From all angles: The state expands and diversifies its energy mix

Blessed with major oil and gas reserves offshore, and a growing oil palm-based biofuel industry onshore, Sabah has an enviable range of energy prospects. Add coal reserves, some promising solar energy sites, geothermal and hydroelectric power, and the state has more than enough potential energy sources to propel its economy further up the value chain. Yet the state also has some of Malaysia’s most difficult terrain to negotiate, and its more energy-hungry communities are often widely dispersed. Since Sabah is one of Malaysia’s less-developed states, and its industry is still nascent, keeping energy costs down to spur growth has long been a government priority. The challenge is to leverage the state’s impressive energy resources in a way that can raise Sabah’s income and yet be both sustainable and environmentally responsible. In its efforts to strike this balance, the state is very much open to foreign investment and international expertise.

Oil & Gas

As in the rest of Malaysia, the leading body in Sabah’s hydrocarbons sector is Petronas, the national oil and gas company. This operates in the state through production sharing contracts with a number of different international oil companies (IOCs). Some of the largest are Shell, Murphy Oil and ConocoPhilips.

The state of Sabah receives a 5% royalty on oil and gas extracted within its borders. This arrangement is not without its controversies: some Sabahans demand a larger share. At the time of writing, however, there seemed little sign of a policy shift. The federal government’s argument is that Sabah already receives federal grants and funds, in lieu of a larger royalty.

Major Deposits

The Sabah Delta basin is one of Malaysia’s three major geographical features that bear oil and gas. Offshore exploration in the 1970s led to the discovery of the fields of Tembungo, Barton, Erb West, Furious South, Saint Joseph, Ketam and Lokan. In the 1990s, further offshore drilling found new gas fields, notably Kebabangan and Kamusut. A breakthrough in deep-water offshore work was Murphy Oil’s Kikeh-1 discovery in 2002, in 1340 metres of water, which opened up the major Kikeh oil field. Other finds followed at Gumusut-Kakap, Malikai, Ubah Crest, Pisangan, Jangas and Wakid. Discoveries have not stopped in recent times: in 2012, Lundin Petroleum made a number of gas finds offshore, while in March 2014, Petronas Carigali (the state oil company’s exploration and production arm), ConocoPhilips and Shell announced a new gas discovery in the Limbayong field.


According to Murphy Oil, production at Kikeh was 94,000 barrels per day (bpd) in 2013, with a peak output of 120,000 bpd. Gumusut-Kakap – operated by Shell as a joint project with Petronas Carigali, ConocoPhilips and Murphy – began operation at around 25,000 bpd and is ramping up this output to an expected 120,000 bpd. A particularly complex operation, this field involves a floating production system with tiebacks to a number of deep-water wells.

Malikai, meanwhile, has a production capacity of 60,000 bpd tied into the Kebabangan Northern Hub Development Project (KBB). To create an offshore hub, this project will tie in Kikeh, Gumusut-Kakap and Malikai at an offshore platform with a capacity of 825m cu feet per day (cfpd) of gas and 25,000 bpd of condensate, according to the US Energy Information Administration.

Flow Chart

The KBB is part of a broader scheme called the Sabah-Sarawak Integrated Oil and Gas Project (SSIOGP), which aims to tie Sabah’s offshore production into the established oil and gas sector in Sarawak. Under the SSIOGP scheme, much of Sabah’s offshore production will be funnelled by pipeline to the onshore Sabah Oil and Gas Terminal (SOGT), a 101-ha site that can take up to 300,000 bpd and 1bn cfpd. Besides the SOGT, some of the state’s oil and gas is piped to the Labuan crude oil and gas terminals. An initial flow of 65m cfpd from the offshore Kinabalu non-associated gas field to SOGT began in December 2013. The plan is to ramp this up in 2014.

Under the SSIOGP, gas from SOGT then heads southwest down the 500-km Sabah-Sarawak Gas Pipeline (SSGP) to Bintulu in Sarawak. There, it is converted to liquefied natural gas (LNG) at the Petronas LNG complex and shipped abroad. Some gas also stays local: according to Petronas, the SSGP is providing for future domestic consumption in both Sarawak and Sabah.

One of the main recipients of this will be the $1.5bn Sabah Ammonia and Urea (SAMUR) plant, located at the Sipitang Oil and Gas Industrial Park (SOGIP). The plant is set to have a capacity of 1.23m tonnes a year, and is to be completed in February 2016. The SOGIP is a major initiative to encourage growth in the state’s downstream oil and gas, offering a range of incentives to companies wishing to locate there.


In the electricity sector, Sabah has both a state generation company – Sabah Electricity Sdn. Bhd. (SESB) – and a series of independent power producers (IPPs) that generally operate under 21-year power purchase agreements. As of June 2014, about 29% of generation capacity was held by SESB, and the rest by IPPs. Sabah also supplies electricity to Labuan. Total generation capacity in July 2013, the most recent figures available, was 1130 MW, with a peak demand of 866.6 MW. A further 891 MW are to be added by 2020. Recent government statements suggest that demand for electricity is rising by 8-10% a year, with a projected average annual hike of 7.7% over the next few years.

One of the largest IPPs is Ranhill Powertron, with a 380-MW capacity from its two gas turbine generators, RP1 and RP2. Other IPPs include the fuel oil plants of ARL Power in Kota Kinabalu (50 MW) and Serudong Power at Tawau (36 MW), and the diesel plants of Stratavest (60 MW) and Sandakan Power Services (34 MW). Two others based in Kimanis – Kimanis and SPR – are to come on-line in August 2014, adding another 300 MW.

