Petroliam Nasional Bhd (Petronas) is looking to sell a stake of as much as 49 percent in the SK316 offshore gas block in Malaysia's Sarawak state, the sources told Reuters, a move that would be among its first major recent sales as it grapples with oil prices that have slumped by half over two-and-a-half years.

That slide has squeezed the cash flows of Petronas [PETR.UL], hurt its earnings and forced it a year ago to announce a 50 billion ringgit (£9 billion) cut in capital expenditure over four years.

Petronas, which accounts for a third of Malaysia's oil and gas revenue, has also cut its dividend. Sources had told Reuters in September it is considering selling its majority stake in a $27 billion Canadian liquefied natural gas (LNG) plant, although the company denied it.

It is now working with an investment bank on the SK316 gas block stake sale and kicked off the process this month, one of the sources said. Petronas did not respond to a request for comment.

Petronas is currently gauging interest from potential buyers, said the sources, who declined to be identified as they were not authorised to speak about the matter.

Gas from the NC3 field in the SK316 block feeds Malaysia's LNG export project, known as LNG 9, Petronas' joint venture with JX Nippon Oil & Energy Corp (>> JX Holdings, Inc.) that started commercial production in January.

The sources said the stake is expected to include a combination of the producing NC3 gas field, the potential development of the Kasawari field in the same block and other exploration acreage in the block.

The funds raised could contribute to the future development of the Kasawari field, one of the largest non-associated gas fields in Malaysia, which has an estimated recoverable hydrocarbon resource of about three trillion standard cubic feet.

Petronas put on hold plans to develop the field in 2015 after oil and gas prices fell, according to media reports.

Prasanth Kakaraparthi, senior upstream research analyst at consultancy Wood Mackenzie said overall capital expenditure for the 316 block is estimated at around $4 billion, of which the upcoming phase of development accounts for nearly 50 to 60 percent.

"Given that the second phase of development will involve a significant amount of capital commitment, it's not completely out of the question to think that they might want to bring in some partners to sort of share some of that burden," he said.

The stake could appeal to firms such as Indonesia's state-owned Pertamina, Thailand's PTT Exploration and Production PCL (>> PTT Exploration and Production PCL) and some Japanese companies, the sources said. They said it might also appeal to the Kuwait Foreign Petroleum Exploration Company, which snapped up Royal Dutch Shell's stake in Thailand's Bongkot gas field for $900 million last month.

A PTTEP official said the company is keen to invest in Southeast Asia but did not specify if it will invest in the SK316 block. Pertamina did not immediately provide a comment.

As huge production comes online in Australia and the United States, LNG markets are oversupplied, resulting in an almost 70 percent slump in Asian spot LNG prices since 2014.

Despite this, Malaysia's LNG assets are viewed as attractive thanks to comparatively low production costs and due to their proximity to North Asia's big consumption hubs of Japan, China, and South Korea.

(Reporting by Anshuman Daga; Additional reporting by Florence Tan and Henning Gloystein in SINGAPORE, Praveen Menon in KUALA LUMPUR, Manunphattr Dhanananphorn in BANGKOK and Wilda Asmarini in JAKARTA; Editing by Muralikumar Anantharaman)

By Anshuman Daga

Stocks treated in this article : PTT Exploration and Production PCL, JX Holdings, Inc.