Regional Economic and Energy Outlook: Perspectives on Malaysia

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1 Strategic Advisors in Global Energy Regional Economic and Energy Outlook: Perspectives on Malaysia Ben Cahill Senior Manager, Markets and Country Strategies Group 12 July 2011

2 Overview: Malaysia s Energy Challenges Challenges: Shallow-water production declines Small size of recent discoveries Difficult reserves Growing gas demand and subsidy burden Proposed Solutions: Upstream incentives for marginal field development Increased investment by PETRONAS, especially downstream Increase in gas prices to tackle the subsidy burden Proposed reduction in PETRONAS dividends to the state Will these reforms be sufficient to position Malaysia for the years ahead? 3 rd Energy Forum PFC Energy Page 2

Emerging Markets, Especially in Asia, Still Driving Oil Demand Growth World oil demand growth is projected to rise by close to +1.4 mmb/d in 2011, and to slow in 2012 to +1.2 mmb/d.

Demand in 2013 will end some 5.0 mmb/d above the pre-recession high, absorbing the bulk of the upstream capacity brought on line since 2008.

3 Emerging Markets, Especially in Asia, Still Driving Oil Demand Growth World oil demand growth is projected to rise by close to +1.4 mmb/d in 2011, and to slow in 2012 to +1.2 mmb/d. OECD economies, especially Japan, are expected to return to demand contraction in Poor economic performance in the advanced economies will hinder global growth, limiting EM growth. Demand in 2013 will end some 5.0 mmb/d above the pre-recession high, absorbing the bulk of the upstream capacity brought on line since Emerging Asia (with China as its core) and the Middle East are likely to remain the world s main growth centers for oil demand in the next two years. FSU and Eastern Europe 6% mb/d 4,000 3,000 2,000 1, ,000-2,000-3,000 Africa 4% Latin America 8% Middle East 9% Global Oil Demand in 2012 (Total = 88.6 mmb/d) Emerging Asia 11% OECD 51% China 11% Global Demand Growth OECD Non-OECD Total Source: PFC Energy, Market Intelligence Service 3 rd Energy Forum PFC Energy Page 3

4 Slower Growth in Asia Emerging Asia s oil demand growth in the next few years will be weighed by higher oil prices, sluggish advanced economy growth and a maturing Chinese economy. In the longer term, growth will slow, in particular in Southeast Asia (except for Indonesia), where countries are trying to substitute away from oil by using more natural gas and biofuels. mb/d 1,200 1, Non-OECD Asia Demand Growth (year-on-year) China India Indonesia Other Asia 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 China will also see slower (albeit still very strong) growth, as GDP growth will probably moderate to around 9% in , in tandem with Beijing s plans to shift the economy to qualitative domestic demand-fueled growth and cool off fixed asset investment. PFC Energy expects non-oecd Asia s oil demand to grow by 660 mb/d and 800 mb/d in 2012 and 2013 respectively. India s demand growth will buck the regional trend and accelerate in the next two years, likely averaging 150 mb/d and 190 mb/d in 2012 and 2013 vis-à-vis the 140 mb/d expected for Source: PFC Energy, Market Intelligence Service 3 rd Energy Forum PFC Energy Page 4

Malaysian Production Outlook: Shallow Water in

grow markedly over the decade, and necessary to

5 Malaysian Production Outlook: Shallow Water in Decline, Deepwater Growth Expected Malaysian Oil & Gas Reserves 19.5 Billion BOE Deepwater production is likely to grow markedly over the decade, and necessary to counterbalance shallow water decline Deep Source: PFC Energy 3 rd Energy Forum PFC Energy Page 5

6 Growing Importance of Deepwater Deepwater production has only recently begun in Malaysia but it will play a key role in future growth. 3 rd Energy Forum PFC Energy Page 6

7 Recent Discoveries Are Smaller in Size Discoveries of oil and gas in the past decade have been significantly smaller. Oil Field Size Distribution (mmbo) Gas Field Size Distribution (bcf) 3 rd Energy Forum PFC Energy Page 7

8 Distribution of High CO 2 Gas Fields by Country 6 Dev. 4 Undev. 5 Dev. 3 Undev. Natuna D Alpha 4 Dev. 1 Undev. 1 Dev. 4 Undev. 1 Dev. 2 Undev. 1 Dev. 1 Undev. 0 Dev. 1 Undev. 1 Dev. 0 Undev. 3 rd Energy Forum PFC Energy Page 8

between 2015 and 2019 New sources of gas will be needed to extend

9 MLNG Accounts for 10% of Global LNG Supply Malaysia is a major world exporter of LNG But 60% of existing MLNG contracts expire between 2015 and 2019 New sources of gas will be needed to extend these contracts Source: PFC Energy 3 rd Energy Forum PFC Energy Page 9

