Rerouting Oil


Economic News

22 Jul 2010
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Plans are underway for the construction of a $7bn oil pipeline that will allow oil shipped from the Middle East to East Asia to bypass the busy Malacca Strait, after Malaysian Prime Minister Abdullah Badawi granted approval for the project last month.

The 960-km Malacca Strait, which links the Indian Ocean to the South China Sea, is considered the world's busiest seaway and currently handles about 40% of the world's oil shipments.

The pipeline is expected to take seven years to complete, will be 300-km long and will link the west and east coasts of peninsular Malaysia crossing the states of Kedah, Perak and Kelantan. Upon completion, the pipeline is expected to reduce the time to transport oil from West to East Asia from 21 to seven days. In terms of shipment volume, the pipeline is expected to reduce the amount of oil carried through the strait by 20-30%, translating to three fewer large vessels using the waterway each day.

Malaysia-based Trans-Peninsula Petroleum, the company spearheading the project, has stated that easing shipment congestion through the Strait of Malacca is essential for oil stability in the region. China is currently the world's second-biggest oil user and the company anticipates oil shipment traffic to continue to get busier as China's oil demand is forecast to double by 2020.

Supporters of the project point to the fact that greater congestion means greater potential for accidents, delays and other supply interruptions which can ultimately lead to higher prices and instability. The pipeline will allow Asian countries, particularly China, to better manage their strategic reserves. With the exception of Japan, most Asian countries do not have 90 days worth of strategic reserves as recommended by the International Energy Agency. The strait is infamous for robberies and hijackings in the past, though this has fallen since Malaysia, Indonesia and Singapore, who share the waterway, increased patrols in 2005.

As Gary Scroby, the British High Commission's senior trade manager for oil and gas, told OBG, "Without question the strait is congested and anything that opens another export route and improves supply security for the region is greatly needed."

The project was officially announced on May 28, with signings witnessed by Abdullah and Indonesian President Susilo Bambang Yudhoyono, at the World Islamic Economic Forum held in Kuala Lumpur. Ranhill, a Malaysian engineering and contracting company, and Indonesia's PT Tripatra have been awarded contracts for the construction of the pipeline. Meanwhile, memoranda of understanding have been signed with Indonesia's PT Bakrie & Brothers for the supply of steel pipes and Al Banader International Group of Saudi Arabia for the supply of oil.

Currently, Trans-Peninsula's chairman, Rahim Kamil Sulaiman, and director, Syed Izhar Al-Idrus, each hold 50% equity. This will later be diluted. According to Rahim, funding for the construction will come from investors, with up to 70% equity in the company to be sold to foreigners. Rahim stated that investors will be invited from key oil-producing nations in the Middle East, Islamic financing funds and major oil consumers from East Asia.

While a purely private sector driven project, the Malaysian government is supportive of the pipeline as it will help with the infrastructure development of the country's Northern Corridor, an area of particular focus in the government's 9th Malaysia Plan, which is the most recent five-year blueprint for the economic development of the nation. Malaysia is currently in the second year of this plan that has significant focus and spending on construction and infrastructure development.

While most players in the oil industry agree that bypassing the strait will help improve energy security in the region, some are questioning the pipeline's economic viability. A similar project was scrapped two years ago in Thailand over concerns about rising steel costs, safety and environmental issues. Accordingly, some sceptics are wondering whether Trans-Peninsula, an unlisted company with a limited track record, can handle the scope of a project this size and attain the necessary funding

Koh Ban Heng, CEO of Singapore Petroleum Company, said at a recent oil and gas conference in Kuala Lumpur, "We would welcome the pipeline for the sake of energy security because of the limited capacity of the Malacca Strait, but a big company has to get involved in this, as the capital expenditure is huge."

The project is also based on the premise that demand for oil will continue to rise significantly upon the time of completion, but some market observers have said that with the exception of China, overall regional demand could slow due to higher oil prices.

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