Monday, 23 May 2011

Gas subsidy review long overdue

A long-overdue review of the heavily subsidised natural gas price is crucial as demand for cheap gas in Malaysia is far outstripping supply.

Analysts said that if this market-distorting situation is not corrected by the government soon, then Malaysia will run out of gas reserves which will jeopardise future generations.

As it is now, the government continues to subsidise gas by as much as 71-77 per cent, which means lost opportunities for the country and the economy not being cost efficient.

This is because the billions of ringgit used to heavily subsidise gas could have been used for socio-economic development projects such as public amenities, roads, schools and other services.

For gas alone, Petronas paid out a massive amount of subsidies amounting to RM131.3 billion between 1997 and 2010.

This being the case, there is a need to gradually move gas prices to reflect international market prices as gas prices in Malaysia are among the cheapest in the region and cheaper compared with alternative fuels.

As a result, a large number of consumers have shifted their consumption of energy from other fuels such as diesel, liquefied petroleum gas and fuel oil to natural gas. This has resulted in an imbalance with demand outstripping supply at a rapid pace.

There is also a misconception among the people that Malaysia has lots of gas reserves to be used for power when the actual situation is that there is real concern over gas reserves as they are finite.

Malaysia is now getting 36 per cent of its natural gas supply outside Malaysia at a higher price which continues to increase, but sold to the power and non-power sectors and industries at highly reduced prices.

These price distortions to the economy which are taking a toll on the country’s finances needs to be rectified soon by rationalising and reducing subsidies as the situation is increasingly untenable.

The local supply of natural gas is insufficient as demand has escalated 400 per cent over the past 10 years from 2000 for customers using less than 2.0 million standard cubic feet per day (mmscfd) and about 160 per cent for customers using more than 2.0 mmscfd while the country's gas reserves are fast depleting at an annual rate of 12 per cent.

The last gas price revision by the government was in March 2009, at a discount of 50 per cent, the prices ranged from RM15.35 per million British thermal units (mmBtu) to RM10.70 per mmBtu, with the obligation to review every six months but that did not happen.

Since the last revision, the price of medium fuel oil (MFO), a reference index from which gas is priced on, had risen over 100 per cent.

This has led the government to bear the cost of heavier subsidies as the price of energy continues to increase in global markets.

On the local scene, the power sector which has been subsidised since 1997, consumes about 55 per cent of the gas needs and a large part of the balance by the industry which had been subsidised since 2002.

The government has subsidised the price of gas to the power sector by as much as 77 per cent or RM10.70 per mmBtu and that to the industries at an average 73 per cent or between RM15.35 to RM11.05.

Based on a simple calculation, for every RM10, the government will have to subsidise between RM7.70 to RM7.30, which is already a burden, bearing in mind the fact that imported gas is bought at international market prices.

The Malaysian public and industries have been enjoying the benefits of subsidies for so long but the world scenario has changed and the days of cheap energy are gone.

From another perspective, Malaysia was subsidising the cost of products of other countries manufactured by their multinational companies based here.

The government will now have to adapt to strategies it knows best to sustain the economy and Malaysians must learn to accept changes and ride the global economic storm to be at the forefront of the competition.

Like it or not, oil and gas prices have increased and the subsidies which have become a burden to the government are very much due for a relook.

Industries have benefitted immensely enjoying double subsidies in the form of cheap gas and subsidised electricity, while receiving other government incentives.

Having relied on cheap gas for their production, there is no incentive for companies to adopt and adapt to new technologies and find new ways to become efficient.

But a gradual removal of subsidies is expected to induce industries to seek more efficient technologies for their processes.

It is understood that some of the industry players do not mind the market rates but expect any move towards that end to be undertaken in a gradual manner.

Since 1997, the government had spent RM131 billion in oil and gas subsidies and the amount is increasing since the gas usage gets bigger while higher MFO prices had caused the situation to be not sustainable in the long run.

As of now, Malaysia is getting supply of natural gas from the Natuna field in Indonesia, the Malaysia-Thailand Joint Development Area (JDA) and also from Vietnam.

Malaysia’s share of gas supply from Vietnam is almost exhausted, which means an additional burden on the government to look for new sources.

It is understood that Petronas would also be importing liquefied petroleum gas (LPG) by 2012 to cater to increasing demand, which is rather costly at about RM40 per mmBtu.

The people have to dispel the misconception that gas is always there and readily available. In reality, Malaysia is a small player and the country's oil and gas reserves are small.

If gas continues to be subsidised, then Malaysia is not optimising its resources when the reserves should be kept for future generations.

Ideally, the price of gas should be at market rates which would then attract other potential companies to import gas and liberalise the market.

By spurring the gas trade, players could import cheaper gas from abroad compared to the current situation, where players are not willing to come onboard as they would not be making any money competing against subsidised gas.

It is understood that Petronas will have its regasification plant ready by 2012 whereby other companies could import LNG and regasify to sell to the industries.

Malaysia, eventually, will attract investors who can add higher value to the gas industry and generate greater income and spur the economy in the process.