Will Asia-Pacific's O&G sector join the global recovery in 2019?
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Will rising demand, new exploration activity and a refresh of government policy bring renewed confidence in Asia-Pacific's upstream industry in 2019? Wood Mackenzie's research director Andrew Harwood shares his thoughts.
Big exploration slowly returning
The need to fill new and old gas infrastructure will see the drilling of exciting offshore prospects across Australia, Brunei, Malaysia,Myanmar, Pakistan and Papua New Guinea. Some will be frontier deepwater exploration. But access to gas demand centres will be the primary driver of which prospects make the grade.
Our top three wells to watch in 2019 involve some of the world's most successful exploration companies - hopes are high for sustained success:
• Offshore Pakistan, ExxonMobil and Eni will spud the ultra-deepwater Kekra-1 well in early 2019, targeting a carbonate play that could be a game-changer for the country's burgeoning gas market.
• Repsol's Rencong-1X well, offshore North Sumatra, Indonesia, is generating strong interest from potential farm-in partners. We expect a deal to be done before the well spuds in Q3 2019.
• In Papua New Guinea, Total's Mailu-1 well is targeting a giant oil prospect in over 2000 metres of water, potentially opening a new ultra-deep offshore play in the Papuan Basin.
From a licensing perspective, several countries are set to launch new bid rounds in 2019. But only those offering a fair balance of risk and reward will be successful in attracting new investment. Despite recent fiscal revisions in India and Indonesia, we expect lacklustre interest in their latest acreage offerings, and investor appetite is likely to be limited for other 2019 licensing opportunities in the Philippines, Bangladesh and Myanmar.
M&A maintains momentum
M&A spend grew over 60% to US$8.7 billion in 2018 compared to 2017. We expect 2019 to be flat with around US$8 billion of potential deals in the pipeline.
We expect to see divestments in Southeast Asia by primarily US-focused players, such as Hess, ConocoPhillips and Chevron, seeking to redeploy capital towards lower-cost, higher-return opportunities elsewhere.
With a steady supply of international oil companies (IOC) assets potentially becoming available, and the region's national oil companies (NOCs) on the hunt for new partners to share financial and technical commitments, there should be no shortage of acquisition opportunities in 2019.
Deal activity in Australia is also likely to continue at a brisk pace, as LNG operators position themselves for the next wave of investment, and local producers look to take advantage of a tightening domestic gas market.
Asia-Pacific O&G Outlook 2019
Fewer project sanctions
Contrary to global trends, 2019 looks a relatively low-key year for new project sanctions in Asia-Pacific. PetroVietnam's Block B gas development and ConocoPhillips's Barossa are the largest projects targeting FID over the next 12 months, but both are in danger of being pushed into 2020.
As attention in Australia's LNG sector turns towards backfilling the existing Pluto and North West Shelf infrastructure, collaboration among operators is becoming a genuine option. Woodside's Scarborough and Browse are the most likely medium-term candidates to provide new feedgas. But Chevron's Clio-Acme development may leapfrog both with a surprise 2019 FID if commercial arrangements for third-party access to LNG infrastructure can be finalised. If so, it would be quite a turnaround for an industry not known for playing together in the past.
Chinese NOCs to raise production
2019 is the year the Chinese NOCs finally start raising domestic budgets in earnest. Gas will remain the major strategic focus, with domestic production expected to rise by 6%.
The Sichuan Basin will lead the way, contributing one-third to 2019's output growth. This will come primarily from conventional sources - shale gas will account for less than 10% of China's gas production. But shale volumes are set to ramp-up as PetroChina races to meet its 2020 target and Sinopec starts development in the Weirong block. Shale production could hit 12.5 bcm this year, but reducing drilling times and alleviating service sector bottlenecks will be critical.
Expect geopolitical wildcards
Political changes are on the cards across the region. Energy and upstream policies will again be front and centre of national debate in Asia-Pacific, with major presidential, general or parliamentary elections scheduled for Australia, Indonesia, Thailand, India and the Philippines in 2019.
In Australia, the east coast gas market will come into focus again ahead of federal elections in May, where a Labor win is a very likely outcome. An increased reliance on renewables is at the centre of Labor plans to reduce power prices, with potential implications for Australian gas producers. But perhaps more pertinent for upstream players is whether a new government maintains proposed changes to the PRRT regime, or starts afresh.
We expect China to become more constructive on its South China Sea claims. 2019 could mark the turning point as countries such as the Philippines and Brunei agree to joint development solutions with China in disputed waters. Further development on this front, especially if a more formal and binding agreement is signed, could set a precedent for other neighbouring countries to follow.
From an upstream perspective, such agreements could eventually unlock disputed areas and allow for exploration in new waters. But working out mutually agreed terms between the countries could take decades. And will these moves embolden China to expand its claims further into new sectors? Or given the current state of US-China trade relations, will China adopt a more cooperative approach with its Asian neighbours?