5 Sabah and Sarawak Production Forecast MLNG Satu & Dua Fields 3.0 2.5 2.

10 Shallow Water Fields Feeding MLNG Likely to Decline After 2015 Kebabangan Gas Project MLNG Dua Fields Kinabalu Gas Project MLNG Dua Fields Sabah Kumang Cluster Project (Phase 1) bcf/d 3.5 Sabah and Sarawak Production Forecast MLNG Satu & Dua Fields MLNG Complex Sarawak rd Energy Forum PFC Energy Page 10

Deepwater Sabah is Key for Future Production PETRONAS Open Blocks

Billiton Murphy Shell BHP Billiton Murphy Murphy Sabah Kamansu

Kamansu East Kebabangan Senangin Kerisi Sarawa k Kikeh Kecil

deepwater developments Shell Kakap Gumusut, Shell Malikai and

11 Deepwater Sabah is Key for Future Production PETRONAS Open Blocks Newfield Open Block Shell O p e n B l o c k s PETRONAS BHP Billiton Murphy Shell BHP Billiton Murphy Murphy Sabah Kamansu East Upthrown Malikai Kamansu East Upthrown Canyon Kinarut Kamansu East Kebabangan Senangin Kerisi Sarawa k Kikeh Kecil Kikeh Kakap-Gumusut Jangas Pisagan Siakap Limbayong PETRONAS New deepwater developments Shell Kakap Gumusut, Shell Malikai and KPOC Kebabangan Cluster will boost production post rd Energy Forum PFC Energy Page 11

Philippines (XOM) 6,362 ft WD Southeast Asia Announced Discoveries 2009 Onwards (not all will be commercial) Jangkrik Indonesia (Eni) 1,312 ft WD Most

12 Malaysian Deepwater Discoveries Have Continued Paus Malaysia (Newfield) ~ 2,500 ft WD Siakap North Malaysia (Murphy) 4,386 ft WD Dolfin Malaysia (Murphy) 2,588 ft WD Geronggong Brunei (Shell) 2,923 ft WD Babendil-1 Philippines (XOM) 4,409 ft WD Dabakan-1 Philippines (XOM) 5,905 ft WD Palendag-1 Philippines (XOM) 6,362 ft WD Southeast Asia Announced Discoveries 2009 Onwards (not all will be commercial) Jangkrik Indonesia (Eni) 1,312 ft WD Most deepwater exploration has been in Sabah-Baram Delta Resolution of Malaysia-Brunei disputed area opens way for Brunei deepwater 3 rd Energy Forum PFC Energy Page 12

Deepwater drilling to increase throughout the decade

13 Offshore Drilling is Expected to Grow Shallow water drilling to remain relatively steady, then slow decline Deepwater drilling to increase throughout the decade Deep Source: PFC Energy 3 rd Energy Forum PFC Energy Page 13

14 The "Malaysian Petroleum Resources Center" Would Foster Local Content and Attract Investment New government Malaysian Petroleum Resources Center (formerly OFSU) is being set up to create a more competitive service sector. MPRC will Restructure industry to improve competitiveness Attract foreign businesses to partner Promote Malaysian companies Proposed as both a Policy Maker and Regulator Regulator Policy Energy Sector Structure PM s Office, Economic Planning Unit Ministry of Energy, Green Technology and Water PETRONAS & PM PETRONAS Petroleum Management Unit (Upstream) Ministry of Trade and Industry (Downstream) Ministry of Domestic Trade and Consumer Affairs MPRC (proposed) MPRC (proposed) Operator Source: PFC Energy 3 rd Energy Forum PFC Energy Page 14

Active and Expanding Local Service Sector MISC : MSE and

Marine conversions Kencana Petroleum Engineering,

vessel conversions SapuraCrest Petroleum Installation of

drilling rigs Sime Darby Engineering Construction Kikeh

15 Active and Expanding Local Service Sector MISC : MSE and MMHE Engineering and Fabrication FPSO/FSO construction Marine conversions Kencana Petroleum Engineering, fabrication, installation services Drilling services Marine vessel conversions SapuraCrest Petroleum Installation of pipelines & facilities Support vessels and services Tender drilling rigs Sime Darby Engineering Construction Kikeh FPSO Newfield W. Belumut Pasir Gudang Sapura rd Energy Forum PFC Energy Page 15

PETRONAS: Large Capex Increases PETRONAS recently announced a massive increase in capex for the next five years, reaching RM300 bn (~US$100 bn) over the period.

