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Malaysia’s Gas Sector is Adopting This Model to Remain Competitive

Natural gas is one of Malaysia’s most vital resources. Malaysia is the third largest exporter of natural gas in the world, and home to an estimated 42 trillion cubic feet of proven reserves. Production of natural gas in Malaysia has quadrupled over the last two decades, with the nation now producing over 7.6 billion cubic square feet of natural gas a day. As of 2016, gas accounts for roughly 40% of the total energy consumed in Malaysia.

the goal is to rebalance differences between the forecast gas price and volumes and the actual price

With these kinds of numbers, it’s clear that balancing the important role that gas plays with support for sustainable market conditions isn’t just smart business, it’s smart for our country. That was the driving force behind the Gas Supply Amendment 2016, a policy designed to help gas prices rebalance with real market value. An important part of this is the Gas Cost Pass Through (GCPT).

GCPT operates in a similar way to the ICPT measures which apply to the power industry. These two mechanisms operate similarly based on a cost-pass through model. The goal is to rebalance differences between the forecast gas price and volumes and the actual price and volumes that are beyond the control of gas utility Gas Malaysia Berhad (GMB). In simple terms, it means that the price they can charge is better able to match the price they have to pay.

How important is Malaysia’s gas industry?

It’s not just how blessed we are with resources, but how those resources bless our economy that makes gas so important. The oil and gas industry contributed almost 15% of Malaysia’s GDP in 2016, and as of 2015 employed more than 41,000 people.

It probably comes as no shock to most Malaysians to mention that national gas company PETRONAS also ranks as one of Malaysia’s most important companies. PETRONAS is Malaysia’s single biggest employer, and one of the biggest sources of government revenue, contributing more than RM36 billion in taxes and dividends last year.

When we consider these sorts of figures, it’s easy to see why building the framework to support a sustainable gas industry is so important. That’s not just focused on the economics of production, but the equally important economics of consumption. Providing the framework to support those flexible market conditions is where GCPT plays its part.

GCPT and gas consumption in Malaysia

We’re not just producing more gas, we’re consuming more of it than ever. In 2000, the total final consumption of natural gas in Malaysia stood at 3,862 kilotonne oil equivalent (ktoe). By 2016, that figure had more than tripled to over 12,000 ktoe. But what do those figures mean? That’s enough energy to power every light, in every home in Peninsular Malaysia, for over 50 years!

We’re not just producing more gas, we’re consuming more of it than ever.

With this rapid growth in consumption, regulators recognised the need to modernise the industry to ensure continued sustainability of supply alongside sustainable market conditions.

GCPT is a mechanism which provides flexibility to GMB to provide competitive pricing in the face of potential fluctuating gas supply costs. Every six months the GCPT cost differential is assessed, and prices are adjusted accordingly, passing through a rebate or increased tariff depending on current market conditions.

Rationalising gas prices

As global commodity prices fluctuate over the years since GCPT was implemented, rebates and price changes have become a common feature of Malaysia’s gas industry. Understanding of gas cost changes makes it clear why such measures have been necessary.

Procurement costs for Gas Malaysia’s local piped gas increased from RM15.55/MMBtu in May 2014 to RM27.55 in Jul 2018, equating to over 75% increase in just four years. This change was primarily driven by a need to converge the local gas price with an international market price to ensure Malaysia’s gas industry remains competitive on a global stage.

Pressure meter and red faucet with steel yellow pipe in natural gas treatment plant in bright sunny summer day

This isn’t the first time that Malaysia’s gas has undergone pricing revisions. A Subsidisation Rationalisation Programme (SRP) launched in 2010 also looked to redress price challenges of subsidised fuel, arguably with a mixed reception. The progression of these price changes towards market parity is one reason why coal is now cheaper than gas for power production in Malaysia. What GCPT offers is a flexible solution that helps adapt to market conditions.

The progression of these price changes towards market parity is one reason why coal is now cheaper than gas

The most recent adjustment under GCPT took place on the 1st of July, with tariffs increasing to RM31.92/MMBtu from RM30.90/MMBtu for non-power sector related consumption in Peninsular Malaysia. While undoubtedly an unwelcome cost increase for some, particularly Malaysia’s energy-intensive industries, there’s no doubt that the mechanism behind these changes is vital to the continued sustainability of Malaysia’s gas industry.

Supporting sustainability with incentive-based regulation

The overall drive of GCPT and incentive-based regulation is to promote more sustainable market conditions for Malaysia’s gas industry. An incentive-driven market environment not only ensures competitive opportunity in an increasingly global world but promotes an efficient and sustainable energy industry that helps ensure continued energy security for Malaysia.

Much like in the power industry, providing a flexible framework so industry can adapt to fluctuating supply costs is crucial to ensure on-going sustainability. With the introduction of GCPT, Malaysia’s gas industry is empowered by a mechanism that allows them to react to these important cost fluctuations. That means a stronger gas industry, which forms a vital part of a stronger Malaysia.

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