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Issues concerning the Trans Sabah Gas Pipeline Project
Published on: Saturday, November 11, 2017

By Datuk Dr Johan Arriffin
MANY Sabahans were not aware of the Trans Sabah Gas Pipeline Project (TSGP) deal until it went viral.

The public should not be blamed as the government does a bad job of informing the public leading to unnecessary speculations.

Minister Abdul Rahman Dahlan rubbished a message on social media alleging that Prime Minister Najib Razak had collateralised oil and gas blocks off Sabah to China for a loan of RM100 billion in the Trans-Sabah Gas Pipeline (TSGP) project.

Rahman clarified the project would be funded by a soft loan from the Export and Import (Exim) Bank of China, and the loan amount was RM4.53 billion, not RM100 billion. China Petroleum Pipeline Bureau (CPP) is the project’s engineering, procurement, construction and commissioning contractor.

According to market information the TSGP is approximately 500km from Kimanis to Lahad Datu.

Strangely there is no mention of Petronas involvement in this deal. Petronas has a monopoly over gas distribution and pricing in Malaysia.

TSGP is owned by Suria Strategic Energy Resources Sdn Bhd (SSER), a company wholly owned by Ministry of Finance. Not much is known about SSER registered on May 19, 2016.

In a letter to a university inviting internship, SSER describes itself as focusing on strategic energy infrastructure and securing energy reserve.

It currently develops pipelines across Malaysia in respect of the petroleum and energy industry.

Rahman said as land matters were strictly under state jurisdiction, the project would not be able to proceed without engagement and cooperation between the Sabah and federal governments.

“With this key energy infrastructure project, Sabah will be able to move up the value chain and add value to local commodities and raw materials.

“This will reduce the state’s dependency on primary industries and create employment for the people throughout the state, increasing their income levels” he added.

The idea of building a Gas pipeline across Sabah from SOGT in Kimanis to Lahad Datu is nothing new.

It traces back to the days in 2011 when Sabah Environmental Protection Association (Sepa) Wong Tack led a successful campaign against the government to shelve the proposed 300MW coal fired plant in Lahad Datu.

Since then the government has been seeking alternatives to deliver power in the east coast to replace the ageing power plants.

One of the alternatives is to build a gas fired 300MW powerplant. For that to happen you need gas supply.

After several studies, the solution was to build a regassification plant (RGT) to receive the gas feedstock.

In February 2016, Petronas and Sabah Energy, the Lahad Datu RGT partners, announced that they have terminated the previously announced proposal to construct RM1bn ($241m) Liquefied Natural Gas (LNG) terminal due to uncertainty and the impact of the Suluk invasion of Lahad Datu in 2013.

The facilities were scheduled to be completed in 2015 and planned to supply gas to an adjacent 300MW combined cycle power plant in Lahad Datu as their first customer.

In a related October 2016 filing with Bursa Malaysia, Ranhill announced that it had received a letter from the Energy Commission (EC) notifying it about the Government’s approval for the proposed development of a 300MW combined-cycle gas-turbine power plant by a consortium of private companies.

“The consortium is instructed to commence negotiations with Petroliam Nasional Bhd (Petronas) and the company identified by the Government of Malaysia to develop the Trans-Sabah Gas Pipeline, to ascertain the terms and conditions of the gas supply required for the project,” Ranhill said.

“A letter of award will be issued by the EC after the terms of the gas supply agreement are determined,” it added.

On the equity side, people like to know who are the consortium of private companies involved in the Lahad Datu power plant project. Are any of the state GLCs involved or some individual beneficiaries?

In the case of Kimanis Power, Yayasan Sabah has 40pc equity, giving good returns to the Foundation to continue giving scholarships, loans and carry out social programmes in the state.

The killer for the project is whether the gas pricing agreement (GSA) has been signed between Petronas and Ranhill and what are the throughput charges to be paid to SSER for using the TSGP.

Furthermore, the power purchase agreement (PPA) agreement has also evolved over the years and its very different from the first generation of PPA.

