Energetic Diplomacy


Economic News

22 Jul 2010
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Regional co-operation in the guise of energy diplomacy was the call from Malaysia's prime minister earlier this week, as he proposed that East Asian nations stave off economic pressure from hydrocarbon markets by co-ordinating their needs.

Speaking at the opening of the 10th Annual Asia Oil and Gas Conference in Kuala Lumpur on June 13, Prime Minister Datuk Seri Abdullah Ahmad Badawi forecast that increasing demand for oil and gas would drive intense competition between the nations' respective national oil companies and private firms.

"Under these circumstances, it would seem that a viable strategic option for Asia lies in political commitment to co-operate in energy diplomacy," he explained. "In principle, such co-operation necessitates recognition by all countries in the region... that we have a common interest."

Co-operation would, he explained, mean that energy-dependent countries like Japan and South Korea could desist current practices such as stockpiling, which puts pressure on prices. For net exporters, closer political co-operation would provide the opportunity to enhance commercial links.

"Co-operation of this scale must also include technological collaboration to improve the efficiency of exploration, increase resource extraction, develop alternative fuel sources, and protect the environment," he continued.

Indeed, with the region expected to make up around 30% of world oil consumption and 17% of world gas consumption by 2020, Asian markets have a significant international presence in the energy market.

Malaysia's position is currently that of a net exporter. With over a century of hydrocarbon extraction history, the nation hosts a variety of international oil and gas firms who have struck production-sharing contracts (PSC) with the national oil company, Petroliam Nasional Bhd. (Petronas).

The nation's fields are obviously quite mature and in a bid to get as much of the sweet crude they produce as possible, extractors are employing the latest technology in extending production. Proven oil reserves as of January 1, 2005, were around 3bn barrels while natural gas reserves were estimated at 2.1 trillion cu metres.

With production levels over 2004 increasing to around 51.3bn cu metres of gas and 750,000 barrels per day (bpd) of oil, reserves are under increased pressure. Oil is expected to last a further 18 years whilst the more substantial gas reserves are anticipated to hold out for another 34 years.

Diplomacy might be a key ingredient for adding to reserves, as well as co-ordinating supply with regional partners. Various disputed areas around Malaysia are known to harbour hydrocarbons and international firms have been keen to get a slice of the pie - even if they are not sure who owns it.

Some disputes have been resolved in recent years and hence many are optimistic about those that remain. The existing agreements allowing joint exploration and production to take place are the Malaysia-Thailand joint development area (JDA) and the Vietnam-Malaysia commercial arrangement area (CAA).

The JDA is located in the Gulf of Thailand and comprises three blocks, each administered by the Malaysia-Thailand Joint Authority (MTJA), in which each country has a 50% stake and agrees to adopt the Malaysian model of PSCs.

The agreement recently concluded between Petronas and the Petroleum Authority of Thailand for the sales of the gas that will come from one of the blocks sees each party buying 50% and piping it back to their respective shore. Purchases from this, the first block to come online, are expected to amount to 11m cu metres per day.

Indeed, the two national oil companies have, in this case, decided to set up a pipeline together to facilitate the transfer of their gaseous wealth back to shore. The trans-Thailand-Malaysia pipeline system will transport gas from the JDA to the peninsular gas utilisation pipeline at Changlun in Kedah, Malaysia. The project also includes constructing two gas separation plants in Thailand.

The CAA has been finalised for a longer period, but delays on the Vietnamese side have meant that Petronas has been able to take 100% of the gas from the fields so far. Canadian independent oil company Talisman Energy has been producing oil, gas and condensates from their operations in the field since before gas sales began in 2003. The company has kept up exploration in the block too and recently found further exploitable deposits in the north of the area which they hope to bring online in December 2007.

Ongoing disputes still exist though, notably with Brunei. Discussions were held between the Sultan of Brunei and former Malaysian Prime Minister Mahatir Mohamad before he stepped down in 2003, but the point has not been addressed by talks since.

Brunei has certainly felt the lack of a resolution more than Malaysia, since the sultanate was relying on further discoveries in the disputed area to bolster and expand its LNG operation. International firms looking to strike oil or gas in the region have also been stalled, in particular Shell in block K and Total in Block J.

However, US independent Murphy Oil has been busy exploring blocks L and M, which it was awarded by Petronas. These blocks make up the same acreage as blocks J and K.
Other discoveries by Murphy and other internationals in non-disputed Malaysian acreage extend into disputed waters, yet exploration and production work in the area has been approved and actively encouraged by Malaysia.

Whilst no talks have been held about that dispute with Brunei, talks are expected between Malaysia and Indonesia in July to resolve the issue of deep-water acreage in the Celebes Sea. Previously, the International Court of Justice had ruled over the territorial dispute in favour of Malaysia, but left the maritime boundary to be decided by the parties.

However, both sides have now awarded concessions to international oil firms around the islands of Sipidan and Ligatan. Some tension did arise from the issue of military vessels deployed in the area, but further talks are expected to diffuse any possibility of further contention. Insiders predict that a resolution will follow the form of the CAA and satisfy both parties.

Diplomacy, it seems, has a course to run on both sides of the economic equation for energy. Co-ordination of supply and demand around the region would surely make importers and exporters less subject to the power of OPEC; sorting out who owns what is a step along the way.

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