WoodMac: Asia-Pacific oil and gas industry set for rebound

The Asia-Pacific’s oil and gas industry looks set to rebound over the next 12 months as rising demand, stronger commodity prices, and an uptick in merger and acquisition activity bring greater confidence to the region, according to a recent report from Wood Mackenzie.

Rising Asian LNG demand, the return of China’s national oil companies (NOC) to growth mode, and renewed interest in upstream investment, WoodMac says, are among the key factors influencing the this rebound, which is not just happening in the Asia-Pacific area but also worldwide.

Firstly, Asian LNG demand continues its robust rise, driven by Chinese coal-to-gas switch policies. Chinese LNG demand increased by a record 8 million tonnes in 2017 and is set to jump by another record 12 million tonnes in 2018. This makes up 50% of global LNG demand growth. Given China is only through its 5-year clean air policy, the China LNG demand growth story is far from finished.

While China grabs many of the headlines, LNG demand growth is a reality throughout Asia. In total, Asia-Pacific LNG demand is set to rise a further 60% to reach 337 million tonnes/year by 2030. By comparison, the rest of the global market is only 75 million tpy 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. LNG Canada’s final investment decision (FID) in October was the first major greenfield project to move ahead since 2015. WoodMac expects 2019 to be the largest year ever for FIDs for LNG projects with sanctions expected soon on plans in Russia, Qatar, Mozambique, and the US.

Nicholas Browne, WoodMac gas and LNG research director, said, “In the medium term, LNG producers in Southeast Asia, Australia, and Papua New Guinea will also be aiming to capture some of this growth through expansion and backfill of existing facilities.”

Worldwide, this year 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 sanctioned developments is much the same as in 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 more than twice the size of those in 2017, up from about 375 million boe last year to 850 million boe this year.

“Asia-Pacific matches the trend exactly, with a jump to an average of 287 million boe vs. 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 $8 billion of investment,” said Angus Rodger, WoodMac upstream research director.

As the Lingshui sanction suggests, Chinese NOCs’ investment strategy also is becoming more dynamic to match rising domestic gas and LNG demand. WoodMac 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 capitalize on China’s growing gas demand, with shale gas, LNG storage and pipeline infrastructure gaining prominence.”

But there also is 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,” Petrov said.

M&A activity

M&A activity also is seeing a resurgence in the region, with more than $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 Ltd.’s $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," said WoodMac Upstream Research Director Andrew Harwood.

More recently, OMV AG’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 NOCs 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 maximize recovery will rise. 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 deemphasised the region. Look out for more deals in Malaysia and Indonesia, particularly after Indonesia’s general election in April 2019,” Harwood said.

“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,” Harwood said.