IRAN - Tehran Funding P/L To Avoid Malacca Strait.

The Chief Minister of Malaysia's state of Kedah, Mahdzir Khalid, on April 11 said construction of a crude oil pipeline across northern Malaysia was to begin by August, offering companies the chance to avoid the congested Malacca Strait. About 70% of the M$50 bn (US$14.5 bn) funding will be foreign, with a significant proportion coming from NIOC.

The line, partly politically motivated, will enable shippers to avoid Singapore, a staunch US ally, if Washington-Tehran relations deteriorated further. Khalid said the project will involve two refineries - one in Yan, on the state's west coast, and the other at Bachok, on the east coast of Kelantan state. A 320-km pipeline will connect them, as well as various other downstream industries. Three JVs were being established, one for each refinery and one for the pipeline.

The Yan refinery will be built by NIOC and SKS Ventures, a Malaysian firm which has recently signed a US$16 bn deal to develop two gas fields and an LNG export venture in southern Iran, and the Bachok plant will be built by Merapoh Resources Corp of Malaysia and as yet unannounced foreign investors.

Trans-Malaysia Petroleum will build the pipeline. Investors include firms from Saudi Arabia, South Korea and Japan in addition to Iran. State governments will have a 5% stake in each JV; the exact revenue-sharing terms are yet to be finalised. When the pipeline becomes operational, in 2010 according to plan, it will ship 800,000 b/d - about 10% of the volume Singapore handles. (Up to half the world's oil travels through the Malacca Strait, which until 2005 was the site of some of the world's most pirate-infested waters).

The pipeline will cut three days off oil shipment times to east Asia. A spokesman on April 11 said: "I don't see a direct conflict with Singapore. We can supplement and complement each other because demand is going to grow significantly from China and Japan. And they can invest here if they want to". The M$50 bn includes construction of facilities such as shipyards, slipways and lubricant plants. He said: "So I would say this is a conservative figure".

Liaw Thong Jung, an analyst at Aseambankers in Kuala Lumpur, described the plan as "ambitious" but said it would likely succeed because "funding is not going to be a problem", adding: "There's a political element to this too. "A lot of the oil is coming from Iran and if there is ever a US embargo on [Iran goods], Singapore is likely to follow it. The pipeline will enable any embargo to be [circumvented]". Malaysia, predominantly Muslim, has consistently opposed the US-led operations in Iraq and its broader Middle East policies. Paolo Mangahas, of WWF Malaysia, an environmental organisation, said insufficient information about the pipeline's "actual alignment" was available to determine whether it cut through environmentally sensitive areas.