Controversies have surfaced on the oil and gas development in Sabah, especially with regards to the RM1.6 billion Kimanis-Bintulu gas pipeline project. Certain Sabah politicians are in no mood to share the gas with Sarawak, even though there may be an excess. There have also been questions raised over the role of the state government. There are even voices that since the gas belongs to Sabah and if the state cannot use it right away, it should be kept for future generations. Questions have also been thrown at Petronas on how the oil and gas industry in Sabah will benefit the local people. Petronas president and chief executive officerCEO Tan Sri Mohd Hassan Marican speaks to gives his view and explanation in this exclusive interview with JONISTON BANGKUAI of the New Sunday Times and Sabah-based Daily Express chief editor JAMES SARDA. The following are excerpts of from the interview. are as follows:
Q: There have been numerous questions raised about the oil and gas industries in Sabah, particularly the 500km multi-billion ringgit Kimanis-Bintulu gas pipeline project and the setting up of a petrochemical complex in Sabah. How do you deal with this?
A: We have to put this in perspective. I am only going to deal with facts because I am a technocrat. You have to go back to history. The oil and gas industry in Sabah started many years ago, even before the incorporation of Petronas. But Sabah has small resources and therefore small production. But it has been a producer for a long time. The oil and gas industry in Sabah was based in Labuan and this included the Labuan Crude Oil Terminal, Asian Supply Base and methanol plant. Labuan became a federal territory in 1984. But the development of oil and gas continued. The first methanol plant was developed by the Sabah Gas Industries which was bailed out by Petronas in 1992. Even though Labuan became a federal territory, Sabah continued to enjoy royalty from the production of oil and gas offshore Sabah. In the last six years, there have been discoveries of oil and gas, particularly in the deepwaters off Sabah. The first major development of this new discovery of oil is Kikeh which came into production in August last year. With that production, Sabah's royalty value went up. The reserves of gas offshore Sabah are small, about 10 trillion cubic feet, and they are scattered in reservoirs that are not very large. This is different from the reservoirs in Sarawak and Peninsular Malaysia which contain huge reserves. Because they are small and scattered, the viability of developing the oil and gas is quite limited until such time when we discover sufficient volume to develop. So what we came up with is this: The development of offshore Sabah gas is going to be undertaken in two clusters -- the northern and southern clusters. What the clusters mean is that there will be a central facility which will gather the gas from various reservoirs and it will be brought to Sabah. So you have two big pipelines coming in from the north and south. And they will end up in Kimanis at the Sabah Oil and Gas Terminal (SOGT). That is for gas. The future development of oil that has been discovered, starting with the Gumusut development, which is ultra deep, will also be landed in Kimanis. There will be crude oil tanks with a capacity for three billion barrels and the oil will be exported from there. Hence, the combined Kimanis facility will be called the SOGT. It took us 30 years to develop Bintulu which is today one of the single largest liquefied natural gas (LNG) complexes in the world. It has taken us 35 years to develop Kerteh. In order for gas to be developed, there has to be a base load to make it commercially viable. In the case of Peninsular Malaysia, the base load was provided by the export to Singapore. Only when you have this base load can downstream gas industries proceed. We are bringing gas from offshore Sabah to onshore Sabah. A portion of it, as we design this, will be piped to Bintulu. That gives us the base to provide the economic viability to develop the gas offshore Sabah. Bear in mind that the gas reserves are not all Petronas' but they also belong to production-sharing contractors who would only develop it if there is economic return.
Q: When did discussion with the Sabah government on the petrochemical plant begin?
A: The first discussion was in 2006 when the whole concept was deliberated. At that discussion, we (Petronas) said we will embark on a masterplan for downstream gas industries which would include petrochemicals. In fact, we conducted a joint feasibility study with Yayasan Sabah for a world-scale fertiliser plant or urea plant. But it was not commercially viable because the cost of construction was very high. We have not given up and we will revisit the proposed project when the cost and market environment changes. In the meantime, we are in the process of completing the integrated petrochemical masterplan which will then be presented to the state government when it is ready. To have a downstream integrated petrochemical complex also requires a lot of other things such as infrastructure -- meaning not only roads but also marine facilities and water. For example, in Kerteh, we use 30 million gallons of water every day. We also need power and human resources. All these need to be taken into account if we are going to attract world-class companies. This is a global business. We need to attract and bring in the "big boys" as partners. We have not been keeping quiet. We have held discussions with key petrochemical companies and identified potential sites. We have been very quiet about this because we don't want any speculation, especially where land is concerned. We are in a competitive global business environment. If you make an announcement prematurely about what project you want to embark on, you will be alerting the competitors who can then be ahead of you. The industry is such that you cannot build little plants here and there. It is not viable. That is why all the facilities we have built are of world-scale capacities.
