Malaysian Pipeline

Malaysia defies doubts, history with pipeline plan
By Syed Azman
Aug 8th, 2007
(Reuters)

Rice farmers, not the oil industry, could make the most money from Malaysia's bold plan to build a $7 billion pipeline across the country.

In the sleepy coastal town of Yan, the proposed starting point for the pipeline, farmers at road-side eating stalls talk excitedly about the state-backed project, which would require the developers to buy up a swathe of rural land.

But in the corridors of the oil industry, there are still plenty of doubts about the economics of the project, which was recently approved by Malaysia's cabinet as a way of providing a short-cut for Middle East crude bound for East Asia.

"It will be very hard for them to make money out of it," U.S. industry expert Al Troner, managing director of Asia Pacific Energy Consulting, said by phone from Houston.

Malaysia and neighboring Thailand have toyed for many years with the idea of piping oil from the Andaman Sea to the South China Sea, removing the need to ship crude around the Malayan peninsula -- but the dream has never left the drawing board.

"This is one of the old projects that never dies. There's some possibilities but I don't see anything very new about the situation," Troner said.

At Yan, there is no sign of construction work yet on the unattended rice fields, waiting to be harvested in coming weeks. Nor is there activity on the nearby mangrove swamps where oil storage tanks are planned to be built.

But the developer, Trans-Peninsula Petroleum, a little-known firm owned by two former executives of state oil firm Petronas, has signed up backers for the 310 km (193-mile) pipeline and insists that, this time, the dream will become reality.

"A lot of people want to come in. We are now about 70 percent of our target to establish a security of demand," said Syed Izhar Al-Idrus, a director and shareholder of Trans-Peninsula.

He said the company was also talking to several Middle Eastern investors, but declined to give further details.

MOMENT OF TRUTH APPROACHES

The pipeline would stretch from Yan on Malaysia's northwest coast to the small fishing port of Bachok in the east.

Oil tankers currently take Middle East crude through the Malacca Strait and around both Malaysia and Singapore before sailing north to ports in Japan, China and South Korea.

The pipeline aims to cut time and costs by bypassing the crowded strait, conduit for over a quarter of the world's seaborne crude. But two years ago Thailand scrapped a similar pipeline project, partly because of rising steel costs.

The Malaysian project would involve laying three 48-inch pipelines over the difficult Titiwangsa mountain range, to transport 6 million barrels of oil per day -- more than enough for all of Japan, an enormous volume for any pipeline.

Day-storage tanks would be built in Yan and Bachok, and mooring facilities off both. The project also includes a new storage facility in Jeli in northeastern Kelantan state to hold up to 180 million barrels -- two days of global oil consumption.

Construction is scheduled for eight years from 2008.

But some analysts say it remains cheaper and potentially quicker to sail around Singapore than to unload a super-tanker at Yan, pipe the crude to Bachok and put it on another tanker.

OSK Research cited the cost to ship oil from the Gulf to the Far East using a very large crude carrier at $2.28 per barrel, and using the pipeline at $2.92.

DEFYING THE NAY-SAYERS

Experts say the investment is large and the return distant.

"The concern would be the huge up-front investment that you would have to put in and what could well be a very long pay-back period," said Chris Eng, an analyst at OSK Investment Bank.

But Syed Izhar disagreed, saying pay-back period for the project, which will derive revenues from oil throughput and storage charges, was expected to be over seven years.

"For Sumed, they've done it in five years," he said, referring to Suez-Mediterranean pipeline, an alternative to the Suez canal. "They have been in existence for the past 30 years, and for the past 26 years they have been making money."

Trans-Peninsula aims to divert a third of oil passing through the Malacca Strait, which analysts think is overly optimistic.

But no one doubts the rice farmers will make a return.

"I think there will be no objection if the price is right," said 41-year-old Md Yusof Yahya, one of hundreds of rice farmers whose land will need to be bought by the developers.

"People here are quite excited, some are planning to look for another plot of land while some just want to invest the money and stop farming," added Yusof, wearing t-shirt and jeans and sipping coffee at a roadside cafe at Yan.