Malaysia Grappling With Futher Price Increases
Gas Prices Potential Hike Subduing Markets

Malaysia will consider raising the price of subsidised natural gas to relieve some of the pressure on state-owned firm Petronas, the country's energy minister said. Energy Minister Lim Keng Yaik said that Petronas, which has asked for a hike, was under "tremendous stress" to meet domestic demand for gas at the subsidised rate, the state-run Bernama news agency reported on Sunday. Lim said Petronas was supplying gas at 6.40 ringgit (US$1.76) per million British thermal units (mbtu), well below the market price of 14 to 18 ringgit per mbtu. But Lim said the government will also take into account what impact a price hike would have on consumers. "Whatever increase in gas price, it has to be passed through. It would be passed to the consumer eventually and we are not willing to do that at the moment."

Last month, the government increased electricity rates for the first time in nearly a decade because of rising fuel costs. Petronas introduced a controversial natural gas price hike in December, but after public protests, the government asked Petronas to reverse the move. Petronas has supplied processed gas to Malaysia's debt-ridden utility giant Tenaga Nasional and independent power producers at the subsidised rate since 1997. Lim said the request from Petronas for a gas price hike would only be considered after talks between the government and power producers are completed. There is no set time-frame for the talks, he said.

The government is trying to re-negotiate power purchasing agreements between Tenaga and power producers to counter the increasing costs of oil and gas, according to reports. Reports say the government is expected to offer producers extended contracts to supply power if they charge Tenaga less.

Both issues are subduing the local equity market. The economy is vibrant and sturdy enough to withstand a hike in gas prices, but the political costs may be too damaging since the weekly protests at KLCC have not yet died down on the last fuel price hike. Considering the leak by Dr. M to the press (but was not even reported in even one local daily) Petronas recorded a record pretax profit of about RM80 billion (US$22 billion) for FYE March 2006. Last year's pretax profit figure was a paltry RM58 billion (and a net profit of RM35.6 billion). Certainly it will amount to political suicide to do a gas price hike now.

As for the renegotiations with IPPs, this uncertainty weighs on the related power stocks and Tenaga. The sooner they can clear it up, the better it will be. Any renegotiation should not result in grave detriment to either party, but will favour Tenaga.