New wave of growth on the horizon for Asia-Pacific's oil and gas sector
Asia-Pacific's oil and gas sector looks set to rebound over the next 12 months as rising demand, stronger commodity prices and an uptick in M&A activity bring greater confidence to the region.
Wood Mackenzie predicts rising Asian LNG demand, the return of China's NOCs to growth mode and new appetite for upstream investment to be key factors influencing the sector, not only Asia-Pacific, but also globally into 2019.
Firstly, Asian LNG demand continues to grow strongly, driven by Chinese coal-to-gas switch policies. Chinese LNG demand grew by a world record 8 mt in 2017, and is set to grow by another world record 12 mt in 2018. This makes up 50% of global LNG demand growth. Given China is only partly through its five year clean air policy, the China LNG demand growth story is far from finished.
But while China grabs all the headlines, LNG demand growth is a reality throughout Asia. In total, Asia-Pacific LNG demand is set to grow a further 60% to reach 337 mmtpa by 2030. By comparison the rest of the global market is only 75 mmtpa currently.
With such strong signals from the demand side, it is time for supply to respond. After a dearth of new greenfield LNG project sanctions in recent years, suppliers are now positioning to grow. The FID of LNG Canada in October 2018, was the first major greenfield project to move ahead since 2015. Wood Mackenzie anticipates 2019 to be the largest year for LNG FIDs ever with projects in Russia, Qatar, Mozambique and the US expected to sanction.
Nicholas Browne, Gas and LNG research director said, "In the medium-term, LNG producers in Southeast Asia, Australia and PNG will also be aiming to capture some of this growth through expansion and backfill of existing facilities."
On a global basis, 2018 has already revealed a big step-up in the scale of new upstream project investments across both oil and gas, and this trend has filtered through to Asia-Pacific as well.
While the number of developments being sanctioned is similar to 2017 on a year-on-year basis, the key change is the size of fields getting the green light. The average project to hit FID in 2018 is over twice the size of those in 2017, up from around 375 million boe last year to around 850 million boe this year.
"Asia-Pacific matches the trend exactly, with a jump to an average of 287 million boe versus 143 million boe in 2017. Key sanctions include SK320 and SK408 in Malaysia, Reliance's KG D6 satellite cluster in deepwater India, and CNOOC's first operated deepwater gas project in China, Lingshui. Together these projects will require nearly US$8 billion of investment, "said Angus Rodger, upstream research director.
As the Lingshui sanction suggests, the Chinese NOCs' investment strategy is also becoming more dynamic to match rising domestic gas and LNG demand. Senior analyst Maxim Petrov said: "China’s national energy champions are starting to become more active. CNOOC and PetroChina are raising their domestic budgets and returning to the international stage. Investment at home is increasingly shifting to gas, driven by its strategic national importance and lower carbon intensity. The NOCs will aim to capitalise on China’s growing gas demand, with shale gas, LNG storage and pipeline infrastructure gaining prominence.
But there is also a clear move towards high-impact exploration overseas and bilateral deal-making. "Expect the Chinese NOCs to continue focusing on large conventional oil fields in the Middle East and Latin America, but also target integrated gas opportunities in Russia, Qatar and Asia-Pacific. Government to government relations and partnerships with the Majors will be crucial in securing future growth opportunities," added Petrov.
M&A activity is also seeing a resurgence in the region, with over US$6.8 billion worth of upstream assets changing hands in 2018, the highest level of activity since 2014. Australia accounts for much of this uptick, with Santos's US$2.2 billion acquisition of Quadrant Energy, the pick of the deals down under.
"Deal activity in Australia has been led by local players looking to reshape their portfolios to focus on domestic gas demand and future LNG backfill options. We expect to see further liquidity down under, as north Asian buyers seek to secure resources and private equity funds prowl for overlooked opportunities," commented upstream research director Andrew Harwood.
More recently, OMV's $800 million entry into Malaysia suggests that the corporate landscape in Southeast Asia could also be set for an injection of fresh capital and ideas.
As national oil companies in the region are increasingly burdened by maturing assets and growing domestic energy demand, the need for partners with technical and financial capacity to help maximise recovery will grow. PETRONAS, PERTAMINA and PetroVietnam are all likely to be on the lookout for new partnerships in 2019, to support continued investment in both old and new field developments.
"The uptick in activity in Southeast Asia has been slower, but we are seeing the first signs of new entrants showing interest again, to fill the gap left by some of the larger IOCs that have exited or de-emphasised the region. Look out for more deals in Malaysia and Indonesia, particularly after Indonesia's general election in April 2019," said Harwood.
"Although things are looking rosy in the region, it is worth noting that for some parts of Asia, the recovery may still lag other regions as politics and national objectives increasingly override commercial considerations," concluded Harwood.