Positive outlook for oil market: how will it affect SEA in 2018 and beyond?

The oil and gas market in Southeast Asia (SEA) is beginning to look optimistic with increasing oil prices alongside a steady economic growth. Much credit on this upturn in the market is due to the supply restrictions led by a group of producers around the Organisation of the Petroleum Exporting Countries (OPEC) and Russia.

Currently, the benchmark price of Dubai crude in SEA is averaged at US$60 per barrel, and projected to reach US$61 per barrel by 2019. This is a US$41 increase per barrel since 2017.

Overall, energy demand in the region is projected to swell by 60% between 2017 and 2040. Oil usage in the region will also expand to approximately 6.6 million barrels per day by 2040 from the current 4.7 million bpd. To satisfy this intensified demand, countries within SEA would not only need to substantially increase their oil and coal imports which may amount to US$300 billion by 2040, but step up on its projects with increasing energy dependency at the same time.

What are the projects to look out for in the region?

Across SEA, a grand total of 50 oil and gas fields would likely be approved for development during 2018-2020 and would require US$28 billion of capex from final investment decision (FID) to the first production. This is on top of the projects that would be carried out in the different countries within SEA as listed below.

Indonesia

Indonesia plans to overhaul its energy policy to attract investments worth US$200 billion over the next decade to reverse the decline in its crude oil production. The amendments to the energy policy, approved by President Joko Widodo, would allow for various financial incentives including tax-free import of drilling equipment and technology or even easier cost-recovery.

In light of this, The Energy and Mineral Resources Ministry plans to offer 40 conventional and three unconventional oil and gas blocks through a tender by early March 2018. This includes 32 blocks that failed to attract investors during 2015-2017 auctions. The winners of the upcoming tender would operate all of those blocks using the new gross-split mechanism, which requires investors to pay exploration and production costs instead of relying on the government’s reimbursement as seen under the former cost-recovery scheme.

While the development of a much-delayed Masela gas project may cost as much as US$16 billion, the East Natuna block with estimated reserves of 48 trillion cubic feet of gas may require a greater investment of US$30 billion to US$40 billion. PT Pertamina is spending billions of dollars to boost output at its oil and gas fields whilst expanding refining capacities in partnership with Russia’s Rosneft OAO and Saudi Arabian Oil Co. Indonesia’s crude output is likely to top 1 million barrels per day by 2019 from about 800,000 barrels currently through a revamp of explorations on existing fields and its “enhanced oil recovery program”.

Indonesia may in fact, need to import half of its annual fuel needs even after increasing its refining capacity by 500,000 barrels a day in the next seven years, according to BMI Research. The nation’s processing capacity may grow 2% by 2025 while consumption surges 31% in the same period, according to BMI.

Malaysia

Saudi Arabia is investing US$7 billion in an oil refinery in Malaysia, a project that would be headed by Malaysian oil company Petronas.

The Malaysian Government is aiming to achieve a US$17.04 billion investment target within the oil and gas sector. As such, they intend to invest in large scale projects including the Jambaran Tiung Biru project, the capacity expansion of the Jangkrik field in the Makassar Strait, the Tangguh Train III project in Papua's Bintuni Bay, and the preliminary front-end engineering design (pre-FEED) for the Masela block in Maluku's Arafuru Sea, which was expected to commence in January 2018.

Meanwhile, Fanshurullah Asa from BPH Migas, a Downstream Oil and Gas Regulatory Agency said the government would auction three gas pipeline projects: the 687-kilometer Natuna-West Kalimantan, the 1,800-kilometer West Kalimantan-Central Kalimantan and the 162-kilometer Central Kalimantan-South Kalimantan pipeline projects.

Thailand

PTT Exploration and Production Public Company Limited (PTTEP) currently has 16 projects in Thailand, majority of which are in the production phase. These projects are located in both the Gulf of Thailand and onshore.

Projects include the Bongkot Project which successfully increased condensate production to alleviate the impact of natural gas low nomination and is currently in the process of concession bidding preparation. The S1 Project has continuously drilled additional production wells with exploration drilling plan in 2018 in order to increase production levels of the project.

Apart from production projects, Ubon Field of the Contract 4 Project is in the process of negotiation with current partners on development preparation with its first oil production expected by 2022 at planned capacity of 25,000-30,000 BOED.

Myanmar

The oil and gas industry is an important and fast-growing one in Myanmar, contributing 23.6% of Myanmar’s total revenue. To support the growth, Singapore’s Surbana Jurong and Myanmar’s MOSB Ltd. have signed an agreement to design an Offshore Supply Base in Mon State, Myanmar.

Under this agreement, Surbana would be providing engineering and marine consultancy, environmental social impact assessment studies and project management to support MOSB in the development of this OSB.

Surbana will leverage on its global experience and sterling track record within the oil and gas sector to support MOSB’s vision of a fully integrated facility that will provide total logistics solutions to oil and gas customers, while improving the infrastructure in the region at the same time.

Singapore

Singapore's rig builders are poised to bag more deals for rig production in 2018, thanks to higher oil prices and reduced project costs as projected by DBS Equity Research. Higher oil prices will be a harbinger for contract flows, which is a company's leading indicator of earnings growth.

For example, Sembcorp Marine (Sembmarine) can bag over S$3 billion that potentially translates to firm orders over the next 12 months. SembMarine has also made significant progress in diversifying its exposure towards the exploration and production (E&P) value chain. It has won large turnkey contracts for offshore production facilities and stands to gain from a further expansion of its net order book, which last stood at S$4.85 billion at the end of the third quarter of 2017.

2018 to be the first year for new hires within oil and gas since 2014

Despite the significant workforce reduction in the industry throughout 2014 to 2016, this negative trend is about to take an optimistic turn. There is an increase of job-postings within the oil and gas market as market sentiments grow more positively. This trend is likely to grow if companies manage to clear existing debt from the downturn, restore dividends and invest into drilling programs. This is also with the assumption that crude prices remain high, which would catalyse more companies to release more roles for projects set in place for 2018 and beyond.

Diversity in hiring is also another growing trend within the oil and gas industry. Currently, women accounted for only 22% of the workforce within oil and gas, one of the smallest ratios among major industries, according to the BCG report.

While women account for about 30% of the workforce at global oil majors such as Exxon Mobil in the U.S. and BP in the U.K., the proportion sinks to below 10% at many large Asian refiners as reported by Bloomberg. As it becomes relatively difficult for companies to differentiate themselves within the oil industry, diversity grows to be a rising dependent factor for companies to remain competitive.

With positive market sentiments driving growth within SEA, and the rate of hiring set on a steady increase from 2018, contact Stuart Clark at [email protected] or follow us on our LinkedIn page if you would like to know more about the ongoing projects in the region or potential trends that would impact the oil and gas industry.