July 17, 2007

$7 Billion Down the Pipe


The largest infrastructure project announced in the second quarter was the plan to build an oil pipeline on the Malay Peninsula for $7 billion. Although the pipeline's planners have the support of the Malaysian and Indonesian governments, experts differ in their assessments of it.

The Straits of Malacca, between the Malay Peninsula and the island of Sumatra, are the shortest sea passage the countries of the Far East and the countries of Europe, South Asia and the Middle East. It is the busiest sea route in the world. According to the International Naval Research Organization, about half of the world's naval cargo turnover passes through the 900-km. strait, which unites the Indian Ocean and the South China Sea. In 2006, about 65,000 cargo ships with a combined deadweight of hundreds of millions of tons plied the strait. By 2015, the number of ships is expected to reach 100,000. The strait's throughput is nonetheless low, because shallows limit the ship channel to 1.5-2 km. in width. In addition, the strait has had a bad reputation since antiquity for the widespread occurrence of piracy there. Piracy has always been a type of local industry for the peoples living on the shores of the strait. The hit Soviet film Pirates of the 20th Century was set in the waters of the strait. In recent years, piracy has been somewhat reduced thanks to a joint Indonesian-Malaysian program to combat it. In recent years, a significant part of the cargo turnover in China, South Korea and Japan is due to oil and petroleum products that come from the Middle Eats to the Far East. According to the International Energy Agency, more than 15 million barrels of oil passed along that route every day in 2006. As oil prices continue to rise, that cargo load is also rising. Huge tankers frequently stand in traffic jams for days, leading to additional expenses and even higher prices on hydrocarbons in the consumer countries. Those countries are prepared to pay the additional cost. In China, oil consumption rose from 6 million to 7 million tons per day in 2006.

The situation is beneficial to Singapore. The sovereign city on the southeastern tip of the Malay Peninsula controls the exit from the strait and has a well-developed oil transshipment and refining infrastructure. Singapore's gigantic oil tanks, refineries and transfer terminals, along with its status as regional financial center has helped the city-state become the center of oil trading in the Asia-Pacific region. While the indicators of hydrocarbon prices in Europe are the quotations on oil futures in London's Intercontinental Exchange and the New York Mercantile Exchange, Asia orients itself to futures prices on the Singapore Commodities Exchange.

The heavy load on the Strait of Malacca and the lack of alternatives make the economies of Far Eastern countries hostage to Singapore, which gives them impetus to search for new shipping routes.

In Thailand, which occupies the narrowest section of the Malay Peninsula, the construction of a canal between the South China Sea and Indian Ocean was discussed around the turn of the century. Preliminary financial estimates were made that indicated the project would cost about $1 billion. It was never carried our, however, because Thai authorities found that price high and did not see any obvious benefit from the canal. The canal would not be the only possible route between the Middle East and Far East. Singapore had advantages such as a well-developed logistics and financial infrastructure, so the operator of the canal would be force to charge dumping rates, which would mean a long payback period and doubtful long-term prospects.

In April of this year, Malaysia announced plans to create a bypass route. Former employees of the state oil company Petronas Rahim Kamil Sulaiman and Syed Izhar Al-Idrus presented a project to the government for the construction of a 320-km. oil pipeline across the Malay Peninsula at a cost of $7 billion. They envision oil tankers unloading on the Western shore of the peninsula, instead of traversing the strait. The oil will be pumped through the tunnel to the Eastern shore, where it will be reloaded onto tankers.

The route for the pipeline proposed by the “simple former Petronas engineers,” as Sulaiman and Al-Idrus are at pains to identify themselves, was swiftly approved by the national government and the administrations of Kedah, Perak and Kelantan, the three northern states the pipeline is projected to pass through. High officials of the United Malays National Organization, the ruling party in power since the mid-1970s, also spoke of the proposed pipeline approvingly. The UMNO said that the pipeline would encourage economic growth in the northern part of the country and benefit the entire country. Neighboring Indonesian authorities also support the project. Sulaiman and Al-Idrus formed the Trans-Peninsula Petroleum company, with authorized capital of 1 million Malaysian ringgit (about $290,000) and, within a month, the company partners for the project, the Saudi company Al-Banader International, Malaysian investment holding Ranhill (which specializes in infrastructure and industrial investments), Malaysian construction companies Merapoh Resources and SKS Ventures (specialists in the oil and natural gas facilities), Indonesian steel pipe maker PT Bakrie & Brothers and Indonesian heavy industrialist PT Tripatra. In April and May, the project was given the appropriate coverage in the local press and at the third World Islamic Economic Forum in Kuala-Lumpur.

On May 28, an agreement on the beginning of the implementation of the Trans-Peninsula Petroleum and its partners was signed in the presence of Malaysian Prime Minister Abdullah Ahmad Badawi and Indonesian President Susilo Bambang Yudhoyono. At that time, analysts and the press were given the basic parameters of the pipeline. Three parallel lines of 1220-mm. pipe are planned to run a distance of 320 km. Construction of the first line, with a daily pumping capacity of 2 million barrels per day, should be finished by 2009 and all construction will be completed and all three lines in use in 2014, at which time the pipeline will pump 6 million barrels per day. That will be about 20 percent of the total amount of oil that is shipped on the Malay Strait. Oil tanks with a combined capacity of 180 million barrels will be built along the pipeline as a sort of buffer supply for Far Eastern consumers in the event of disruptions in deliveries of Middle Eastern oil. TPP will be the owner and operator of the pipeline. Its founders say that 70 percent of the company's stock has already been distributed among the members of the consortium. The exact shares of each participant have not been made public. Approximately another 5 percent of the stock should be transferred to the authorities of the three states the pipeline will pass through. The co-founders of the consortium and Malaysian governmental officials say that the pipeline is a completely private initiative and will be financed by the members of the consortium and private investors with private sources, without a cent from the state budget. They emphasize that the project will be quite profitable, since oil consumption in China and other Asia-Pacific countries will only grow, and the throughput of the Malay Strait will not. The pipeline will cut the shipping time from the Middle East to China from 21 to 28 days. The savings in time will convert into money saved for the suppliers and transporters. Under the technical specifications, most of which were released after the signing of the agreement among the consortium participants, the cost of transporting a barrel of oil is to drop by an average of $1.50. With an expected recoupment of 16 percent, the participants foresee a payback period of seven years from the beginning of full operations.

