Malaysia’s Pipeline Dreams

Despite the departure of Prime Minister Mahathir Mohamad three years ago, and with him some of the more grandiose dreams of Malaysian development, the country’s fondness for megaprojects continues with its proposed northern oil hub.

At a cost of US$7 billion the project will be pricier than some of the more controversial ones pushed by Mathathir, including the Kuala Lumpur International Airport ($3.5 billion) and Putrajaya ($5.26 billion), the ghostly federal administrative territory 25 km from Kuala Lumpur built to house the government in splendid isolation.

Government officials say the grand oil hub will address what those projects haven’t – the nation’s nagging rural-urban economic divide. It will include two refineries and a 188-mile pipeline that will slice through the underdeveloped northern states of Kedah, Perak and Kelantan, and may involve laying down three pipelines. It is expected to create thousands of jobs upon completion in 2014.

The pipeline would transport oil mainly from the Middle East en route to East Asia and bypass the congested Malacca Straits to the south, through which a third of the world’s oil passes. Planners estimate it would be able to handle 6 million barrels a day, or half of the 12 million barrels currently being shipped through the Straits.

But doubts are being raised about whether the hub will save either time or money. The idea of such a pipeline across the isthmus has been repeatedly raised – and abandoned – by Thailand’s government, for instance, which for decades has talked about a similar pipeline across the Kra peninsula, only to give it up as both costly and impractical. Analysts say handling and refining expenses could actually exceed the US$67, 000 per day spent to ship by tanker from the Persian Gulf around the Straits to East Asia.

Use of the pipeline would require docking, unloading, transporting and reloading a second ship on the receiving end. Refining would take longer. By some estimates the process could take six days.

The Malaysian government has given the project its blessing while at the same time distancing itself, stressing that it is an entirely private-sector initiative. Petronas, the national oil company, is not involved. Rather a relatively unknown company, Trans-Peninsula Petroleum, is expected to construct the pipeline along with Ranhill Engineers and Constructors and Indonesia's PT Tripatra. Trans-Peninsula has also recruited Saudi Arabia's Al-Banader International to provide oil.

A closer look reveals that Trans-Peninsula was founded by Petronas executives. Members of Prime Minister Abdullah Badawi’s long-ruling United Malay National Organization (UMNO) are major stakeholders in Ranhill, whose chairman, Sallehuddin Mohamed, for instance, is a former chief secretary in the government. Meanwhile, the refinery in Yan, Kedah, is to be built by SKS Development and the National Iranian Oil Company. SKS is controlled by entrepreneur Syed Mokhtar Albukhary, one of Malaysia’s richest businessmen, who has long maintained close government ties.

A general manager with SKS said unequivocally that the refinery has no connection with the pipeline, though another general manager with SKS said on the condition of anonymity that “at the moment we are not talking with the pipeline promoters…though we are looking into the feasibility.” United Engineers Malaysia, which has submitted plans to assist with piping the project, is wholly owned by Khazanah National, the government’s investment arm.

Private sector-government synergy has been known to abet high-level corruption in Malaysia, and this may be one reason the government is publicly distancing itself from the project. Another reason might be to downplay the geopolitical implications of the project at a time when Malaysia has quietly gone about strengthening ties with some of the world’s leading human rights abusers, including Iran and Russia, not to mention Chad and Sudan, where Petronas has been investing heavily.

Last November Foreign Minister Syed Hamid Albar said Malaysia and Iran held "identical views" on many international issues, and agreed during a visit to Tehran to develop closer ties in various fields, including oil and gas. Some analysts say the pipeline is intended in part to assist Tehran in delivering oil to East Asia, should Iran be slapped with international sanctions – in which case, Tehran fears, Singapore, a major US ally, would prevent Iran from shipping oil through the Straits. Syed Mochtar’s SKS recently cemented a $16 billion deal with Iran to develop two gas fields in southern Iran, and the National Iranian Oil Company will be Syed Mokhtar's partner in the project, with a 30 percent stake, according to the Edge Weekly.

China is also said to fear a shutdown of the straits, with 80 percent of its oil supply passing through the narrow waterway. Anticipation of a row over Taiwan is thought to heighten those fears, as is China’s lack of naval resources required to defend its sea lanes at a time when oil demand is rising, says Ian Storey, a researcher specializing in Southeast Asia’s relations with external powers at the Institute for Southeast Asian Studies, Singapore.

The pipeline may also abet Burma’s military regime in transporting oil to China, said a researcher with the Defense Ministry. The researcher said waters off both coasts are shallow and will require new mooring facilities. But as Burma is close to Malaysia, it could be feasible to use feeder ships.

To be economically viable the project would depend on large foreign investment and rising oil demand in East Asia. Toward that end Trans-Peninsula Petroleum's chairman, Rahim Kamil Sulaiman, said his company is courting offers from major Middle East oil producers, Islamic funds and large consumers in East Asia. But while China’s oil demand is growing, demand in the rest of the region is tapering off amid rising oil prices.

But then, economics appears to be just one part of this equation.