Are IOCs Leaving Asia Pacific?
Asia is the world’s fastest growing region in the world, home to some of the fastest growing economies in the world. According to data from the IMF1, real GDP growth in the Asia and Pacific region grew an average of 5.86% an annum between 2010-2019. As a comparison, worldwide real GDP growth grew 3.76% within the same period. This growth was driven by the emerging economies, particularly China, India and Southeast Asia2.
This trend is expected to persist in the foreseeable future. Despite predicting a moderation of growth in the coming years, the Asian Development Bank expects Asia to regain the dominant economic position it had 300 years ago, before the industrial revolution3. China, India and Southeast Asia are expected to become the biggest economies in the world by 20504.
Figure 1: Asia’s predicted share of Global GDP (Asian Development Bank, Asia 2050)3
This economic growth will come hand-in-hand with higher demand for energy and fuels, as people consume more goods and services. Energy consumption in the Asia Pacific region has grown to make up 41% of the world’s demand5 in 2017 and is expected to rise to 46% in 2050.
It would be reasonable to expect an increase in upstream investment by International Oil Companies (IOCs) in the region to take advantage of this macro-economic trend, increasing upstream exploration and development in the region to supply it with the oil and gas it needs. However, there is growing evidence to the contrary, with IOCs appearing to be slowly divesting their assets in the region.
IOC Upstream Divestments
In the second half of 2019, ExxonMobil announced its intention to dispose of several mature assets in the Asia Pacific region6, including PSCs in Malaysia, Thailand, Vietnam and Indonesia. Following which, multiple other IOCs including Chevron, Eni, Shell and ConocoPhillips announced their divestments or plans to sell assets in the region. In this article, we explore the reasons for this trend.
Table 1: IOC divestments in the region since 2019
Maturing Assets in the Region and Declining Production
The upstream industry in the Asia Pacific has shown signs of a decline in recent years. According to Wood Mackenzie, investment exploration in the region has seen a decline by 66% to around US$6 billion in 20187. Despite the increase in production of natural gas, driven by growth in China and Australia, oil production in the region peaked in the early 2010s.
Figure 2: Asia’s Oil Production from year 2000 (BP Statistical Review 2020)5
The region is characterised by big and mature fields, like China’s Daqing oil fields, Indonesia’s Rokan block and PTTEP’s Gulf of Thailand fields8. In Southeast Asia, 70% of the production comes from mature assets with a 4.5% year-on-year decline9. An estimated 200 offshore fields in Southeast Asia alone will stop producing by 2030, comprising of over 1,500 platforms and 7,000 wells10. According to Rystad Energy9, further delays in Final Investment Decisions (FID) and the continued reduction in exploration spending, may result in a steeper production decline rate of 7% by 2024.
Late life assets often require significant investment to maintain production, requiring large numbers of workovers and additional infill or step-out drilling. Operators are also left with potentially hefty abandonment and decommissioning costs. As production drops across the region, many IOCs have chosen to divest their assets and exit the region to focus on other areas.
IOCs Refocusing their Portfolios
In this difficult oil price environment, oil majors have started to rethink and adjust their strategies. For many IOCs, the aim is to have businesses that are profitable, even in difficult price environments11. As a result, many have started to prune their portfolios, especially in the mature Asian region, to invest in areas where they believe they can obtain higher margins and lower breakeven costs. Research from Rystad showed that “Majors account for nearly 70% of the liquid volumes and 50% of the gas reserves tagged for divestment”12.
In 2019, ExxonMobil embarked on a $25 Billion divestment plan by 202513 for assets in Asia, Africa and Europe. They aim to streamline their portfolio and raise cash for investments in key areas of focus, like Guyana, Brazil, the Permian and their LNG portfolios in PNG and Mozambique14.
Shell had also recently embarked on a massive $30 billion asset divestment after its BG Group acquisition to invest in their core holdings of Deepwater and LNG, with the intention to become a more focused company15.
Another overarching trend has been the emphasis that European Oil Majors have placed on the energy transition. BP, Shell and Total have pledged to be net-zero carbon emissions by 2050 while others have embarked on significant climate and emissions goals16. This has led to billions of dollars of investments on renewable and Carbon Capture and Storage investments.