It’s no longer lucrative for new power players, having to contend with IRR of 9pc or less.

Without gas subsidy, high throughput fees through TSGP and EPCC challenges, there are many questions on the viability of the project.

The economics to build a 500km gas pipeline to supply a single power plant in Lahad Datu is different from the supply of gas through SSGP to feed the LNG 9 trains in Bintulu.

It’s well known that Petronas has been pushing for market price for gas. In 2011 Petronas criticised the federal government for continuing to subsidise gas in a bid to woo foreign direct investments (FDIs), saying the policy was “distorted” and “inefficient”.

President and chief executive Shamsul Azhar Abbas said the continued reliance on cheap gas has not helped to encourage power producers and consumers to pursue efficiency. “It just goes to show the amount of inefficiency that’s prevailing within the system. And all this distortion is created by the (gas) subsidy,” he said.

Shamsul said the government’s policy to keep gas prices low has forced Petronas to fork out some RM20 billion worth of subsidies. To prepare for market pricing, Petronas built regassification plans in Sungai Udang, Malacca and Pengerang, Johore Baru for the import of gas. Lahad Datu was supposed to be the third, albeit on a smaller scale.

Rahman Dahlan’s brief is also perplexing. According to him, Sabah will be able to move up the value chain and add value to local commodities and raw materials. There are so many qualifications to that statements.

Firstly, if you are going to rely on gas to develop industries in the east coast, it’s not going to happen as gas is an expensive feedstock unless subsidised.

Secondly, gas is a scarce resource and viable for downstream petrochemical industries.

MPRC has already conducted studies on the Oil & Gas downstream masterplan and found that East Coast areas is not suitable for development of petrochemical industries cluster. That is why Sipitang was chosen as the site for Oil & Gas Industrial Park.

Furthermore, there are no supporting oil & gas supply chains like Bintulu and Miri to support petrochemical industries in the east coast. East Coast is primarily Oil Palm and it is more economical to buy electricity off the grid than buy gas from TSGP. We need more clarity on Rahman Dahlan’s political speak.

It is well known that the Sabah state government has had some run-ins with Petronas on gas supply and gas pricing. After opening 4,065 of land in 2010 at the Sipitang Oil & Gas Industrial Park, the Ammonia and Urea Plant (Samur) owned by Petronas is the only project in the Industrial Park. Sources from the state government indicated that the second urea plant has been thwarted by Petronas due to the supply and gas price issue.

If the state government has had problems with Petronas on the gas supply and pricing, it is likely that whoever buys the gas off the TSGP will have to face the same problems and pay commercial price unless the Federal government steps in to subsidise the price.

The EIA must not be overlooked. Did SSER or the state government carry out a detailed Environmental Impact assessment? There is no information on the EIA and whether the public and people affected have been invited to give their feedback. The public is entitled to access the EIA report if any.

Looking at the map of Sabah, the pipeline route is likely to traverse the most sensitive part of the oldest tropical rainforest in the world, conservation areas and wildlife corridors. Like the Lahad Datu coal fired power plant and the proposed Sukau bridge project, it has attracted world attention. Sabah’s conservation reputation and tourism industry will be at stake.

The TSGP project is an ambitious project. From the SSGP experience, it’s not going to be easy.

The 520km 4.6 billion SSGP project from Kimanis to Bintulu had to deal with so many land compensation issues causing delay, Penans roadblocks, hundreds of river crossings, rock formations, steep elevations requiring helicopters to lift pipes, loss of life, and other challenges numerous to mention. SSGP project which started in 2008 was supposed to be completed after 36 months. It was only came on stream in 2014 due to delays and cost overruns.

The TSGP project risk is taken up by the Federal Government by way of guarantees.

Land acquisition and environmental issues will take time to be resolved and any delays will push the project costs up. If the completion date is 36 months from now, the east coast will not see a new power plant until 2020 or beyond.

The cost benefit analysis of TSGP project need to be robust as there are no other industries at the receiving end except for the POIC cluster and an overdue power plant. It takes time to develop an industrial cluster like KKIP or SOGIP.

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