Cablegate: Trans-Peninsula Pipeline: Just a Pipedream?

DE RUEHKL #1064/01 1720721
P 210721Z JUN 07





E.O. 12958: N/A


1. (U) Summary: According to recent press reports, the
Malaysian Government has approved plans for a US$ 7 billion
oil pipeline across northern peninsular Malaysia near the
Thai border, with a large storage facility in the middle and
a refinery at each end. The pipeline is portrayed as a
shorter and more secure alternative to shipment through the
Straits of Malacca, through which about 18,000 crude carriers
pass annually. The GOM recently granted exclusive rights to
develop the pipeline to Trans-Peninsula Petroleum (TPP), a
small, little-known Malaysian company operated by two former
Petronas executives. At this stage, there appear to have
been no serious assessments of the project,s economic
viability or its potential environmental impact. Moreover,
there are no indications that the necessary financing is in
place. The Malaysian firm SKS Ventures has been approved to
build the refinery in Yan at the west coast end of the
pipeline. (Note: SKS Ventures is the same Malaysian company
that reportedly signed an MOU with the National Iranian Oil
Company (NIOC) to develop the Golshan and Ferdos gas fields
in Iran (reftel)). According to press reports, NIOC will
help SKS Ventures finance the US$ 2.2 billion refinery, while
a Saudi firm has signed a memorandum of agreement with TPP to
"help secure oil supplies" for the pipeline. Petronas,
Malaysia's national oil company, does not appear to be
involved. Domestic politics may be a bigger driver for the
project than the potential economic payoff. End summary.

Pipeline Partners

2. (U) On May 28, Trans-Peninsula Petroleum Sdn. Bhd.
(TPP), which holds exclusive rights from the Malaysian
government to develop a trans-peninsular pipeline from Kedah
to Kelantan, signed several memoranda of agreement with
partners, according to press reports. These included
Malaysian company Ranhill Engineers and Constructors and
Indonesia's PT Tripatra Engineers and Consultants. In
addition, Indonesia's PT Bakrie & Brothers reportedly will
supply the steel pipes and Saudi Arabia's Al-Banader
International Group will help secure oil supplies. The
signing ceremony was witnessed by Malaysian Prime Minister
Abdullah Badawi and Indonesian President Dr. Susilo Bambang
Yudhoyono on the margins of the Third World Islamic Economic
Forum in Kuala Lumpur.

Purpose of the Project

3. (U) The proposed pipeline is portrayed as a shorter and
more secure alternative route for Middle Eastern crude oil en
route to the Asia/Pacific region which would enable some
vessels to avoid the congested Straits of Malacca. According
to the U.S. Energy Information Agency, approximately 43
million barrels of crude oil are transported by ship each
day. More than 25 per cent of that volume transits the
Straits of Malacca. A trans-peninsular pipeline
theoretically could provide an alternative that would reduce
risks from piracy and terrorism while easing the expected
increase in shipping traffic as the demand for energy grows
in the Asia/Pacific region, especially in China. Traffic
congestion is aggravated periodically by the reduced
visibility caused by a blanket of haze produced during
several months of the year by raging brush fires in the

Plans As Presented to the Press

4. (U) The proposed 193-mile pipeline would run from Yan in
the state of Kedah on the west coast to Bachok in the state
of Kelantan on the east coast, with a storage facility midway
between in Jeli, Kelantan. The storage center would be
designed to hold 90 percent of the system's capacity.
Construction reportedly would begin in mid-2008, with the
first phase completed in 2011, at which time the pipeline
would become operational and generate income to help finance
phases two and three. The first phase is estimated to cost
US$ 2.3 billion and would have a capacity of storing 60
million barrels and transporting 2 million barrels per day
(bpd). At completion of the third phase, targeted for 2014,
capacity would reach 180 million barrels of storage and 6
million bpd throughput.

KUALA LUMP 00001064 002 OF 003

5. (U) The project plans offshore mooring facilities at each
end of the pipeline, built to accommodate Very Large Crude
Carriers (VLCCs) which require a minimum depth of 25 meters.
Many smaller Asia/Pacific ports cannot accommodate such large
carriers because of depth requirements; for example, the
maximum depth of the Port of Hong Kong is 15.5 meters.
Therefore, oil destined for Hong Kong is carried on smaller
ships such as the Aframax class, with only a 60-80,000 ton
capacity as compared to the 210-250,000 ton capacity of a
VLCC. TPP claimed to the media that 60 per cent of the crude
carriers passing through the Malacca Straits are smaller
vessels, which take on average 21 days to travel from the
Middle East to Japan or China. The proposed pipeline would
allow VLCCs to transport crude from the Middle East to Yan
where it would be pumped into the pipeline. Smaller Aframax
carriers would fill up at Bachok and transport the crude to
Asia/Pacific ports. TPP predicts the pipeline would divert
about 20 per cent of the crude being shipped through the

Pressure on the Environment

6. (U) Malaysia,s Department of Environment has not
received an environmental impact assessment (EIA) and does
not plan to begin an evaluation until after the companies
have submitted financial protocols to the Ministry of
Finance, according to press reports. The proposed route
traverses the Titiwangsa mountain range, several major
rivers, and Lake Temengor in the Belum Forest Preserve. TPP
reportedly is working with the state governments of Kedah,
Perak, and Kelantan to acquire a 100-meter wide corridor of
land across the three states. Opposition MPs have raised
concerns in Parliament over the delay and possible avoidance
of an EIA and claim the GOM is looking for loopholes to
commence the project without concern for environmental impact.