The increase in capex is needed given the large number of capital-intensive projects to which PETRONAS is committed.

16 PETRONAS: Large Capex Increases PETRONAS recently announced a massive increase in capex for the next five years, reaching RM300 bn (~US$100 bn) over the period. This is double what it spent in the last five years, and more than double what it spent the five years prior to that. The increase in capex is needed given the large number of capital-intensive projects to which PETRONAS is committed. The composition will also likely look different from previous years, with a greater capex share directed to downstream, including PETRONAS s commitment to the RAPID project. In the domestic upstream, PETRONAS will look to increase spending on exploration, EOR for mature fields, as well as deepwater projects. 3 rd Energy Forum PFC Energy Page 16

Gas Subsidies: Tackling a Growing Burden Rising gas subsidies, borne by PETRONAS, have been a challenge for some time. The recent announcement of a subsidy reduction reflects gas supply challenges.

17 Gas Subsidies: Tackling a Growing Burden Rising gas subsidies, borne by PETRONAS, have been a challenge for some time. The recent announcement of a subsidy reduction reflects gas supply challenges. Gas prices will rise by 28% for the power sector and 7% for the industrial sector, and continue to increase by RM3 every six months until market prices are reached (by 2015). This increase in gas prices will improve the economics of PETRONAS s domestic E&P developments serving Peninsular Malaysia, as well as the two regasification projects under consideration in Melaka and Pengerang, Johor (as part of the RAPID project). Without the price changes, the commercial case for increased supply to the domestic market is weak, incentivizing PETRONAS to focus on higher value export markets. 3 rd Energy Forum PFC Energy Page 17

PETRONAS: Change to Dividend System to Free Up Cash for Investment PETRONAS is a key contributor to government revenues in the form of taxes, royalties and dividends, which together account for more

Since FY2008, PETRONAS has paid a fixed RM30 bn ($10 bn) of dividends annually to the state, even when profits fell sharply in FY2010.

18 PETRONAS: Change to Dividend System to Free Up Cash for Investment PETRONAS is a key contributor to government revenues in the form of taxes, royalties and dividends, which together account for more than 40% of government revenues. Dividends account for about half the total payout to the government. Since FY2008, PETRONAS has paid a fixed RM30 bn ($10 bn) of dividends annually to the state, even when profits fell sharply in FY2010. The proposed change, which appears to have state approval, will peg dividend payout at 30% of net income. This will further improve PETRONAS s financial position and give it flexibility to grow its capex as announced. If PETRONAS is able to translate the increased retained earnings into growth in domestic investments, the change will be beneficial for the overall economy. 3 rd Energy Forum PFC Energy Page 18

19 Key Conclusions Progress toward addressing upstream challenges: Increased capex Focus on challenging reserves and play types New incentives But other challenges remain: Gas pricing lack of incentives for deepwater gas Small contribution of marginal field developments 3 rd Energy Forum PFC Energy Page 19

20 Strategic Advisors in Global Energy PFC Energy consultants are present in the following locations: Beijing Brussels Delhi Ho Chi Minh City Houston Kuala Lumpur Lausanne London Mumbai New York Paris Singapore Vancouver Washington, DC Main regional offices are shown in blue. Asia Main regional offices: PFC Energy, Kuala Lumpur Level 27, UBN Tower #21 10 Jalan P. Ramlee Kuala Lumpur, Malaysia Tel (60 3) Fax (60 3) PFC Energy, China 79 Jianguo Road China Central Place Tower II, 9/F, Suite J Chaoyang District Beijing , China Tel (86 10) Fax (86 10) PFC Energy, Singapore 9 Temasek Boulevard #09-01 Suntec Tower Two Singapore Singapore Tel (65) Fax: (65) Europe PFC Energy, France 19 rue du Général Foy Paris, France Tel (33 1) Fax (33 1) PFC Energy International, Lausanne 1-3, rue Marterey 1003 Lausanne,Switzerland Tel (41 21) Fax: (41 21) North America PFC Energy, Washington D.C Connecticut Avenue, N.W. Suite 800 Washington, DC 20036, USA Tel (1 202) Fax (1 202) PFC Energy, Houston 4545 Post Oak Place, Suite 312 Houston, Texas , USA Tel (1 713) Fax (1 713) info@pfcenergy.com

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