Asia Pacific upstream - 5 themes to watch in 2020
Wood Mackenzie has identified five themes related to project sanctions, exploration, M&A, energy transition and IMO 2020 that will impact Asia Pacific’s upstream industry in 2020.
Australia leads in bumper year for Asia Pacific FIDs
Asia Pacific is expected to see a boost in major project sanctions next year. About US$35 billion of new development expenditure and 4.6 billion barrels of oil equivalent (boe) of resource could be sanctioned in 2020, compared to only US$5.5 billion and 1.2 billion boe of new projects getting the go-ahead in 2019.
After a dearth of project sanctions in the last few years, Australian project final investment decisions (FIDs) are now back on the cards in 2020.
Wood Mackenzie senior analyst David Low said: “Barossa is closest to the line as new operator Santos looks to backfill the Darwin LNG plant. We expect Woodside to sanction Scarborough to underpin the Pluto Train 2 expansion, and Shell is set to take FID on the Crux field to backfill the Prelude FLNG facility.”
Research director Andrew Harwood added: “In Q1 2020, PETRONAS will be looking to develop its deepwater expertise close to home through Limbayong, offshore Sabah, and the Kelidang Cluster, offshore Brunei. Given its deepwater ambitions in Mexico and Brazil, the national oil company (NOC) will be keen to demonstrate proficiency in bringing similar domestic projects online.”
Exploration: Wildcats out, brownfields in?
After a record year for Asia Pacific exploration in 2019, attention is expected to switch to delineating some of the key discoveries over the last 12 months. Appraisal drilling at Repsol’s Kali Berau Dalam, Eni’s Ken Bau, PTTEP’s Lang Lebah, and CNOOC’s Yongle 8-3 will prove up commerciality ahead of development planning.
The outlook for pure wildcat exploration looks more limited in 2020. But there are still some potential play-openers in New Zealand’s Great South Basin, deepwater Myanmar, offshore North Sumatra and offshore Papua.
In Australia, it will be a pivotal year for the Beetaloo and McArthur Basins, long thought to hold significant resource potential, that could be the saviour of the Australian east coast gas market.
“This could be the breakout year when we find out if all the hype is justified. Origin, Santos and Empire Energy are hoping to get a better understanding of the rock mechanics and well deliverability with their exploration programmes in 2020. Flowrates above 5 million cubic feet per day (mmcfd) would be considered a success,” added Low.
The cooldown in Asia exploration activity in the last few years reflects a global shift in resource capture strategies, with greater emphasis on getting more from existing fields.
Harwood said: “In 2020, we expect a growing focus on improving recovery rates by NOCs and smaller specialist players. PERTAMINA will hope to slow declines at Offshore Mahakam via an ambitious drilling campaign and new well and platform designs. PTTEP aims to recover more contingent resources from G1/61 (Erawan) and to lower development costs through synergies with its nearby assets.”
M&A opportunities aplenty
The pipeline of assets for sale remains strong. The Majors alone hold US$18 billion worth of non-core assets in Asia Pacific. Divesting late-life assets, low-return, pre-FID projects and positions with limited growth potential will be priority. Chevron’s Indonesia Deepwater Development and Repsol’s PM3 CAA are two examples of key assets expected to change hands over the next 12 months.
In Australia, LNG related deals will once again make headlines in 2020. Santos’ 2019 acquisition of ConocoPhillips’ northern Australia portfolio is the catalyst for further M&A to align equity interests. SK E&S, part of the Barossa JV, is in line to move first and acquire 25% of Santos’ stake in Darwin LNG and Bayu-Undan. Likewise, the Japanese participants in Darwin LNG are also expected to farm into the Barossa JV.
Upstream industry finds its way in energy transition
Until recently, national energy needs have usually trumped environmental concerns when it comes to upstream development decisions. However, awareness of the energy transition has accelerated across the industry, with environmental, social and governance (ESG) criteria increasingly influencing company strategy and investor behaviour.
2020 could well see more Asia Pacific asset divestments as international oil companies seek to reduce carbon-intensive assets. Projects that do go-ahead will place more emphasis on carbon capture during development, and in some cases, the use of renewables to power upstream operations.
Low said: “Australian players have already started or are exploring carbon capture and storage and the use of renewables in upstream operations. As momentum grows in 2020 behind ‘green LNG’ as a buyer option, Australian operators will need to demonstrate they are making tangible progress in reducing their own carbon footprints.”
As the global upstream industry plots a more sustainable future, Asian NOCs will also need to make a stand in 2020.
Harwood added: “PETRONAS' giant 7 tcf Kasawari gas field offshore Sarawak is one of the flagship projects to watch. Sanctioned in 2019, we foresee PETRONAS abandoning previous plans to vent the field's 20%+ CO2, in favour of a more ambitious capture and sequestration solution.”
IMO 2020 impact extends to Southeast Asian gas producers
Kicking in from 1 January 2020, the impact of new IMO regulations governing sulphur content in marine fuels will be far-reaching. Lower demand and thus lower prices for high-sulphur fuel oil (HSFO) will have a direct impact on regional upstream cashflows. Most gas supplied from Peninsular Malaysia, the West Natuna Sea and South Sumatra is priced with a linkage to HSFO.
Over 2,500 mmcfd of gas production is exposed. Some of the most exposed operators include PETRONAS, ExxonMobil, Hess, PTTEP and Medco Energi.
Ultimately, the IMO impact on revenues may be neutralised by higher offtake levels - lower HSFO-linked prices will boost the competitiveness of pipeline suppliers, which have faced pressure from cheap LNG in recent months.