KUALA LUMPUR/SINGAPORE/KUWAIT (Jan 27): Saudi Aramco's decision to shelve a plan to partner with Malaysia's state oil company threatens the country's ambitious plans for an oil and gas processing hub, which it may struggle to keep on course if it cannot find another foreign investor.

The Saudi oil major suspended plans for a joint venture with Petroliam Nasional Berhad, or Petronas, on the US$27 billion project in the southern Malaysian state of Johor, due to concerns it would not yield high returns, sources told Reuters this week.

Petronas - which has been hit hard by the slump in oil prices, cutting jobs, capital expenditure and its contribution to government coffers — insists the Refinery and Petrochemical Integrated Development (RAPID) project at Pengerang, on Malaysia's southern tip, remains on track and will begin operations as planned in 2019.

Analysts say the project is too politically important for Prime Minister Najib Razak, mired in a corruption scandal involving state fund 1MDB, to be scrapped or drastically pared back, but believe Petronas will need a strategic investor to bring in funds and industry expertise.

"They may scale it down, but it's going to go ahead. It might get staggered," said Subbu Bettadapura, senior director of energy, Asia Pacific, at consultancy Frost and Sullivan.

"(Malaysia) would definitely try to channel funds into Pengerang, because a lot is riding on that. All the forces, political and industrial, would be trying to make this a reality."

Industry analysts and consultants say Petronas is in talk with other foreign investors.

Najib — who has said RAPID will create jobs, raise standards of living and boost the country's economy — will want to ensure the project in electorally key Johor state faces no further hurdles before the next national election due by 2018.

With Western oil majors also hurting from a slump in oil prices, the most likely solution for RAPID would be to recruit Chinese players to partner with Petronas.

Some analysts say cash-rich Chinese refiners looking to expand into new markets could be interested in RAPID.

Najib has been moving closer to Beijing diplomatically as the fallout from the 1MDB scandal strains ties with the United States, returning from a November state visit to China with about US$34 billion in deals.

"Najib needs to ensure that RAPID can still go on," said Achmad Sukarsono, analyst at political risk consultancy Eurasia Group. "Politically Najib would want to involve China more."

Project economics

Others, however, caution that RAPID may not make sense for China, which already has enough refineries to meet even its huge oil thirst. Chinese energy firms, they say, would rather invest in more crude production.

A bigger concern is the economics of the project, which have been called into question, after sources said Aramco had concluded it would not generate sufficient returns.

Petronas said in a statement on Thursday that RAPID — which includes a 300,000-barrel-per-day oil refinery producing gasoline and diesel — was expected to deliver positive returns and value as planned.

The project, part of the huge Pengerang Integrated Petroleum Complex (PIPC), was announced in 2011, when oil traded at US$110 a barrel. Crude prices have since halved.

Like neighbouring Singapore, the Pengarang peninsula sits between the Malacca Strait and the South China Sea, through which almost all the Middle East oil and gas bound for northern Asia's industrial powerhouses of China, Japan and South Korea is shipped.

If fully developed, PIPC would become one of Asia's biggest hubs for oil storage, fuel refining and petrochemical production, as well as imports and exports of liquefied natural gas (LNG).

Sushant Gupta, research director of refining and chemicals at energy research and consulting firm Wood Mackenzie, predicted Asian markets will be short of gasoline by 2020, meaning RAPID could hit the market at the right time to benefit from improving refining margins.

"So it will be prudent for the sponsors to get the refinery ready on time to capture the expected upswing in margins," Gupta said.

Canadian sacrifice?

The RAPID setback means Petronas now faces questions over two of its biggest projects.

It is in the middle of making a final investment decision on a US$27 billion liquefied natural gas project in Canada that has faced several delays, due to environmental concerns.

The state-run company is also wrestling with lower profit and cash flow. In early 2016, Petronas said it would cut spending by up to 50 billion ringgit (US$11.27 billion) over the next four years.

With the questions hanging over RAPID, Petronas may be forced to re-think the Canada project.

"RAPID will still come online, it's just there is a greater financial burden on Petronas now," said Peter Lee, an oil and gas analyst at BMI Research. "If anything were to give way or be delayed further, I would think it is the Canada project first."