Fuel Links

Malaysia

Economic News

22 Jul 2010
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Malaysia will soon begin work on a $14.5bn project to build two refineries and an oil pipeline linking them in the northern part of the country. National Iranian Oil Company (NIOC) and privately owned Malaysian company, SKS Development, will manage the project together.



According to a report by local investment bank, Aseambankers, the $4bn pipeline will be an "arduous and challenging feat". The over 300km pipeline will go through the northern states of Kedah, Perak and Kelantan. The crude oil will be moored off Kedah, refined, sent through the pipeline to Kelantan and then loaded onto tankers. From there it will be shipped to South Korea, China and Japan, bypassing Singapore. The pipeline will substantially reduce transport times and costs as oil is normally shipped via oil tankers across the Malacca Strait, one of the busiest and narrowest shipping lanes in the world.



The $2.2bn initial phase of the first refinery at Kedah, covering 600ha, is expected to take off in July. The refinery is expected to process 200,000 barrels per day and is scheduled to be operational by the end of 2010.



The northern states have been identified as the Northern Corridor Economic Region, an area targeted by government for economic development and growth. The pipeline will contribute towards government plans to develop this region by drawing in funds and creating job opportunities.



The report stated that at least three local companies are interested in the oil pipeline project: SKS, UEM World and Trans-Peninsula Petroleum. The last is a small company controlled by former executives of Petroliam Nasional, more commonly known as Petronas. Because the crude oil is coming from the Middle East and not Malaysia, Petronas, although aware of the project, has said it will not be involved.



Although a few companies are eyeing the oil transmission pipeline project, the majority of the funds will come from foreign direct investment. Aseambankers predicted this figure could reach 70% of the total amount needed. China and Saudi Arabia are also potential investors in the project, said Kedah State Chief Minister Mahdzir Khalid, although he did not name specific companies.



It is not the first time Malaysia and Iran have formed oil and gas partnerships. The small Malaysian company, SKS Development, sought Iranian expertise and capital for the project shortly after its parent company, SKS Ventures won a $16bn gas development deal with Tehran in January.



Currently, Iran has no liquefied natural gas (LNG) capabilities. With Malaysia's help, it hopes to develop two gas fields in southern Iran into LNG projects. Malaysia has a highly developed LNG programme, which contributes 16% to the world's LNG export market.



As part of this 25-year agreement, SKS will have a 50% stake in any LNG produced by the project, potentially drawing in millions of dollars a year. It could also open the way for Iran to develop export markets in India, Turkey and Europe.



The increased collaboration between Malaysia and Iran on oil and gas projects comes at a time when Iran is facing increasing pressure from the US over its nuclear enrichment programme. Malaysia is also in the process of negotiating a Free Trade Agreement (FTA) with the US. However, the US Congress halted talks when SKS Ventures signed a preliminary contract to develop LNG capabilities in Iran. Malaysia has insisted it will not bow to US pressure over its business ties with Iran.

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