Sulaiman and Al-Idrus say that the company has already received proposals from local investment banks to attract private investment. Many of those banks have published favorable analytical reviews of the project. They also say that they are in negotiations with the giant China National Oil Company.

Not all analysts and transporters are as optimistic. They say that the expectation that oil consumption will continue to grow as fast as it is growing now in the Asia-Pacific is not entirely justified. Chairman of the Asia Oil & Gas Conference and former energy advisor to the Iranian government Fereidun Fesharaki, noted in an interview with the Malaysian press that the growth in demand for Middle Eastern hydrocarbons will slow on China and other of the region's leading countries because of rising prices. “The authors of the project are counting on price growth [on oil] sharply jumping, and that won't be,” Fesharaki said.

Ghanimi Fard, director of international affairs of the state National Iranian Oil Company, largely agrees with him. “When the market for fuels grows rapidly, a project like that may seem profitable. But now, when the tendency toward change can be noted, we cannot be sure of its economic basis,” Fard commented. Many are paying attention to the unusually high expenses on the construction – $7 billion for a 320-km. pipeline. That is almost $219 million for every kilometer. Considering that the pipeline will be triple, each pipe will cost $7.3 million per kilometer. For comparison, the cost of construction of a kilometer of the first line of the East Siberia – Pacific Ocean pipeline, which has a diameter comparable to that of the Malaysian pipeline, is $4 million, which is already rather high. A kilometer of the Baku-Ceyhan line cost $2.2 million.

On the other hand, the sum announced does not include the cost of construction of mooring in the outer harbor for the VLCC-class supertankers that are used where they can unload their 200,000-400,000 ton loads. The shore of the Malay Peninsula on both sides is much shallower than in the Malacca Strait and the supertankers will not be able to get closer than within 20 km. of the shore. Transshipping moorings will have to be built for their unloading, and that will not only significantly raise the price, it will also significant complicate the loading of the pipeline and unloading of it on the Eastern side. A number of experts say that the planners either underestimated or resisted mentioning those details. That complex logistics could reduce or eliminate the time savings declared in shipping.

Local media have been asking the most questions about the fact that a project of such a scale was initiated by unknown private persons and so quickly and easily received the support of the Malaysian federal government. It also seems odd that TPP so quickly and easily found partners among major regional corporations many times larger than it. Ranhill, Merapoh Resources, SKS Ventures, PT Bakrie & Brothers and PT Tripatra are comparable to the largest Russian holdings in their influence and lobbying power in their countries. At the same time, Malaysia's largest oil company, Petronas, in which the TPP founders worked from the late 1970s to the early 2000s, is demonstratively distancing itself from the project.

The Malaysian press has suggested that Sulaiman and Al-Idrus are front men for much more influential and rich people who for some reason wish to remain behind the scenes. The TPP founders deny those suggestions. “We are not covering for anyone. We worked independently on this project for the last two years,” Al-Idrus told Malaysian and Indonesian business publications. His partner Sulaiman adds that, “We didn't need lobbyists' help. We have convincing enough conclusions to support our ideas. And the start-up capital we saved up working at Petronas as petroleum engineers.”

The Most Expensive Projects in Malaysia

Project Years Implemented Cost Description
Iskandar development zone
2006-2025 $13 billion in the first five years for a total of $105 billion The project includes the construction of a new city in the southern state of Johor, modernization of the airport and two seaports, creation of an IT center. Total area of the zone will be 2217 sq. km., with the creation of 800,000 jobs. The state Khazanah Nasional Bhd is carrying it out.

New Capital
Putrajaya 1st Stage
2nd Stage
1st Stage Budget amounts to $5.3 billion; 2nd Stage Budget - $3 billion
The new capital is located 25 km from Kuala Lumpur. The city area is 50 sq km. Five complexes of government buildings, international airport, metro, monorail road have been constructed. The city has a population of 30,000 and 350,000 will be its residents by 2010.

Cyberjaya (Malaysian Silicon Valley) 1996-2000 $4 bln A unified IT center was created on an area of 30 sq. km. It includes offices and scientific centers of more than 250 companies (Ericsson and IBM, for instance), a university and two colleges. The city has a population of 29,000.

Kuala Lumpur Airport 1990-1998 $3,5 bln Located 50 km. from the city, it is one of the largest airports in Asia with a passenger flow of 25 million in 2006. There are plans to raise the number of passengers to 100 million.

Petronas Twin skyscrapers 1992-1998 $752 mln Two 452-m. towers connected by a 58.4-m. bridge at a height of 170 m. They have a total areas of 395,000 sq. m. from 1998 to 2004, they were the tallest buildings in the world.

Maxim Sorchinov

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