VZCZCXRO5807
PP RUEHBC RUEHCHI RUEHDA RUEHDE RUEHDT RUEHFK RUEHGI RUEHHM RUEHJS
RUEHKSO RUEHKUK RUEHLH RUEHNAG RUEHPB RUEHPW RUEHROV
DE RUEHKL #0398/01 1370535
ZNR UUUUU ZZH
P 160535Z MAY 08
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC PRIORITY 1006
INFO RUCNARF/ASEAN REGIONAL FORUM COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUCNISL/ISLAMIC COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 03 KUALA LUMPUR 000398 
 
SIPDIS 
 
TREASURY FOR BELL AND WEISEL 
SINGAPORE FOR BAKER 
 
E.O. 12958: N/A 
TAGS: ECON EPET EFIN ENRG MY PGOV
SUBJECT: MALAYSIAN OIL REVENUE: GRAVY TRAIN RUNNING OUT OF 
TRACK 
 
REF: KUALA LUMPUR 173 
 
¶1.  (U) Summary:  At its current 4% annual rate of increase, 
domestic demand for petroleum products is expected to 
overtake supply by 2011 or 2012, making Malaysia a net 
importer of oil, according to Petronas, the country's 
national oil company.  This bodes poorly for a federal 
government that relies on its national oil company for nearly 
40% of its revenue.  Petronas' response is to continue to 
expand its operations globally.  The Government of Malaysia 
hopes to address this challenge by gradually reducing its 
crippling fuel subsidies that cost USD 14 billion dollars a 
year and perversely undermine efforts to increase efficiency, 
reduce consumption, and develop alternative sources of 
energy.  Few oil and gas insiders, and fewer among the 
general public, seem aware that the gravy train of oil 
exports is quickly reaching the end of its track.  However, a 
local technology company has developed a promising system 
that could reduce fiscal outlays  by limiting fuel subsidies 
to low-income citizens, using existing national electronic 
identity cards that all Malaysians are required to carry. 
This could be the most palatable solution for the general 
public and save the government from a pending fiscal fiasco. 
End summary. 
 
PETRONAS' PRODUCTION FORECASTS 
 
¶2.  (U) At a recent conference Petronas Vice President for 
Corporate Development Mr. Nasarudin Idris provided an 
overview of Malaysian oil production.  Malaysia has 5.36 
billion barrels of proven reserves which are expected to last 
approximately 16 years.  However, Malaysian oil fields are 
maturing, and output is declining.  Production peaked at 
750,200 barrels per day (bbl/day) in 2004, then dropped to 
735,700 bbl/day in 2005, to 699,100 in 2006, and further to 
661,100 bbl/day in 2007.  Production declined in 2007 even 
with the addition of the Kikeh Field, a joint venture between 
Murphy Oil and Petronas and Maysia's first deepwater 
operation, which came online in August. 
 
¶3.  (U) In order to achieve the government's goal of 
maintaining production at 700,000 bbl/day, Malaysia would 
have to continue its exploration efforts and develop new and 
more challenging fields, Nasarudin explained.  New sources of 
oil were being discovered, but in deeper waters and in more 
challenging fields with high pressure, high temperatures, and 
high CO2 levels.  Petronas also was working to increase 
recovery rates in existing fields, looking outside of 
Malaysia, and continuing to develop its technology and 
capabilities.  To maintain production, Petronas would need to 
plow earnings back into exploration and development, he said. 
 He also noted that in 1997 Petronas' contribution to federal 
coffers amounted to 15% of the government's revenue; today, 
it amounts to nearly 40%. 
 
¶4.  (U) In a meeting with Robert Manning, Director of Energy, 
U.S. National Intelligence Council and ECONOFF on April 25 
Mr. Muhamed Firouz Asnan, General Manager of Petronas' 
Business Development Unit Mr. Khairil Anuar Ramili, Manager 
of Group Strategic Planning confirmed Petronas' earlier 
announcements that Malayia was on track to become a net 
importer by 2011 or 2012, given current trends in domestic 
demand which are increasing by 4 to 5 percent annually. 
These calculations included the new deepwater fields and 
plans to increase recovery rates, they said.   Murphy Oil's 
new Kikeh Field is expected to reach 120,000 bbl/day by the 
end of 2008, they said, and the joint Petronas-Shell 
deepwater operation at Gumusut Field is expected to come 
online in 2012.  Meanwhile, ExxonMobil is planning to upgrade 
its equipment to maximize recovery rates in its mature fields 
off the east coast of Peninsular Malaysia (reftel).  These 
factors are expected to offset declining production in 
Malaysia's mature fields, leaving production largely flat 
over the next decade, according to Firouz.  When domestic 
demand overtakes supply, as is expected in the next three to 
four years, Malaysia will become a net importer of oil. 
 
