Cover Story: A gas pipeline’s costly malfunction

This article first appeared in The Edge Malaysia Weekly, on February 17, 2020 - February 23, 2020.
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SUPPLY disruptions” in the commodities sector, which included a decline in crude oil and natural gas production, were named by the central bank as one of the factors that caused Malaysia’s fourth quarter GDP reading to come in way below expectations. GDP for the quarter would have been 4.3% instead of 3.6% had it not been for the disruptions, Bank Negara Malaysia said.

Growth in the mining sector contracted 2.5% year on year in 4Q2019, slower than the 4.3% contraction registered in 3Q2019, as output gradually recovered after major maintenance work in the previous quarter. Growth in natural gas output contracted as production was affected by temporary facility closures, according to Bank Negara’s quarterly bulletin for 4Q2019.

Together with the 5.7% contraction in the agriculture sector — where oil palm output was affected by severe dry weather conditions and cutbacks in fertiliser application during the early part of 2019 — the declines negated the higher growth in the services and construction sector during the quarter.

Citing industry data, a source said the contraction in mining output was the result of a 6.2% year-on-year decline in crude oil and condensate production, coupled with a 1.2% decline in natural gas production.

The declines, he explained, were due to maintenance works in Sabah and Sarawak that overshadowed the recovery in production in Peninsular Malaysia following the completion of planned maintenance. Sarawak underwent planned maintenance for crude oil-related assets, whereas Sabah underwent planned maintenance for gas assets.

More interesting, however, is the unplanned maintenance of gas-related assets in both East Malaysian states.

When contacted, an executive of a local oil and gas (O&G) services company related that the operation of the Sabah-Sarawak Gas Pipeline (SSGP) was disrupted in the last quarter of 2019, particularly in the Lawas district in Limbang, Sarawak.

Spanning over 500km and costing more than RM4 billion to develop, the SSGP links the Sabah Oil and Gas Terminal in Kimanis with Petronas’ liquefied natural gas complex in Bintulu, Sarawak. According to a January 2020 report by Wood Mackenzie, the pipeline has an initial capacity of 750 million cu ft per day (mmcfd), but may be expanded to around 1,100 mmcfd with the addition of extra compression at a later date.

In 4Q2019, Petronas conducted safety checks along the gas pipeline that involved “blowdowns of the pipe route”. The process was conducted along the Miri-Bintulu portion from Nov 17 to 31 and the Lawas-Kimanis section from Dec 2 to 21. Put another way, significant parts of the pipeline would have been offline for 35 days combined.

A back-of-the-envelope calculation shows that the resulting disruption could have affected delivery of up to 26.25 billion cu ft of gas. Based on rough estimates, that represents some 4% of Malaysia’s gas production in one quarter.

Petronas does not provide data for its oil and gas production volume in Malaysia. It also did not respond to queries by The Edge on whether the safety checks done were part of planned maintenance, or whether the works were unplanned.

There had been several rounds of unplanned maintenance work at the SSGP pipeline since it commenced operations in early 2014.

In June 2014, an explosion ripped apart a section of the pipeline between Lawas and Long Sukang. Operations resumed only in 2016.

In January 2018, another gas leak occurred at Long Luping in the Lawas district. At the time, Petronas said that delivery of its LNG cargo was not affected.

In May 2019, the national oil company shut down the pipeline for two months as part of its maintenance work, according to news reports. A fire had occurred at the pipeline,  also in the Lawas district, early that month.

According to the O&G executive, setting up for planned maintenance works is a tedious process. As such, halting planned maintenance work — just to offset surprise a production shortfall from unplanned maintenance at another facility — would be disruptive and not necessarily the most viable solution.

That said, Petronas can choose to increase production at one field to offset the loss of production at another field as a temporary measure. When planned maintenance work was done for the SGPP last year, Petronas increased gas production in Sarawak to make up for the shortfall of supply from Sabah.

Moving forward, it is unclear whether Malaysia’s gas production has recovered to normal or, at least, would no longer be a drag on GDP numbers in the first quarter this year.

It is understood that planned maintenance works for upstream assets are usually slow in the first quarter of the year, which is when companies calibrate their budget before the activities are allocated.

The level of activity around offshore upstream assets also depends on the weather, as Malaysia typically undergoes a monsoon season from October to February. “However, the monsoon season was not too bad this year, and the industry opted to allow maintenance work to proceed in the last quarter,” said the executive.

The bad news is that the SGPP suffered another rupture in the northern district of Marudi, Sarawak, in January this year. It is unclear how long the pipeline’s operations were affected as a result and if measures were taken to offset any shortfall.

Another concern stems from a deeper crude oil production cut agreed upon last December by the Organisation of Petroleum Exporting Countries (Opec) and its allies — which includes Malaysia — to keep prices afloat.

“Consensus reached in December among Opec+ to reduce crude oil supply by an additional 500,000 barrels per day (bpd) as well as disruptions to the SSGP would weigh on the mining sector in 1Q2020,” CGSCIMB said in a report dated Feb 11.

The latest production cut took effect on Jan 1. It is unclear what Malaysia’s commitment under the latest agreement is. In 2019, the government pledged to cut production by 15,000bpd, less than the 20,000bpd it undertook in 2018.

First-quarter GDP data for 2020, slated for release on May 13, will be closely scrutinised as the reading would be the first to show the impact of the coronavirus outbreak on the Malaysian economy.

 

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