As IOCs embark to raise cash for reinvestment in other areas, the mature and non-core assets of Asia would form a key part of their divestment programmes, resulting in a noticeable shift out of the region.
Impact of Covid-19
As oil prices collapsed at the beginning of 2020, due to the dual impact as of Covid-19 mitigation measures and the Saudi Arabia-Russia economic conflict, IOCs have taken drastic measures to reduce costs and raise cash. Many majors have reduced operating costs, planned capital expenditures, dividend cuts and share buybacks, while hastening the divestment of low-priority assets. In addition, they have accessed the bond market and raised debt17. These actions have been taken to secure liquidity and strengthen their balance sheet as to be able to ride out the difficult oil price environment.
As a result, Covid-19 has delayed investments in new projects and hastened divestment targets in the Asian Pacific region.
Rise of the NOCs and independents
Across the world we have seen the rise in state owned National Oil Companies (NOCs) at the expense of the IOCs. Forty years ago, NOCs controlled less than 10% of global oil and gas reserves. That figure is close to 90% in the modern era17.
NOCs have several competitive advantages. They can raise equity and debt capital in the global markets, at more favourable rates than IOCs despite lower oil revenues18. NOCs have strong credit ratings as a result of the backing from national governments. An example of this was PETRONAS’ successful bond offering in the US dollar bond market in the first half of 2020, with a 6.2-time oversubscription ratio19, showing the market’s confidence in PETRONAS as well as similar NOCs. The ease in raising capital has allowed NOCs to expand upstream investments even as IOCs are forced to scale back20.
PETRONAS has recently stated it will strive to maintain capital budgets for domestic investments despite the difficult environment of Covid-19, while other Asian NOCs like CNOOC, ONGC, PTTEP and Pertamina have given similar guidance21. This results from governmental intervention to strengthen local economies by supplying resources to NOCs that provide local employment and opportunities.
As the NOCs develop their expertise and technology, they have grown less dependent on the IOCs, especially in their local markets where they are keen to invest and provide energy stability. Countries like Thailand and Indonesia have decided to hand the ownership of large PSCs like Bongkot, Erawan and Rokan to local NOCs from IOC operatorship22. NOCs have also been aggressively acquiring assets held by IOCs and large independent companies in the region to increase their reserves as evidenced by PTTEP’s $2 billion acquisition of Murphy Oil’s assets in offshore Malaysia23.
The recent exits have provided opportunity for local independents to snap up assets. These regional firms have significantly increased their participation in acquisitions within the region. PT Medco’s 2019 acquisition of Ophir Energy had established the company as one of the leading independent companies in the region24. Other smaller independents are also expanding, with the Singapore based Jadestone Energy acquiring a 90% interest in the Lemang PSC from Mandala Energy25.
This trend is expected to persist in the future, as NOCs look to establish dominance while IOCs look to divest.
Table 2: NOC and Independents M&A in the region
Disputes with local governments
In the last few years, there have been several cases where divergences with local governments about project development have resulted in the divestment of IOCs. In the planning stage of the project, the government will try to protect the region’s interest by ensuring the project’s development creates jobs and develops local infrastructure. In some cases, the most economic development plan does not maximise utility for the local community.
In the Masela Block in Offshore Indonesia, several differences have threatened the future of the project. The initial proposed plan was to develop a floating LNG plant using Shell’s technology and expertise. This was rejected by the government which insisted on using an onshore LNG terminal that would provide more local employment but would be more expensive and time consuming26. According to a report from S&P Global Platts, as a result of the ongoing dispute, Shell is trying to divest its interest in the block and is in the process of sourcing for interested buyers26.
A similar situation has unfolded in the Greater Sunrise field in offshore Timor-Leste. This project has seen delays due to a border dispute between the Australian and the Timor governments. Although settled in a treaty in 2019, the terms of the treaty allowed the Timor government to pursue its vision for an onshore LNG plant on the Timorese southern coast, rather than being processed in Darwin as initially planned27. This change may have prompted ConocoPhillips and Shell to divest their stakes in the project28.