Q: Can you elaborate on what the SOGT entails?
A: As part of the development of the SOGT, the immediate thing that has happened is the joint venture between the state government and Wah Seong Corp Bhd which is a listed company operating pipe welding and coating plant in KKIP (Kota Kinabalu Industrial Park) which employs 250 Sabahans. The plant is not built just for the SOGT but also for other projects in Malaysia and outside Malaysia. We are also training close to 500 Sabahans in various skills and not just for this development. But again, the expectation of the oil and gas industry as a large provider of jobs is also not correct. It is a highly skilled, highly technical job with few vacancies. But the spillover effect for small-and medium-size industries to provide services is huge. We have been in communication with the state government to encourage Sabahans in this. What is important is that this is a long-term industry and we have to look at the success of the Sarawak service providers because they have been very focused. They have been able to look at the long-term to the extent that they have been able to export their services. If the expectation is for all this to happen overnight, it is wrong. Another key consideration is when we talk about having a gas-based industry, any investor who wants to invest in a petrochemical facility will want to see the sustainability of production and reserves for at least 20 years. You do not invest billions of dollars and find that there is no gas after six or seven years. As the gas owner, you have to give that commitment that you will be able to provide the resource for at least 20 years.
Q: How long will Sabah be able to produce gas?
A: The offshore Sabah resources compared with Sarawak and the peninsula is very small. Sarawak's gas reserve is 45 trillion cubic feet and in the peninsula, it is about 39 trillion. Sabah has about 10 trillion to 12 trillion, if you include associated gas, and it is scattered and in small reservoirs making it expensive to develop. The important thing is developing the gas the way we have conceptualised and planned to help maximise value to the state government because the state will receive royalty from the gas production.
Q: Is the setting up of the proposed petrochemical plant in Sabah something new?
A: It has been ongoing and the methanol plant in Labuan is also a petrochemical plant. Many competent and capable Sabahans are actually located in Labuan where they are the service providers. The chief minister (Datuk Seri Musa Aman) and some state officials visited Kerteh in 2006 to see the operation there.
Q: Some Sabah leaders want a gas plant to be set up in the state, instead of spending RM1.6 billion to build the gas pipeline to Bintulu.
A: The proposal was considered but it was not viable because we cannot sustain it for 30 years. In the end, if you look at it in the national context, we will be wasting resources because we already have a complex in Bintulu. The reason we are sending the gas to Bintulu is because of the base. The cost of an LNG plant today is about US$1,200 (RM4,224) per tonne. The third plant in Bintulu which was completed in 2002 cost US$200 a tonne.
Q: Does this mean that the only option is to send the gas to Bintulu?
A: Yes, but we will still pay Sabah the royalty. We don't plan to take everything to Bintulu. We keep a certain amount to support the downstream gas industry in Sabah. This will provide the base to develop the resources.
Q: When do you expect the masterplan on the proposed petrochemical complex in Sabah and the urea plant to be completed?
A: By early next year we will be able to complete the petrochemical masterplan. As for now, the urea plant is out because the cost is too high.
Q: What about the proposed gas-powered plant that is to be built in Sabah?
A: Petronas Gas Bhd has already entered into a joint venture with Yayasan Sabah for a 300 megawatt combined cycle power plant in Kimanis. It should be fully on stream in early 2011, which is when the gas is expected to land. We have a joint committee chaired by the state secretary to oversee this.
Q: The public has the impression that the state government had not been playing an active or participatory role in the project.
A: Like I said, you cannot make a premature announcement on a project like this.
Q: What is the overall investment required for the petrochemical complex in Sabah?