7. (SBU) An Amcit engineer working for a large
international oil company told econoff that it would take
about 40 hours to empty a VLCC into the pipeline. He was
skeptical of claims that much time would be saved, and even
more concerned about potential environmental implications,
including those involved with building and maintaining the
pipeline and the increased risks of spillage and leakage
involved with pumping the crude off the ship, across the
peninsula, and then back onto another ship at the other end.
A similar project was proposed in 2004 for the Isthmus of Kra
in Southern Thailand, but never materialized although the
distance involved would be shorter and the terrain less

Profit or Politics?

8. (U) How the pipeline will be financed remains unclear.
TPP is not listed on the Bursa Malaysia; therefore, little
information is available on the company. A press report
described TPP as a "small, loss-making company owned by two
little-known Malaysian businessmen." Parliamentary sources
characterize TPP as a very small entity, registered in the
state of Perak and with a listed capital base of RM 150,000
(about US$ 45,000). Press reports attribute
self-contradictory statements to both the GOM and TPP with
regard to whether this would be a completely private,
for-profit venture or a government-led "development
initiative." In April, Deputy Prime Minister Najib was
quoted as insisting that the proposal was "purely a
commercial initiative." However, on May 7 Prime Minister
Abdullah was quoted saying that the project was one of the
government's major initiatives to develop Malaysia's northern
and eastern regions. On May 28, the press quoted TPP
Chairman Mohamed Kamil Sulaiman saying, "The savings in using
our pipeline to the oil producers, to oil traders, is enough
to even pay for one month of storage." However, on May 29
another press article reported that an unnamed TPP source had
said the company wanted the GOM to have a "golden share,"
giving the federal government veto rights over other
shareholders, and saying that the project was an essential
element of the national economic development plan for the
northern and eastern corridors.

9. (SBU) Bachok, the proposed east coast endpoint of the
pipeline, is little more than a fishing village just south of
Kota Bharu, the state's capital city. However, it happens to

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be located in the home district of Deputy Finance Minister
and UMNO parliamentarian Awang Adek. The State Government of
Kelantan is controlled by the opposition Islamic Party of
Malaysia, PAS, which holds a mere one-seat majority in the
state assembly. In typical rivalry, PAS wants the endpoint
of the pipeline in the PAS-controlled parliamentary district
of Tumpat, located just north of Kota Bharu nearly on the
Thai border, where port facilities already exist. Jeli, the
proposed site for the storage facility, is the home district
of Minister of Higher Education Mustapa Mohamed. Yan, at the
western end, is the home turf for Syed Mokhtar, owner of SKS,
one of Malaysia,s richest men and a strong financial
supporter of UMNO.

Skepticism Among Petroleum Professionals

10. (SBU) An Amcit shipping industry executive told econoff
he had mixed views about the project. On the one hand, he
was skeptical that the pipeline would be economically viable,
given the high costs involved in building it and the minimal
time and distance saved. However, he pointed out that
economic viability might not be the driving factor. Rather,
he saw the project as part of a broader attempt by
Malaysia,s leaders to cozy up to the Islamic world, pointing
to NIOC's agreement to help finance SKS Ventures' refinery in
Yan and Petronas' eagerness to do business with both Iran and
Sudan. Moreover, given current oil prices, oil companies
around the world are trying to maximize production, he said.
The shipbuilding industry can't keep up with demand, and oil
companies in the Middle East are absorbing Malaysian human
capital, offering people with any experience in the industry
three to six times their current salaries. If oil prices
remain what they are, he said, congestion in the Straits of
Malacca will only worsen, increasing the need for such a

11. (SBU) Several Malaysian oil and gas industry experts
also expressed mild skepticism in conversations with econoff
about the pipeline, but none was prepared to dismiss the idea
completely. One Malaysian executive working for a large
energy company told econoff he had heard a number of people
speculate that TPP was just a front company for someone else
-- how could a small, unknown company have the capacity for
such a massive, multi-billion dollar project? He also found
it strange that Petronas was not involved. Separately, a
reporter told poloff that Petronas did not want to have
anything to do with the project.

Pipeline or Pipedream?

12. (SBU) Comment: The typical order of business for major
projects in Malaysia is: someone has vision, companies rush
in to acquire "exclusive rights," and only after that are
feasibility studies conducted, numbers crunched, and
environmental impacts (possibly) assessed. With an expected
world-wide shortage of refinery capacity over the next
decade, the package might be more attractive for the proposed
refineries at each end than the pipeline connecting them. At
this stage, deals have been struck on paper, but there
appears to have been no solid analysis of the economic
viability or the environmental risks of this project.
However, these might not be the deciding factors. If
Malaysian federal and/or state governments step in to assist,
construction contracts and other deliverables to favored
parties may become more important than the payoff from the
completed project. With elections expected before spring
2008, pipeline development would provide many opportunities
to reward UMNO supporters with lucrative contracts regardless
of whether or not the project makes long-term sense. The
refinery and pipeline in Bachok would be seen as a potential
UMNO deliverable and might just tip the balance in a
PAS-controlled state shortly before the election. If
environmental concerns subsequently stymied the project, it
would offer a face-saving way out after the election, even if
UMNO carries the state. In any case, until financing is
secured this pipeline is probably just a pipedream.

© Scoop Media

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