The future of IOCs Involvement in the Asia Pacific
Despite the ongoing headwinds, not all IOCs are pulling out entirely. Several IOCs continue to expand their gas portfolios in Australia and Papua New Guinea, hoping to take advantage of the rising demand for LNG in the region.
Even in the challenging economic climate, Shell decided to take a positive FID on Arrow Energy’s Surat Gas Project in Queensland, Australia29. Shell has pledged to continue to invest in Australia, insisting that the area remains core to its long term plans30, and recently restarted activity at the troubled Prelude FLNG31. ExxonMobil has led the development of the $19 billion PLNG project in Papua New Guinea32, and continue to invest in the downstream, investing in a multibillion-dollar expansion of its refining and petrochemical complex in Singapore33.
Looking to the future, there is expectation for the current trend of IOC divestment in the region to continue as IOCs continue to realign their portfolios to fit with new strategic priorities, which are based from the macro-economic and social challenges. However, Asian NOCs and independent companies will be well positioned to continue to fill any gap that the IOCs might leave in Asia.
1 Asia and Pacific Regional Economic outlook: (2019, October). Retrieved from International Monetary Fund: https://www.imf.org/en/Publications/REO/APAC/Issues/2019/10/03/areo1023
2 Economic Outlook for Southeast Asia, China and India: (2019, December 11). Retrieved from OECD Development Centre: https://www.oecd.org/fr/dev/economic-outlook-for-southeast-asia-china-and-india-23101113.htm
3 ASIA 2050 Realizing the Asian Century: Retrieved from ADB: https://www.adb.org/sites/default/files/publication/28608/asia2050-executive-summary.pdf
4 ASEAN Growth Projections: Retrieved from US-ASEAN Business Council: https://www.usasean.org/why-asean/growth#:~:text=With%20a%20projected%20annual%20growth,India%2C%20and%20the%20United%20States.
5 Statistical Review of World Energy: Retrieved from BP: https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html
6 Exxon aims to sell $25 billion of assets to focus on mega-projects: Retrieved from Reuters: https://www.reuters.com/article/us-exxon-mobil-m-a-exclusive/exclusive-exxon-aims-to-sell-25-billion-of-assets-to-focus-on-mega-projects-sources-idUSKBN1XV1Q9
7 Can the right fiscal terms revive Asia-Pacific’s upstream sector?: Retrieved from Wood Mackenzie: https://www.woodmac.com/news/can-the-right-fiscal-terms-revive-asia-pacifics-upstream-sector/
8 Oil price meltdown puts Asia’s upstream projects in jeopardy: Retrieved from S&P Global: https://www.spglobal.com/platts/en/market-insights/latest-news/oil/031920-oil-price-meltdown-puts-asias-upstream-projects-in-jeopardy
9 Oil and Gas Exploration Challenges in South East Asia: Retrieved from GeoEX PRO: https://www.geoexpro.com/articles/2020/06/oil-and-gas-exploration-challenges-in-south-east-asia
10 The Coming Decommissioning Wave in Southeast Asia: Retrieved from Akin Gump: https://www.akingump.com/en/experience/industries/energy/speaking-energy/the-coming-decommissioning-wave-in-southeast-asia-what-to-expect-and-the-relevance-of-experiences-in-the-north-sea-and-us-gulf-of-mexico.html#_ftnref1
11 New horizons: Strategic choices for upstream oil and gas companies in a volatile oil price environment: Retrieved from Deloitte: https://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/new-horizons-upstream-oil-gas-companies.pdf
12 Majors Seeking to Streamline Portfolios through oil, Natural Gas Asset Sales Amid Covid-19 Impacts, Rystad Says: Retrieved from National Gas Intel: https://www.naturalgasintel.com/majors-seeking-to-streamline-portfolios-through-oil-natural-gas-asset-sales-amid-covid-19-impacts-rystad-says/
13 ExxonMobil Eyes $25-Billion Divestment Plan by 2025: Retrieved from Yahoo Finance: https://sg.finance.yahoo.com/news/exxonmobil-xom-eyes-25-billion-144402510.html
