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The pipeline that may just change the littoral states’ destiny

Updated On: Jun 01, 2007

This week, a deal was signed that might just change the destiny of some East Asian countries.

The deal involved a US$7 billion 300 km pipeline to be laid across northern Malaysia (from Kedah state on the northwestern coast to Kelantan state in the northeast) that will divert up to a third of oil now being carried through the Malacca Strait. Work will begin next year looking for completion in 2014. Expectations are that the pipeline would be made profitable by the demand from oil-hungry China.

Here is how it works. Crude oil would be refined in Kedah, pumped through the pipe to Kelantan and then loaded onto tankers bound for JapanChina and South Korea, completely bypassing Singapore and the Malacca Strait. Two refineries with a total cost of US$9 billion, will be built in Kedah by 2010 with a combined refining capacity of 450,000 barrels a day. The new pipeline will cut oil transportation time from the Middle East to China and Japan from 21 days to seven by bypassing the congested Malacca Strait and Singapore.

Such initiatives are not new but past efforts to bypass the Straits of Malacca as an oil route have ended prematurely. Nevertheless, the fact that politicians were present to sign the agreement for the latest pipeline shows some form of political support for the project. The signing ceremony was witnessed by Prime Minister Datuk Seri Abdullah Ahmad Badawi and Indonesian president Dr Susilo Bambang Yudhoyono.

Casting doubts that the project is purely economics-driven, Prime Minister Abdullah Ahmad Badawi first announced the development earlier in May 2007, noting that this pipeline was part of the government's effort to develop Malaysia's northern region: "We have always wanted to do more for that area and that also will take care of the eastern corridor" The hope is that eventually the big boys in the North, China, Japan and South Korea will come down south to invest in this project and expand it. Rahim Kamil Sulaiman, chairman of Trans-Peninsula Petroleum, the owner and promoter of the project said "we have made known our projects to bothChina and Japan, especially China".

Already questions are raised as to how Singapore would be able to survive this latest challenge to its status as Asia’s largest oil trading center. Both Malaysia andSingapore, are competing to control the passage of crude between the Far East and the rest of the world. Industry executives warned that the pipeline could start diminishing Singapore's position as the region's oil transhipment hub. "If it's going to divert traffic, it's going to have some effect on Singapore," said Kaladher Govindan, head of research at TA Research in Kuala Lumpur.

The challenge now is to determine whether it is cheaper to transport oil by the proposed pipeline or by tankers to Singapore. Another issue raised is whether Islamic insurgencies in Southern Thailand which is a stone’s throw away from the pipeline would be as destabilizing as piracy in the Straits of Malacca. Many in the industry will be watching closely.  (31 May 2007)

Sources:

Oil group seeks to skirt Malacca Strait (Taipei Times, 29 May 2007)

US$7b trans-peninsula pipeline deal sealed (Business Times, 29 May 2007)

New pipeline to bypass Malacca Strait (Bangkok Post, 29 May 2007)

Plan to build oil pipeline across north Malaysia inked (Straits Times, 29 May 2007)

Deals signed on pipeline that seeks to divert Malacca Strait oil (Channelnewsasia, 28 May 2007)

Malaysian oil pipeline would bypass sea path (IHT, 28 May 2007)

Malaysia oil pipeline project moves toward reality (Reuters, 28 May 2007)

IndonesiaSaudi Arabia join Malaysian oil pipeline deal (Kyodo News, 28 May 2007)

Malaysian oil plan gets partners (BBC News, 28 May 2007)

Billion-dollar oil scheme which won't flow so smoothly (Business Times Singapore, 28 May 2007)

Ranhill to sign pact with TPP Monday (Business Times, 26 May 2007)

Deals signed on pipeline that seeks to divert Malacca Strait oil (Agence France Presse, 28 May 2007)

UPDATE 1-Malaysia oil pipeline project moves toward reality (Reuters, 27 May)