Gas for China

Malaysia

Economic News

22 Jul 2010
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This week Malaysia's Petroleum Nasional (Petronas) has announced two major deals in China. The national petroleum company has brokered a deal to sell China its liquefied natural gas (LNG), as well as a technological partnership with a Chinese automotive manufacturer. The moves come as a boost for Petronas and demonstrate how Malaysian firms can benefit from the rise of the regional giant.



According to Chinese state media, the agreement regarding Malaysia's LNG is the largest ever signed between China and Malaysia.



Under the terms of the sale and purchase agreement, Petronas will supply some 70m tonnes of LNG to Shanghai LNG Company over the next 25 years. Petronas's subsidiary LNG Tiga will deliver a minimum of 1.1m tonnes annually from 2009, with 3m tonnes annually for the years following 2012. Based on current prices, Petronas is expected to earn a total RM92bn (US$25bn).



The gas will be supplied from the Petronas LNG complex in Bintulu, Sarawak. The Bintulu complex is the world's largest natural gas processing plant. It has an annual output of 23m tonnes and mainly supplies Japan, Taiwan and South Korea. Delivery to China will be via Shanghai LNG's receiving terminal in Zhejiang Province. The terminal is currently under construction and scheduled for completion in mid-2009.



The other announcement involves a strategic tie-up with Nanjing Automotive Corporation (NAC), one of the largest automotive enterprises in China.



A Malaysian team will design and develop three types of engines for the Chinese car manufacturer. All are commercial variations on the EO1 engine, which was originally developed by Petronas's Formula One division. NAC and Petronas hope to begin the project in December, with manufacturing expected to start in 2009. NAC plans to produce 100,000 cars per year both for the growing Chinese market and for sale elsewhere. Petronas will receive a commission for every unit of the three types of engines.



Petronas will provide technology and support through its research and development centre in Malaysia. In a statement made by Petronas, the parties are exploring the setting up of an engine research and development laboratory in China.



According to a report by the Malaysian firm OSK Research, the deal should offer significant benefits to two of Petronas's subsidiaries: MISC - Malaysia's shipping giant - and Petronas Gas.



The agreement will require a consistent supply of gas and a sufficient number of ships for transport. Petronas has brokered numerous deals that are being sourced from the Bintulu facility, so the company may be faced with the challenge of ensuring an enduring supply of gas in future years. Petronas Gas will operate a natural gas pipeline that is under construction between Kimanis, a terminal in Sabah, and Bintulu.



The research firm also said that with up to 10 Chinese LNG projects having received provisional approvals, prospects are bright for more LNG export contracts with China. Currently China has three terminals either built or under construction. A further seven are planned.



Against a background of higher oil prices , Petronas has been actively working to boost its LNG exports. Natural gas has become an appealing, cleaner alternative to coal in energy production, particularly in China. Moreover, while LNG's popularity used to be limited to northern Asian markets, it has now increased in popularity in Europe and the United States.



Prime Minister Abdullah Ahmad Badawi said on October 30 that the new projects would take bilateral trade between the two nations to a higher level, to the benefit of both countries. Speaking in the days prior to the China and the Association of Southeast Asian Nations (ASEAN) business summit, he urged Malaysia's entrepreneurs not to view China's progress as a threat, but rather as an opportunity to pursue joint ventures.



The Petronas technological partnership with NAC points to the role that Malaysia can potentially play in the region as many of its neighbours are becoming more competitive in manufacturing industries The engines that will be used by NAC are the products of Petronas's Formula One tie-up with Sauber, the Swiss racing car manufacturer. Given years of massive foreign investment by multinational companies, Malaysia has benefited from technology transfers for decades. Moreover, some observers predict that Malaysia is likely to become the technology provider to its less developed regional partners.

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