Exclusive: Petronas in Talks with Oil Majors for Petchem Tie-up

By Niluksi Koswanage and Liau Y-Sing

Petronas advertising boards are seen near the grandstand ahead of the Malaysian F1 Grand Prix at the Sepang circuit outside Kuala Lumpur April 7, 2011. REUTERS/Tim Chong

KUALA LUMPUR (Reuters) – Petronas is in talks with several global oil majors including Shell <RDSa.L> and Exxon Mobil <XOM.N> to develop petrochemical plants within its $20 billion refinery complex in southern Malaysia, two sources with direct knowledge of the matter said.

Malaysia’s national oil company is also talking to Japanese firms Itochu Corp <8001.T> and Mitsubishi Corp <8058.T> as well as to Dow Chemical Co <DOW.N> — the largest U.S. chemical maker — as it seeks to tap surging Asian demand and diversify its earnings, the sources told Reuters.

Petronas <PETR.UL> is expected to make a decision on the partnerships by mid-2012, which signals it is quickly moving beyond the feasibility stage of the project.

“Petronas is getting a lot of interest for the joint venture undertakings,” said one source who declined to be identified as the talks are ongoing.

“They have moved to the basic engineering and design stage and after this the tendering process for building the complex will start,” the source added.

Petronas, Shell and Mitsubishi officials in Malaysia declined to comment. Itochu, Dow Chemical and Exxon Mobil were not immediately available to comment.

Petronas first unveiled the Refinery and Petrochemicals Integrated Development (RAPID) project in May and has said the complex will be commissioned by end-2016, which both sources said was on track.

The $20 billion complex is to be built in southern Johor state which borders Singapore — the largest oil trading hub in Asia.

The project is key to Petronas’ plan to join the likes of India’s Reliance Industries <RELI.NS> in grabbing a larger share in the $395 billion global market for specialty chemicals — high value raw materials used in products from diapers to higher performance tires and LCD televisions.

“In terms of markets for petrochemicals coming from RAPID, Petronas is aiming for Myanmar, Bangladesh and parts of the subcontinent,” said a second source.

“The potential is there as these are huge markets or in the case of Myanmar, just opening up.”

RAPID REACH

The RAPID project will include a 300,000 barrel-per-day refinery that produces naphtha, gasoline, jet fuel, diesel and fuel oil. The first source said the crude feedstock would come mostly from Petronas’ equity projects in Sudan, Chad and eventually Venezuela instead of Malaysia’s own higher quality and expensive crude, domestic production of which is slowing.

The crude feedstock from Petronas equity projects will also be channeled into the petrochemicals and polymer complex, including a 3 million ton-per-year (tpy) naphtha cracker and petrochemical derivatives facility focusing on synthetic rubber.

“Over 1 million tons will be for ethylene and propylene and the rest for high grade specialty chemicals,” said the first source.

“Synthetic rubber is a big thing. Nearly 90 percent of a tire is made of synthetic rubber because natural rubber production is declining in Asia, so there is an opportunity for Petronas,” the source added.

STRUGGLE OR SURVIVE

The RAPID project gives Petronas’ downstream operations a better chance of staying afloat in times of economic downturns and poor margins as it allows Malaysia’s only Fortune 500 company to tap into its global feedstock sources, analysts say.

“From a Petronas perspective, there is vertical integration opportunity,” said Andrew Wong, lead analyst covering Petronas at Standard & Poor’s in Singapore.

“I think the expectation for a recovery in the petrochemical sector in 2011 did not quite happen due to the external factors and there is concern whether the project will come on-stream at a good point in time of the global economic cycle,” he added.

Industry players have said Malaysia and Petronas’ ramp-up of oil infrastructure in the southernmost tip of the country will create a “Greater Singapore” trading hub that allows the region to keep up with competitors like China.

Petronas is counting on interest from Japanese firms which are looking to relocate their plants or re-invest outside their home base after the March tsunami and earthquake triggered uncertainty over future energy supply, the second source said.

“The interest has particularly been strong from the usual Japanese players in the petrochemical market. This project has started at the right time,” the source added.

(Editing by Himani Sarkar)

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