Analysis: Malaysia's LNG supply cuts tighten market but upstream challenges persist

Singapore — Malaysia, the world's fifth-largest LNG exporter, has cut its LNG exports for the second-quarter by nearly 27% from the previous year, in a move that has helped tighten the Asian LNG market and prevented a total collapse of spot prices in the region.

The fall in exports is in line with Petronas' strategy of optimizing supply in a record-low price environment, allowing the national oil company to skirt losses and defer supply to 2021 when LNG prices are likely to be more favorable.

Malaysia's LNG exports began posting a notable drop in April, and over the April-June period averaged around 1.58 million mt/month, which was about 27% lower than a year ago and about 30% lower than monthly exports in the first-quarter. That is a reduction of about 10 or 12 cargoes per month.

Petronas has a higher exposure to the spot market than peers like Qatar or Australia, with roughly 50% of its portfolio tied to long-term contracts, partly because many contracts underpinning its flagship Bintulu LNG project rolled off in recent years, Jeff Moore, Asia LNG manager at S&P Global Platts Analytics, said.

As one of the more "spot exposed" producers, Moore said Malaysia has therefore reacted by turning down production and actively dialed back from selling on the spot market where cargoes are, by definition, becoming increasingly "homeless".

Malaysia loaded 36 fewer cargoes year-to-date than over the same period in 2019 and together with Indonesia and Brunei, the three exporters loaded 48 fewer cargoes through June than the same period last year, Moore added. This compares with around 45 cargo cancellations from the US in August alone.

"Petronas has been pretty quiet in the spot market for a couple of months now, with fewer tenders and bilateral trading. It likely reduced production at its facilities, but I don't think there was any maintenance," a trader based in China said.

China is a key market for Petronas, who took advantage of the US-China trade dispute to place its LNG cargoes through much of 2019.

"I heard from [Petronas] that the current JKM price is lower than their breakeven point, so unless the price goes up again, I don't think they'll ramp up production," a South Korean end-user said, adding that Petronas will not produce more for spot sales unless they have last minute requests to adjust the DQT, or Downward Quantity Tolerance.

It is unclear whether Malaysia will extend supply cuts into the third-quarter. The Platts JKM spot LNG price for August was assessed at $2.150/MMBtu on July 1, and market participants see little upside in the coming months.

UPSTREAM CHALLENGES

Petronas' primary LNG terminal is located at Bintulu, in the eastern state of Sarawak, on the island of Borneo. The Bintulu LNG complex has nine production trains with a combined LNG production capacity of over 25 million mt/year making it one of the world's largest.

But like most Asian national oil companies, Petronas faces declining domestic output, while field development has been further complicated by cuts to capital expenditure imposed due to the ongoing epidemic and oil price crash.

The near-term outlook for gas supply from Sarawak is challenged by the maturing of legacy supply acreage, deficit of new supply, lack of new investment, and difficulties in developing resources with high levels of CO2 and other contaminants, Wood Mackenzie upstream analyst Lionel Sumner said.

Sumner said in the state of Sabah, adjacent to Sarawak, lack of local demand or reliable export infrastructure has deterred investment in new gas production, impacting the outlook for new supply.

"In our outlook, we've deferred spend and removed future phases of development on multiple projects in both regions, such as the ConocoPhillips operated Kebabangan Cluster in Sabah and the Petronas operated Kasawari project in Sarawak," he said.

Gas production at Bintulu was also affected by outages at the Sabah-Sarawak Gas Pipeline, or SSGP, that carries gas from the Kebabangan offshore gas field in Sabah to Bintulu. A pipeline explosion was reported as recently as January 2020.

"Pipeline integrity issues have impacted supply via the SSGP. We expect the pipeline to restart operations in Q1 2021, but throughput is likely to be restricted given the number of incidents since the pipeline was commissioned," Sumner added.

Petronas' floating LNG production vessels, PFLNG1 and PFLNG2, have yet to scale up to full capacity and will find it tough to breakeven at current prices. Sumner estimated that the two projects together cost around $6 billion and are economically marginal.

"Given the current upstream investment climate, and the challenges faced by FLNG developments elsewhere, it remains to be seen whether FLNG technology will play a significant role in the next wave of LNG supply," he added.