Malaysia’s Energy Conundrum
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The upcoming elections in Malaysia form a potentially uncertain backdrop to the country’s future energy policy, to say the least. The state oil company, PETRONAS, which is the chief source of government revenue, is beginning to grumble about its role, as the company’s profits have been increasingly used to fund political pet projects and what look like vote-buying schemes. That they have to do this in the face of diminishing reserves could potentially be devastating for a political system dependent on petroleum profits.
Malaysia’s Prime Minister Naijib has finally acknowledged the unsustainability of gas and petrol prices, the lowest in Southeast Asia, and faces continued accusations of cronyism by opposition leader Anwar Ibrahim. The problem, of course, is that this is a political nightmare for someone who is already facing growing anger at the ruling party. So, here we are. Malaysians are being incentivized into a consumptive lifestyle with cheap gasoline and electricity from subsidized natural gas providing 60% of their power, and they will not be happy about having to pay rising prices at the pump, as they have become habituated to a particular cost.
The subsidy of petrol and diesel co-exists with a mandate for B5 biodiesel to support the price of palm oil, which along with crude oil is the country’s main export. Malaysia is one of the two countries on Earth that can produce enough palm oil derived biodiesel to find out if it would be economic compared to petroleum diesel, but the market is so far from a natural state that it is impossible to know at this point. The iShares MCSI Malaysia Index ETF (NYSEMKT: EWM) is heavily weighted towards palm oil and PETRONAS’ listed subsidiaries. It has lagged behind other Asian single country ETFs, but the KLCI Malaysia Index closed at an all-time high on July 3rd and looks like it will continue its bull run now that the liquidity spigots have been opened in the E.U. and the U.S.
The government in Vietnam is dealing with a similar problem, and in many ways so is China. Earlier in the year in Vietnam, gas prices were so out of whack that importers were being asked to sell at nearly half of their costs at a time when the central bank was trying to wring price inflation out of the economy. Rising gas prices plus a nearly frozen real estate cum interbank market created flat to negative CPI growth starting in March and continuing through today, when the CPI in June actually saw prices drop. That the situation in Vietnam has not responded to loosened monetary policy yet has pressured the Market Vectors Vietnam Index ETF (NYSEMKT: VNM) in the 2nd quarter after a blistering first quarter.
The current electricity production breakdown for Malaysia is a 60/30/10 split between natural gas, coal and hydropower. Nuclear is apparently off the table in the wake of Fukishima. The current plan, which is well under way, is to raise the amount contributed by coal to 46%. To this end, the amount of coal imported between 2004 and 2010 doubled. During that same period Malaysia’s production of coal grew more than six times, rising from 4.5% of domestic consumption to 14.1%. Malaysia has vast untapped coal reserves that have not been utilized because of its prodigious oil and gas reserves.
But those reserves are becoming harder and harder for PETRONAS to monetize effectively given the amount of their profit they pay as a dividend to the government. According to a recent report by Reuters, PETRONAS pays more than 55% of its net profit to the government, which is 50% higher than the average state owned oil company. PETRONAS, like Exxon-Mobil (NYSE: XOM) and others, is a massive company that operates all around the world in more 30 countries. Exxon-Mobil, along with Conoco-Phillips and Hess, all cut deals with PETRONAS’s gas division in June to develop three major gas blocks in the North Malay Basin with production starting in early 2013.
They recently put in a bid to buy Canadian company Progress Energy Resources to secure a long-term supply of natural gas from a politically-stable country. They will not be getting that natural gas from Saskatchewan to Kuala Lumpur at $4 per million BTUs, which is what the price is set at right now. Next door in Singapore the price of natural gas is nearly $20 per million BTUs, much closer to the market price.
UNMO has controlled Malaysian politics since the country won its independence, and Ibrahim’s challenge this fall has put the ruling party on the defensive, notably not implementing an agreed upon lowering of the natural gas subsidy every six months until a market price has been achieved. Given Ibrahim’s history of not supporting bank bailouts during the Asian Financial Crisis in 1997-8 and his recent criticism of the expanded subsidies for sugar, it’s a good bet that in the event of his victory, which is not in any way certain, that he would have the short-term political capital to unwind some of these imbalances.
On the other hand if Naijib survives the challenge, the strength of the opposition may be large enough to begin the process anyway. The recent spate of IPOs of major state owned enterprises looks to be a step in this direction.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.