SESB – 80% owned by Tenaga, the national power company, and 20% by the Sabah state government – is the state’s sole distributor. Much of its capacity comes from plants that use diesel and other heavy fuel oils, a vulnerability in recent times as prices of these inputs have risen. Both Sabah and Peninsular Malaysia maintain subsidies on fuel prices. These were worth RM0.1235/KWh ($0.038) in December 2013, according to Maximus Ongkili, federal minister of energy, green technology and water. SESB’s true cost of generation was RM0.4346/KWh ($0.136), which explains why it increased tariffs by 16.9% at the end of 2013. Even with this hike, said Ongkili, SESB has to absorb RM0.159/KWh ($0.050). Given the subsidies, consumers in Sabah have it comparatively good. “The price of electricity in Sabah is still below the price in Peninsular Malaysia or Sarawak,” SESB’s managing director, Abd Razak Sallim, told OBG.

Capacity Management

The state grid is undergoing a major expansion and upgrade. Some RM1.4bn ($437m) has been allocated over the next five years for this, as well as to complete the loop between Tawau and Keningau, a southern link that will help balance the whole system. Currently, there are grids on the east and west coasts, and a Kota Kinabalu-Sandakan connection linking the state’s east and west to the north. The southern part of the loop – across some formidable terrain – still awaits completion.

One issue is the age of the diesel plants, which have needed periodic refitting and refurbishment. This has only put further pressure on existing capacity. Some of the IPPs also reportedly have issues with ageing machinery. Others use gas more heavily, making them vulnerable to the gas transmission problems that occurred in 2014, including a pipeline blow-out, adding to the risk and frequency of blackouts.

Sabah Energy Corporation, a state-owned entity charged with developing the state’s energy sector, and also tied in with Ranhill, has recently found a successful formula for transmitting gas to industrial customers – a “virtual pipeline network” delivering compressed natural gas, which is taken in containers to workplaces and then fed into the factory system.

A second project, aimed at solving generation capacity issues in the east of the state, was a projected 300-MW coal-fired power station at Tawau. This idea, earlier abandoned in the face of environmental protests, was tabled again in late 2013 by the federal authorities. State authorities have thus decided to bring liquefied natural gas to the east coast and are looking at a way to generate power via a gas pipeline.

Another solution could come from Sabah’s neighbours. Brunei Darussalam, for one, has expressed an interest in exporting electricity to the state, particularly to Sipitang, from a hydroelectric plant it plans to build in cooperation with the state government in Sarawak. Indeed, Sarawak has a large number of hydroelectric projects in the pipeline or under way, and will likely have major surplus capacity in the years ahead. Exporting some of this to Sabah could help the state meet its future energy demands.


Another component of Sabah’s generating capacity is renewable energy (RE). In early 2014, Ongkili told reporters that the state had an RE potential of some 2700 MW, with hydro potential at 1930 MW, geothermal at 405 MW and biomass at 370 MW. Five RE plants have already been connected to the grid, supplying some 36.5 MW of power, of which 30 MW comes from biomass and 6.5 MW from mini-hydro.

Sabah’s large oil palm industry is the basis for most of its biomass generation. One firm, Eco Biomass Energy, is developing a 23-MW plant at Lahad Datu. Sabah’s northern coast also has some wind energy potential, particularly at Kudat on its northern tip, which has an annual mean wind speed of 2.6 metres/second at 10 metres of height – the highest speed in Malaysian Borneo, according to a 2013 report from Universiti Malaysia Terengganu. Consistency, however, is an issue: the wind varies considerably according to the typhoon season. Sandakan, too, may have good wind potential.

In hydro, a project to generate 180 MW from a dam on the Ulu Padas River is due to begin operation at the end of 2014. The dam is also part of a flood mitigation project. Sabah, with its many rivers and dispersed rural communities, is a natural place for mini-hydro projects. NGOs such as Tonibung (“friends of village development”) have been installing such systems in remote areas. In some cases, these have given villagers light and power for the first time without having to buy and transport diesel for generators.

In biofuels, in May 2014 Felda Global Ventures (FGV) – part of the major Malaysian plantations group – announced the launch of a RM14m ($4.4m) biogas power plant in Felda Umas, Tawau. The plant uses waste from a neighbouring palm oil mill to generate 1000 cu metres of biogas per hour. This was the 11th such FGV project, and the company has said it has 11 more plants in the pipeline. As for geothermal, Tawau Green Energy recently announced that it was working on a 36-MW plant in the state. Sabah also has solar potential, with one of the highest irradiation rates of any Malaysian state, at 1800 KWh per sq metre per year.


Investors in RE have many avenues. The state government is actively searching for new investors in RE generation. The federal government, too, has a soft-loan scheme for RE projects. Under a separate, feed-in-tariff (FIT) scheme for RE power, the SESB must pay premium tariff for FIT “approval holders” who supply RE-generated power to the grid. Those approved – be they individuals or companies – are awarded a quota to fill. An FIT is also available for electricity generated from biogas. The whole scheme is part of the 2011 Malaysian Renewable Energy Act, and is administered by the Sustainable Energy Development Authority Malaysia, which opened a Sabah office in April 2014.


Pulling all these elements together, while upgrading and improving the existing structure, is a challenge for a state in which some 83% of SESB’s customers are households, which consume relatively little subsidised electricity. Industry is thus faced with most of the bill, even though it too is often underdeveloped and anxious to keep costs down.

Investment in all energy segments is therefore needed, along with further state support, to help drive the economy forward. By leveraging its RE resources as well, Sabah could develop local power sources that can take pressure off the national grids. In oil and gas, past discoveries bode well for future ones. Harnessing these to the local economy, as well as to exports, will be a key task – and potentially a highly lucrative one for investors.


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The Report: Malaysia 2014

Sabah chapter from The Report: Malaysia 2014

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