Need for national oil companies to step up their game-

Since 2014, major domestic oil producers and international oil companies (IOCs) in the Southeast Asian region have moved away from the region to other regions such as the US that offered comparatively higher returns and shorter project development time. As per the latest data available with Wood Mackenzie, oil majors and IOCs have sold about 800 million barrels of oil equivalent (mboe) of Southeast Asian assets till date. These have been purchased by new East Asian and Middle Eastern players. These include companies such as JX Nippon Oil and Gas Exploration Corporation, Mitsubishi Corporation, Kuwait Foreign Petroleum Exploration Company, PT Medco Energi Internasional Tbk, Sapura Energy Berhad, etc. Since 2013, these independent oil companies have acquired over 600 mboe of resources in Southeast Asia.

These independent oil companies’ are acquiring stakes in operational oilfields from major players. These include acquisitions such as the acquisition of ConocoPhillips’ 40 per cent interest in the South Natuna Sea Block B by Medco Energi and the acquisition of the entire equity stake in Newfield Malaysia Holding by Sapura Energy. The production from these conglomerates and domestic independents has more than doubled within the last decade, from 260,000 barrels of oil equivalent per day (boepd) prior to 2008 to more than 675,000 boepd in 2018. Today, these companies account for about 12 per cent of the region’s production.

Going ahead, the growth of these new entrants is likely to be modest in the next decade. This will be driven by the diverse portfolio of their offerings and their entrepreneurial approach. They are expected to increasingly partner with national oil companies (NOCs) on large-scale projects and drive domestic production in the region.

Rationale for the shift: A cause for worry

Oil production from the Southeast Asian region peaked at around 3 million barrels per day (mbpd) in 2001. It declined to around 2.5 mbpd in 2016. This was mainly due to a production decline in Indonesia and Malaysia. As per the Southeast Asia Energy Outlook 2017, published by the International Energy Agency (IEA), the remaining proven reserves are also relatively modest at 13.1 billion barrels at the end of 2016. This is just 1 per cent of the global reserves.

As per projections by the IEA, oil production from the Southeast Asian region will further decline to 2.1 mbpd by 2025 and 1.7 mbpd by 2040, declining at a compound annual growth rate of (1.6) per cent (since 2016). On a similar footing, natural gas production is also expected to decline from 188 million tonnes of oil equivalent (mtoe) in 2016 to 185 mtoe in 2040, making the oil and gas scenario in the region unattractive for the oil majors. To add to this, the low oil price environment after 2014 has made oil majors desperate for cash to fund their investments. Thus, they are constantly looking to divest their non-core assets. Since the oil majors prefer to spend their money on investment opportunities to increase production from greenfield assets rather than maintaining production from brownfield assets, the sale of mature oil assets in Southeast Asia seemed an obvious choice.

However, this shift should be a cause of worry for policymakers in the region. Generally, a company selling its assets does not like to invest further in the same region. This could mean that oil production from the region could decline even faster than predicted as investments necessary to limit the natural decline of mature fields would not take place, unless oil price recovers significantly. Besides, it has been seen that the production capacity once idled is very difficult to revive completely. Thus, any reduction from mature oilfields would not be a temporary decline, one that can be corrected once the oil price recovers to more sustainable values. Rather, such a decline could have a permanent impact on production from the region, which is a cause of worry for policy makers in the region.

Major oil and gas divestments in Southeast Asia

There has been significant merger and acquisition (M&A) activity in Southeast Asia in the last decade. Royal Dutch Shell announced its plans to sell a 22.2 per cent interest in the Bongkot field and adjoining offshore acreage in Thailand to the Thai national petroleum exploration and production company PTT Exploration and Production in January 2018. The deal was completed in June 2018 and was valued at $750 million. Shell completed another sale of 15 per cent of its shareholding in Malaysia LNG Tiga Sdn Bhd to the Sarawak State Financial Secretary for $750 million in the same month.

Other deals such as Kris Energy’s $65 million acquisition of Chevron’s 30 per cent interest in the first phase of the Apsara oilfield in Cambodia has also led to a decline in assets owned by the oil majors in the region. The majors are also selling stake in energy assets other than oil and gas. For instance, as part of its strategy to raise cash, Chevron completed the sale of its geothermal assets in Indonesia in 2017.

The changing role of NOCs going ahead

The major transactions seen in the Southeast Asian markets lately point towards an emerging trend: the increasing role of NOCs in shaping the future of the oil and gas industry in the region. The governments of Thailand and Malaysia had recently bought back significant shares in the Bongkot field and Malaysia LNG Tiga Sdn Bhd respectively from Shell. This indicates that NOCs are gradually increasing their stake in their domestic oilfields, most of which are at an advanced stage of development or are already developed. Developed oilfields require less investment as compared to greenfield projects.

NOCs are also taking control of blocks where oil majors are not willing to extend their operations. A case in point is the Makassar Strait gas block in Indonesia’s deepwater development. The Indonesian government has decided to terminate Chevron’s production sharing contract (PSC) after it decided not to extend its operations in the block beyond 2020. Another example is the Mahakam oil and gas block in Indonesia. PT Pertamina took control of the block on January 1, 2018 after Total and Japan’s Inpex Corporation were unwilling to extend their PSCs.

Outlook

At present, around 68 per cent of the total oil and gas production in the region comes from midlife and mature fields. However, in the absence of any significant exploration and production activities in the region, production from the region will decline significantly. As per Wood Mackenzie, output from Southeast Asia is expected to decline by 15 per cent by 2025 owing to factors such as tough fiscal conditions and a restrictive regulatory environment.

Going ahead, independent oil companies are expected to increasingly partner with the NOCs to develop oil and gas assets in the region. NOCs are also creating subsidiary companies to boost oil and gas production from the region. For instance, PETRONAS floated a 100 per cent subsidiary called Vestigo Petroleum in 2013, which is involved in the development of small and marginal fields. PETRONAS through its experience is helping Vestigo get access to small and mature resources. If managed well, the collaboration between NOCs and the independents could result in the creation of new companies that specialise in mature field management and redevelopment. This could even lead to a revival in Southeast Asia’s oil industry.