Thursday, November 3, 2011

Tenaga prospect~

Although the Bekok-C gasfield resumed operations sooner than expected in the second week of October 2011, the current 75 million standard cu ft per day (mmscfd) of gas it is supplying to the power sector will not be enough to bring TNB back into the black.

TNB now received close to 1,050 mmscfd of gas, which is short of the 1,150 mmscfd it needs to avoid burning alternative fuels and distillates. In the meantime, TNB will still have to rely on alternative fuels, which are imported and five times more expensive, although in lesser quantities.

Earnings visibility already weakened by slowing electricity demand growth will be somewhat uncertain possibly until Petronas' regasification plant in Malacca is ready in July 2012.

The gas shortfall had forced TNB to incur an additional RM1.3bil in fuel costs for its third quarter 2011 due to 61 days of gas supply disruption, of which 51 days were due to unscheduled maintenance.

The Bekok-C gasfield, which was damaged in a fire in December 2010, was supposed to be restored by Petronas in June 2011, but that was postponed to September and again to end-October 2011. Estimate that when the field is back in full working order, it will increase gas flow by 150 mmscfd, thereby substantially enhancing operational reliability.

The taskforce comprising the Performance Management and Delivery Unit and Economic Planning Unit, that was set up to review the gas shortage, might not be able to do much since “the resolution depends solely on Petronas sorting out its gas facilities problem.”

Meanwhile TNB had proposed to issue RM5bil in Islamic debt notes to finance the development of the 1,010 MW coal-fired power plant in Manjung, Perak. It would establish an Islamic securities programme of RM5bil in nominal value through an independent special-purpose company Manjung Island Energy Bhd.

The proposed Islamic securities programme would have a tenure of 28 years from the date of first issue, which was expected to be in November. The proceeds will be used to purchase certain syhariah-compliant leasable assets from TNB Janamanjung Sdn Bhd.

Near-Term Woes ..

Tenaga CEO has been quoted that the gas shortfall has forced Tenaga to buy pricey oil and distillate to run its machines. However, the additional cost incurred cannot be passed on to the consumers because the government will not allow the pass through mechanism.

Because of the gas shortfall, Tenaga is now forced to spend an additional rm400 million per month on fuel oil and distillate. If the situation continues, Tenaga will be forced to borrow to fund its operating expenses. In addition, Tenaga has had to spend more on purchasing coal on the spot market.

The more pressing matter is the current state of Tenaga, which has been hit hard as a result of Petronas curtailing gas supplies in order to upgrade its facilities.

The gas shortage problem has been ongoing since mid 2009, which was when Tenaga first mentioned. At the time, the most immediate effect was that Tenaga had to burn more coal, which was pricier than subsidized gas. This then hiked up its total fuel bill.

In early 2011, however, the focus has shifted from simply pay more to having an assurance of supply in the light of the natural disasters. Massive flooding in certain parts of Australia disrupted coal mining operators, which had already been ramped up to meet growing demand from China and India .

Then, the massive earthquake and tsunami that hit Japan in March 2011 resulted in a number of nuclear plants being shut down globally amid safety concerns, which meant that an increased reliance of gas and coal plants.

This was when Tenaga really started to feel the pinch. Because of the prolonged gas curtailment, due to a fire at facility and scheduled plant maintenance, Petronas has been delivering around 25% less than the 1250 mmscfd promised to the power sector.

As a result, Tenaga has been forced to buy more oil and distillate at market prices or five times more per KW to make up for the gas shortfall. Tenaga had to issue a profit warning, stating that it was now spending (Sept 2011) more than rm400 million a month on additional fuel.

Aside from the higher price tag, using oil and distillate in gas turbines shortens the life of the machinery, a problem that both Tenaga and the IPPs share. What this means is that from having to service the machines on a yearly basis, for example, the maintenance cycle is now (Oct 2011) shorter, which means more shutdowns.

The gas turbines are not meant to be run on other types of fuel, such as distillate. This shortens the lifespan of the machinery and means higher maintenance costs in the long run as the cycles get shorter.

Ultimately, the prolonged gas supply issue resulted in Tenaga slipping into the red in 3QFY2011 ended May 31. Tenaga provider posted a net loss of rm441 million compared with a net profit of rm1.1 billion in previous corresponding period.

Critics said that Tenaga will even making losses in 1QFY2012 if the gas shortage persists.

And for the first time, Tenaga is looking to borrow to fund its operating expense. It has already gone to the bond markets to sell rm4.85 billion debt to fund the expansion of its Janamanjung coal fired plant.

