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NEWS UPDATES Asean Affairs        23  May 2011

Gas subsidies must go in Malaysia

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A long-overdue review of the price of heavily-subsidized natural gas in Malaysia is crucial as demand for cheap gas is far outstripping supply.

Analysts said that if this market-distorting situation was not corrected by the government soon, Malaysia would run out of gas reserves and this would jeopardize future generations.

As it is now, the government continues to subsidize gas by as much as 71 to 77 percent, which means lost opportunities for the country and the economy not being cost efficient.

This is because the billions of ringgit used to subsidize gas could have been used for socio-economic development projects such as public amenities, roads, schools and other services. For gas alone, Petronas paid out a massive amount of subsidies, amounting to RM131.3 billion between 1997 and last year.

This being the case, there is a need to gradually move up gas prices to reflect international levels as prices in Malaysia are among the lowest in the region and cheaper compared with alternative fuels.

As a result, a large number of consumers have shifted their consumption of energy from other fuels such as diesel, fuel oil and liquefied petroleum gas (LPG) to natural gas.

This has resulted in an imbalance, with demand outstripping supply at a rapid pace.

There is also a misconception that Malaysia has lots of gas reserves to be used for power when the actual situation is that there is real concern over gas reserves as they are finite.

Malaysia is now getting 36 per cent of its natural gas supply from abroad at a higher price, which continues to increase, but is sold to the power and non-power sectors and industries at highly reduced prices.

These price distortions to the economy, which are taking a toll on the country's finances, need to be rectified soon by rationalising and reducing subsidies.

The local supply of natural gas is insufficient as demand has escalated 400 per cent over the past 10 years for customers using less than 2.0 million standard cubic feet per day (mmscfd) and about 160 per cent for customers using more than 2.0 mmscfd while the country's gas reserves are fast depleting at an annual rate of 12 per cent.

The last gas price revision by the government was in March 2009. At a discount of 50 per cent, the prices ranged from RM15.35 per million British thermal units (mmBtu) to RM10.70 per mmBtu. There was an obligation to review this every six months, but this did not happen.

Since the last revision, the price of medium fuel oil, a reference index on which gas is priced, has risen over 100 per cent.

This has led the government to bear the cost of heavier subsidies as the price of energy continues to increase in global markets.

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