This article first appeared in The Edge Malaysia, on November 9 - November 15, 2015.

The government has awarded YTL Power International Bhd a “two-year plus 10-month” extension for the 800mwPaka power station. But the company has run into more than a little resistance.

The day YTL Power’s power purchase agreement (PPA) expired, Petroliam Nasional Bhd (Petronas) immediately cut off the gas supply to the Paka power plant, as well as YTL Power’s 400mw plant in Pasir Gudang that expired on the same day.

Note that the Paka plant has been awarded an extension for only 600mw of the total capacity. The Pasir Gudang plant did not get an extension.

Likewise, Tenaga Nasional Bhd (TNB) disconnected both plants from the grid, according to industry sources.

This means that in the event of a power shortage, the national grid would not be able to draw on some 1,200mw worth of power controlled by YTL Power.

At the same time, both government-linked companies (GLCs) have been giving YTL Power (fundamental: 1.50; valuation: 1.40) a tough time in finalising the PPA extension for the Paka plant.

According to the industry sources, Petronas has been delaying the signing of the new gas supply agreement (GSA), which is critical for the new PPA.

It is worth noting that YTL Power is suing Petronas for an estimated RM700 million in overpayments for gas supplied.

In a written reply, Petronas tells The Edge, “The GSA between Petronas and YTL Power came to an end on Sept 30, 2015. A new GSA has yet to be entered into. As with any commercial arrangement, the terms of the agreement will have to be agreed to by both parties and are subject to the approval of both parties’ management.”

At the same time, TNB has also not signed the PPA, saying that YTL Power needs to first sign a new land lease agreement (LLA) for the land on which the Paka power plant stands. The land is owned by the utility. 

However, the government has already intervened, hoping to resolve the impasse, say sources. Following mediations between the conflicting parties last month, the Ministry of Energy, Green Technology and Water instructed Petronas to sign the GSA and TNB the PPA.

But the GLCs have yet to sign on the dotted line.

Is Petronas obliged to supply gas?

On one hand, it can be argued that Petronas is obliged to supply gas to YTL Power since it holds a monopoly on gas in the country. But if that is the case, why did the ministry need to intervene? Applying the Competition Act 2010 should have resolved the issue.

Some might argue that Petronas does not monopolise the country’s gas supply, since the regasification terminal in Melaka has open access, allowing for the import of liquefied natural gas (LNG) by third parties.

Although it hasn’t been done yet, YTL Power could theoretically import its own LNG. Even if it were more expensive, any increment on fuel costs will be passed on to TNB.

However, industry players say such an arrangement would be impractical and not commercially viable simply because LNG would be supplied on a take or pay basis while the PPA with TNB is not.

It would make more sense for the stakeholders involved for Petronas to supply the gas. The question is — why is it holding back on the GSA?

“Petronas views the arbitration matter and the new GSA as two separate and distinct matters,” the state oil firm stressed when asked on the matter.

But with such a large sum — RM700 million — at stake, observers say Petronas could be holding back on signing the GSA as leverage.

Recall that earlier this year, Petronas sought to arbitrate the matter with YTL Power in London. It was reported that evidential hearings since March had ruled in favour of YTL Power.

In brief, Petronas had a contract to supply gas to YTL Power for its two power plants at a predetermined price in 1993, but it raised prices in 1997. YTL Power had to pay the excess over the years but is now suing Petronas for the difference — approximately RM700 million with interest.

Petronas could not comment on the arbitration since it is subject to a confidentiality agreement, but tells The Edge that it has filed an application to set aside the arbitration award at the Kuala Lumpur High Court.

“In turn, YTL has also applied to strike out Petronas’ application. Both applications will be heard on Nov 30, 2015,” adds Petronas.

Unable to land the PPA

TNB wants to sign a new LLA with YTL Power, despite the fact that the existing lease expires only in end-2018. And without the new LLA, TNB is reluctant to enter into a PPA with YTL Power. 

The extension for YTL Power’s power plant runs from March 1, 2016 to Dec 31, 2018.

Hence, there is no need to renegotiate the LLA. It is understood that the Energy Commission originally intended to extend YTL Power’s PPA until end-2019 but settled for the shorter extension to match the existing LLA.

“YTL Power’s land is about 16ha but not all of it is in use. TNB wants to sign a new LLA so that it can take back the unused portion,” explains one source.

When contacted, TNB declined to comment.

It is learnt that the Ministry of Energy, Green Technology and Water wrote to TNB saying that the new LLA should not be a condition precedent to the signing of the PPA.

But even if TNB were to sign the PPA, it would still be useless without a GSA as the PPA is conditional upon YTL Power securing a GSA from Petronas.

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