14 2020 Investor Information: Retrieved from ExxonMobil: https://corporate.exxonmobil.com/-/media/Global/Files/investor-relations/Investor-presentation.pdf
15 Royal Dutch Shell Second Quarter Results 2020: Retrieved from Royal Dutch Shell: https://www.shell.com/investors/financial-reporting/quarterly-results/2020/q2-2020/_jcr_content/par/toptasks_copy.stream/1596121949128/e8f9223452afbba86e7be982a94c8c99f7cf6b0d/q2-2020-results-webcast-presentation-transcript.pdf
16 Net Zero: European Integrated majors outpace US E&P : Retrieved from S&P Global: https://www.spglobal.com/platts/en/market-insights/latest-news/natural-gas/072720-net-zero-european-integrated-majors-outpace-us-eampps-midstream-on-climate-goals#_ga=2.75490967.408497173.1600879236-1919531113.1599211567
17 Oil Majors raise $32bn of debt to weather crisis : Retrieved from Financial Times: https://www.ft.com/content/c4121d80-0815-4d7d-b43f-582f55ad2892
18 National oil companies reshape the playing field : Retrieved from Bain & Company: https://media.bain.com/Images/BAIN_BRIEF_National_oil_companies_reshape_the_playing_field.pdf
19 Petronas raises US$6bil from first US dollar bond market : Retrieved from New Straits Times: https://www.nst.com.my/business/2020/04/584557/petronas-raises-us6bil-first-us-dollar-bond-market
20 National oil companies to retain investment dominance: IEA’s Birol : Retrieved from Reuters: https://www.reuters.com/article/us-oil-iea-interview/national-oil-companies-to-retain-investment-dominance-ieas-birol-idUSKCN11K1R1
21For Asia’s NOCs its time to go big or stay home: Retrieved from Wood MacKenzie: https://www.woodmac.com/news/opinion/for-asias-nocs-its-time-to-go-big-or-stay-home/
22PTTEP wins Erawan, Bongkot petroleum blocks in the Gulf of Thailand: Retrieved from Reuters: https://de.reuters.com/article/thailand-energy-auction-idUSL3N1YI2BB
23Completion of acquisition of Murphy Oil Corporation’s Interests in Malaysia: Retrieved from PTTEP https://www.pttep.com/en/Investorrelations/Regulatorfilings/Setnotification/Completionofacquisitionofmurphyoilcorporationsinterestsinmalaysia.aspx
24MedcoEnergi Announces Completion of Acquisition of Ophir Energy plc: Retrieved from MedcoEnergi: https://www.medcoenergi.com/en/subpagelist/view/12/2941
25Acquisition of Operated 90% Interest in Lemang PSC: Retrieved from Jadestone Energy: https://www.jadestone-energy.com/acquisition-of-operated-90-interest-in-lemang-psc/
26 Shell in talks to exit Indonesia’s Masela block and LNG project : Retrieved from S&P Global: https://www.spglobal.com/platts/en/market-insights/latest-news/natural-gas/070620-shell-in-talks-to-exit-indonesias-masela-block-and-lng-project-regulator-says
27 The great game for Greater Sunrise : Retrieved from Petroleum Economist: https://www.petroleum-economist.com/articles/politics-economics/asia-pacific/2019/the-great-game-for-greater-sunrise
28 Shell to sell stake in Greater Sunrise to East Timor for $300m : Retrieved from Offshore Technology: https://www.offshore-technology.com/news/shell-to-sell-stake-in-greater-sunrise-fields-to-east-timor-for-300m/
29 Shell invests in Arrow Energy’s Surat Gas Project : Retrieved from Royal Dutch Shell: https://www.shell.com/media/news-and-media-releases/2020/shell-invests-in-arrow-energy-surat-gas-project.html
30 Shell focused on turning around troubled Australian Assets : Retrieved from Investing.com: https://www.investing.com/news/commodities-news/shell-focused-on-turning-around-troubled-australian-operations-2295541
31 Shell begins restart activity at Prelude FLNG : Retrieved from Argus: https://www.argusmedia.com/en/news/2138588-shell-begins-restart-activity-at-prelude-flng
32 About PNG LNG : Retrieved from PNG LNG: https://pnglng.com/About
33 ExxonMobil Investment builds on presence in Singapore: Retrieved from Straits Times: https://www.straitstimes.com/business/companies-markets/exxonmobil-investment-builds-on-presence-in-spore