A: Kertih's was RM70 billion. As for Sabah, developing the two gas clusters and the Gumusut field has already exceeded RM10 billion. Gumusut, which is being developed by Petronas, Shell Production Sharing Contractors and Conoco, is expected to start producing in 2011. We are working with the various training institutions in Sabah to train Sabahans.
Q: Some Sabah politicians are saying the gas belongs to Sabah and as such it must benefit the state.
A: I think this is a national resource. You cannot look at it in a parochial way. The focus should be on all the supporting industries. We have explained to the trade and business chambers in Sabah on many occasions that there will be many opportunities for them. When we talk of certain packages of contracts, we restrict it to Sabah contractors. For example, the site preparation work for the SOGT in Kimanis involves two Sabah Bumiputera contractors and the value of the contract is RM100 million. One consortium gets RM60 million and the other RM40 million. The first consortium is led by Montis and the other is Ribuan Gaya. The supply and coating of pipes is worth RM400 million, and it is a 60 per cent joint venture with the state government. The company is Petropaip Sabah Sdn Bhd.
Q: Minister in the Prime Minister's Department Tan Sri Bernard Dompok had said that he was disappointed that the state government was not supporting his objection to the pipeline on grounds that the gas was most needed in Sabah. What is your view on this?
A: To be fair to the state, they know more about what had transpired. But we did not want to have a premature announcement. We are only a small reserve holder compared with Iran, Saudi Arabia and Qatar. If we make too much noise, what happens if the Saudis say they want to do the plant first? You are in competition as a resource holder to attract the right investor to come into a joint venture with you. The competition from Indonesia, Thailand and Singapore that I went through to get Dow and BASF to come to Kertih and Kuantan was tremendous. We were on the same flight to New York with the chairman of EDB (Economic Development Board of Singapore) and we were going to see the same investor.
Q: Are you saying it is unfair for certain quarters to say the state government was hardly involved in the project?
A: What I can say is that they have been fully involved since 2006 when we presented and discussed the concept with them. Like I said, I am not a politician but a technocrat. I can give you facts, the history and how we've done it.
Q: Is it fair to say then that in the case of the state government, the chief minister was aggressively involved in the petrochemical plant project, contrary to the perception that has been created?
A: Yes. I think it is fair comment. And also together with him we even discussed this with the national leaders, both the prime minister and his deputy since 2006.
Q: In the Sabah Development Corridor (SDC), one of the core focus is the development of an oil and gas industry in Sabah. Can you elaborate?
A: That is how it got lifted and included as part of the corridor's development. Not the other way around. Even before 1995, when we landed gas in Kg Gayang (Tuaran), for many years nobody used the gas. The independent power producer only used 20 per cent of the capacity that we landed.
Q: Sabah is facing an energy shortage and following the proposal to build a coal-fired power plant in the east coast, there is talk of using gas to produce electricity.
A: This (gas-powered electricity plant) is in our discussions with Tenaga Nasional. You cannot just land (the gas) here, there and everywhere. We are continuously discussing with Tenaga Nasional their requirements. I have always believed that Borneo should have its own power grid instead of having small power plants here and there. It makes economic sense.
Q: The published cost for the gas pipeline is RM1.6 billion but some politicians in Sabah think it will be RM3 billion.
A: The EPCC (Engineering, Procurement, Construction and Commissioning) cost of the gas pipeline is RM1.6 billion. One of the members of the consortium is a Yayasan Sabah company, Petrosab. The others are India-based Punj Lloyd and Dialog E&C Sdn Bhd.
Q: Although you have outlined the reasons, the lingering feeling will still be why not a LNG plant in Sabah?
A: The Kertih plant was not cheap because you are talking about reactors. An urea plant today will cost a fortune. And all these products have a global market and the price will be determined accordingly. So when you do a feasibility study you are not only doing the technical feasibility study but also looking at the market, the future price.
Q: It is left to Sabah then to get a better deal in some other way, perhaps higher royalty?
A: That is not for me to comment.
Q: Another grouse of Sabah leaders is that Petronas has hundreds of subsidiaries and yet Sabahans are not benefiting in the form of directorships, etc.
A: Sabahans have got quite a number of our scholarships. And all these training is funded by us.