Things have come to a point where the government has set up a task force comprising Permandu and the EPU to look into the problem.

In another two months (Dec 2011), the government is set to review the gas subsidy again as earlier announcement that the cost of gas will increased by rm3 every six months to catch up with market prices as part of a subsidy rationalization plan. But it should be warned that even if an increase in gas price is agreed upon, it does not automatically translate into an increase in tariff.

The problem with gas supply may be alleviated in the longer term through higher gas prices, so eventually Petronas will have more incentive to supply more gas to the power sector. The next review is due in Dec 2011 but this is questionable as the election is speculated to be around the corner.



Petronas has always bristled at supplying the bulk of its gas to the power sector, vocal about the potential revenue it could have made selling the gas at market prices. This, it does seem that if the power sector paid market prices, it would get the full amount it needs.

Petronas can hardly be faulted for not wanting to supply gas at a subsidized price because the commodity can fetch higher prices on the open market. Petronas claims that because the domestic power sector is heavily dependent on gas, it has not been able to undertake regular maintenance works on its own facilities, which has resulted in a forced shutdown.

On a positive note, Petronas has completed its mobile offshore platform unit bypass for the Bedok C gas field. This has led to the flow of 75 mmscfd of gas to the power sector since the second week of Oct 2011. The impact will be felt in 1QFY2012.

The Longer Term Plan …

Rumors have been rife that a corporate exercise at Tenaga will culminate in the national power provider being broken up into three units – generation, transmission and distribution. Although the Minister of Energy, Green Technology and Water has come out to say that there are no plans to break up Tenaga, there is a proposal to unbundle its accounts.

However, the crux of the matter is whether separating Tenaga’s acounts will helpp avoid a recurrence of the problems of the power provider is facing now (Oct 2011).

While the main cause of Tenaga’s troubles – the shortfall in the supply of gas from Petronas – is short term, it serves as reminder yet again of the underlying weakness of the industry as a whole.

The most niggling being the lack of a fuel pass through mechanism. This is oft cited as being the main dampener when it comes to accessing the power’s supplier’s prospects.

Separating the accounts would then reveal the true cost of generation. At the moment, Tenaga’s generation cost includes others aside from fuel, such as administration costs. If the actual cost of fuel were identified, then the fuel cost pass through tariff can be tied to that number as a base.

This would in turn determine the subsidy needed for Tenaga to make up for the shortfall between the actual cost incurred and what is being charged. At the moment, Tenaga’s generation cost is lumped as part of its operating expenditure. It comes under the sub-segment of energy cost in its operating expenditure.

Without full disclosure, it is difficult to tell if Tenaga’s generation plants are as efficient as those of the IPPs.

At the moment, Tenaga is the sole offtaker of all the power generated in Malaysia .

The proponents of segmenting the accounts say this will make the entire process of procuring and distributing power more transparent. While an increase in tariff will not be welcomes, it will help stem the constant criticism hat Tenaga is inefficient.

Separating accounting will make the cost pass through formula more transparent to all parties. It can be used to show that there have been cross subsidies from the generation segment to the transmission and distribution segments.

But it should be noted that this proposal to separate Tenaga’s accounts is not new. Tenaga states in 2008 that segmental reporting is not presented as rge group is principally engaged in the generation, transmission, distribution and sales of electricity and the provision of other related services, which are substantially within a single business sector.

What is clear is that energy cost makes up the bulk of Tenaga’s opex – some 90% - but without additional data, it would be hard to estimate whether that proportionally translates into the same percentage of sales.

It is for this reason that some argue against breaking up Tenaga. If there is one division within Tenaga that is in the red, it would prove difficult for that segments to gain funding. Inability to meet its capex needs would mean a break in the supply chain.

While the restructuring of Tenaga will help form the base of industry reform, there is question that the industry itself is due for a change.

Previously, re-negotiations with the IPPs were cited as one of the main stumbling blocks. However, now (Oct 2011) with the first generation power purchase agreements due to expire in three years from now, it might make the IPPs soften their stance somewhat.

Sources say the government has made some progress with the first generation IPPs. The terms being offered are an extension of the PPAs but at a much lower cost per KW.

The government is talking to Petronas and getting it to commit to a certain amount of gas for a certain number of years, but that is still preliminary.

What could happen in the nearer term is the re-emergence of the undersea cable between Sarawak and the peninsula Malaysia as more plants come up in the former.

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Please note that all data given are merely blogger's opinion. It is strongly recommended that you do your own analysis and research before investing.