s no economic returns,” Shamsul reportedly said while adding that the final investment decision (FID) will only be confirmed in March next year.

There also rumours saying that Petronas is having second thoughts on the RAPID projects due to changing market conditions that would make the project not as attractive as it initially thought it could be.

Even though the Pengerang project could conceivably still proceed, it would be unthinkable for the centerpiece of Najib’s petroleum hub project to exist without the participation of its biggest local player and benefactor – Petronas. That alone would cast a serious psychological blow on the future of the entire Pengerang project.

Petronas’ final decision on RAPID next year is highly anticipated and could play a huge part in swaying market sentiments on Pengerang.

“Many companies that have shown interest in PIPC are now adopting a wait-and-see attitude. Potential investors want to know the fate of Petronas’ RAPID before making their next move,” said Mohd Yazid Jaafar, CEO of JPDC (Johor Petroleum Corp Bhd), wholly owned subsidiary of MPRC (Malaysia Petroleum Resources Corporation), the federal agency tasked with developing Pengerang.

Political hot-potato

This was the second big blow to the Pengerang project just after KPTC (Kuokuang Petrochemical Technology Company), a subsidiary of state-owned oil refinery corporation ( CPC or Chinese Petroleum Corp) was rumoured to be dropping its plans to invest RM35 billion in Pengerang. KPTC had initially signing a letter of intent with the Johor state government last year.

Soon after, KPTC seemed to backpedal on that announcement by saying that they haven’t completely abandoned their plans in Pengerang and that the project is still undergoing feasibility studies.

The Pengerang project has been a political hot-potato of sorts since its inception.

It has been plagued by protests by locals and environmentalists. The political backlash on the project was easy fodder for opposition leaders in the last general election, latching onto fears by local residents over the project’s potential hazards on health, environmental effects (ala Lynas’ rare earth refinery), inadequate compensation by the authorities on land acquisition and relocation.

Questions of infrastructure

There are many who question the approval of KPTC to run a petrochemical project in Malaysia that was rejected by the authorities in Taiwan itself. KPTC’s plant is said to require large quantities of water (400,000 tons per day) and potential health concerns of respiratory diseases were cited in the Taiwanese authorities’ reasons for rejecting the project.

Besides water supply, there are also genuine concerns that the infrastructure for the whole of the Pengerang (such as electricity supply) are not sufficient yet to accommodate the sheer scale of the projects planned.

There are also rumours of KPTC’s “difficulties in securing land for the project” that some sources have attributed to political meddling that are in favour of relocating the project elsewhere.

Dialog’s flagship PIDPT

The RM5 billion PIDPT was initiated by local oil and gas service provider Dialog whose executive chairman Ngau Boon Keat is an old hand in the oil and gas sector. Dialog has entered into a partnership with Dutch company Royal Vopak N.V (the world’s largest independent tank storage provider) and the Johor state government for the initiative.

PIDPT is scheduled to be constructed in phases covering 500 acres of reclaimed land with an initial 1.3 million cbm (cubic metres) growing to a total 5 million cbm of petroleum storage capacity in the future. PIDPT is also expected to support Petronas’ massive RM60 billion RAPID.

Ngau is adamant that any delays in RAPID would not affect Dialog’s flagship PIDPT project.

“It would be a bonus for the PIDPT project if RAPID progresses as planned but RAPID was not in the future when Dialog was planning PIDPT,” said Ngau. “Our project is not just built for RAPID. There are many other potential customers for our storage facilities.”

Apparently, the market was not as assured as Ngau. Dialog’s share price tumbled by as much as 6.33% soon after news broke of Petronas’s delaying the RAPID project.

Analysts optimistic

Still, analysts still seem generally optimistic of Pengerang’s viability. “We see little risk of the RAPID project being completely axed although it has yet to reach FID,” said a RHB research report last month.

Thus, Dialog is proceeding with its plans in Pengerang. Recently, it was announced that Dialog and Singapore’s Concord Energy has inked an MOU (Memorandum of Understanding) for a feasibility study on a dedicated crude oil and petroleum storage terminal in Pengerang. The terminal would have deepwater jetty facility with water depth of 24 meters to handle very large crude carrier.

Dialog is also preparing the final investment decision on its RM4.08 billion LNG (Liquefied Natural Gas) terminal also to be developed with Vopak. Under the proposed project, Dialog in consortium with Vopak and the Johor state government will develop an LNG storage, loading and regasification terminal.

Asia’s Rotterdam

Ngau, an industry veteran and former Petronas engineer has grand ambitions for PIDPT to eventually become the “Rotterdam of Asia” – referring to the Dutch city’s renowned status as a major port and the world’s largest refining centre.

According to Ngau, one of the key advantages of Pengerang is the depths of its waters.

“It is 24 meters deep compared to Singapore’s 18 meters and Rotterdam’s 20-22 meters. This would allow the berth of very large crude carriers (VLCCs) and ultra large crude carriers (ULCCs),” said Ngau at a press conference last year.

Ngau also compared Pengerang to other cities such as Rotterdam that has an oil storage capacity of 28 million cbm and Singapore that has a capacity of 10 cbm (third largest oil refining hub).

“If Singapore can do it, why can’t we?” asked Ngau while adding the facts that Pengerang is strategically located at one of the world’s busiest shipping lanes and Malaysia is a petroleum exporting country as bonus factors for the growth of PIDPT.

In its JV (Joint Venture), both Dialog and Vopak hold a 51% and 49% stake respectively in Pengerang Terminals Sdn Bhd.
In turn,
 Pengerang Terminals holds a 90 per cent stake in an SPV (Special Purpose Vehicle) Pengerang Independent Terminals Sdn Bhd, the operator of PIDPT  with the Johor state holding the remaining 10% equity interest.

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