CONSTRAINTS ON PRODUCTION 
 
¶5.  (U) Mr. Ngau Boon Keat, a co-founder of Petronas who now 
runs Dialog Group Berhad, a local technology company, said 
that the seismic data from Malaysia's shallow waters was from 
the 1960s and 1970s.  Ngau confirmed that Malaysia's fields 
were in the decline phase, but he felt that if Petronas were 
to re-survey with modern technology, they likely would make 
 
KUALA LUMP 00000398  002 OF 003 
 
 
new discoveries which could boost production.  The main 
constraint, according to Ngau, was a lack of human resources. 
 Oil companies operating in the Middle East were offering 
much higher salaries to anyone with experience in the energy 
sector, as much as four times what they earned in Malaysia. 
Because Petronas was a national oil company, large salary 
increases would have to be approved by the government; 
however, civil servants were unwilling to approve large 
salary increases well over what they themselves were earning. 
 
 
¶6.  (U) The shortage of human resources, especially with the 
salaries being offered in the Middle East, is a common 
refrain from executives from Murphy Oil, Petronas, and others 
in the industry.  Murphy executives point out that a lack of 
capacity is another major constraint in this capital 
intensive sector.  With the price of oil soaring, every 
available piece of equipment is being used, but with future 
prices unknown, building more equipment becomes risky.  It 
can take several years and millions of dollars to build 
additional equipment and infrastructure.  Commitments made 
based on today's prices might not be profitable by the time 
they come online if prices fall.  Several industry experts 
expected oil prices to fall, saying the current price of more 
than $120 dollars per barrel was inflated by speculators, not 
a realistic indication of demand and supply.  One industry 
expert, Mr. V.V. Nathan of Deleum Berhad, a local energy 
services company, speculated that prices would fall to as low 
as USD 60 per barrel.  Others were more reluctant to cite 
figures. 
 
MALAYSIAN DOMESTIC DEMAND BOOSTED BY SUBSIDIES 
 
¶7.  (U) Reducing petroleum subsidies has been on the GOM 
agenda for some time.  A price increase at the pumps in early 
2006 drew public protests.  Reducing subsidies is highly 
unpopular even in the best of times, but under the current 
climate of political uncertainty the task is even more 
difficult.  In the run-up to the March 8 election this year 
there was much speculation that the GOM would raise gasoline 
prices, most likely by 30 to 40 sen (ten to thirteen cents) 
per liter as soon as the election was over.  Some opposition 
candidates cried foul, saying that as a net exporter of oil 
Malaysia should be increasing its subsidies because the oil 
rightfully belonged to the people, and that the poor would be 
worst hit by such a move.  When election results handed 
record gains to the opposition the GOM had to think of other 
ways to cut its subsidy bill without further alienating 
voters. 
 
¶8.  (U) One proposal was to increase the price of high octane 
fuel required in high-performance vehicles.  The likely 
impact of such a move on the GOM's subsidy bill would be 
negligible.  It also would not address the problem of 
"smuggling," an issue getting more attention recently.  The 
GOM claims that many fishermen don't bother to fish anymore 
because they make bigger profits by gassing up their boats in 
Malaysia and selling the subsidized fuel in Thailand, the 
Philippines, or Singapore at market prices.  Singaporeans are 
much maligned for driving across the bridge only to fill 
their tanks with subsidized Malaysian gasoline and then drive 
back.  By drawing attention to these small-time opportunists, 
the GOM is raising public awareness about the need to cut 
subsidies. 
 
¶9.  (U)  Ngau Boon Keat's firm Dialog Group worked with 
ConocoPhillips to develop a system that would provide limited 
subsidies to low-income Malaysian citizens.  Customers would 
pay market prices at the pump, but could swipe their national 
electronic identity cards, the "MyKad" which every Malaysian 
is required to carry at all times, through a card reader at 
the gas station.  The MyKad would transmit the purchase 
information back to the government's Economic Planning Unit 
which maintains a database of financial information on every 
taxpayer.  Low-income taxpayers would be eligible for a 
refund of part of the purchase price, up to a certain number 
of liters per month.  Refunds would be transmitted 
electronically to the taxpayer's bank account or, if the 
taxpayer has no bank account, the EPU would establish one on 
his or her behalf.  Everything would be done automatically. 
Ngau plans to unveil the system at a conference on 
information technology on May 18.  The GOM could save as much 
as 50 percent of the GOM petroleum subsidy bill, says Ngau, 
if they approve it.  Also, its use could be expanded to other 
products the GOM subsidizes as well.  (Note:  Approximately 
 
KUALA LUMP 00000398  003 OF 003 
 
 
30% of the products in the consumer price index basket are 
subsidized.) 
 
GETTING THE MESSAGE OUT --  OR NOT 
 
¶10.  (SBU) In spite of Petronas' public efforts to set the 
record straight on Malaysian oil production, most Malaysians 
take a complaisant view.  Several industry insiders as well 
as the CEO of the Malaysian Energy Center, a local energy 
think tank, told ECONOFF that Malaysia would remain a net 
exporter of oil for 15 years or more, apparently confusing 
total reserves with net exports.  When questioned further 
about production, demand, and remaining reserves, even the 
think tank CEO deferred to Petronas.  The GOM is beginning to 
ring the alarm bells to some extent by announcing that it 
expects to spend RM 45 billion (USD 14 billion) on fuel 
subsidies this year, more than its development budget.   In 
order to generate the momentum for a significant subsidy cut, 
though, it will have to do a better job getting the message 
out. 
 
 
KEITH