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Middle East raises stakes in Southeast Asia oil market as US moves in

Highlights

Middle East accounts for at least half of ASEAN's oil imports

10-member ASEAN oil import bill reached $74 bil in 2018

Indonesia's Pertamina aims to triple US crude imports

Dubai — Middle East oil producers are investing in more Southeast Asia energy projects to keep their market share as US crude exports grow in a region that is equivalent to India's $3 trillion economy.

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The most immediate project to come to fruition is Malaysia's Pengerang Refining and Petrochemical, or PREfChem, a joint venture between Saudi Aramco and Petronas in the Johor province adjacent to Singapore. Abu Dhabi National Oil Co., the UAE's biggest oil producer, also signed an agreement with Indonesia's Pertamina last year to explore opportunities. Potential investments between the two countries are estimated at $10 billion, including the upgrade of Balikpapan refinery and LPG storage.

US crude exports are showing up in unusual places as the country takes advantage of its shale resources. The US became Australia's top crude supplier for the first time in November, according to government data. Last year, Indonesia's state-run Pertamina bought its first cargo of US crude oil and plans to triple purchases this year, officials have said. The Middle East currently accounts for at least half of southeast Asia's oil imports.

"It (US crude) gives Asian buyers more options and leverage," Alexander Yap, a senior analyst at S&P Global Platts Analytics, said. "They historically were locked in with the Middle East, now there are more options, which is a rationale for the Middle East to make these investments to secure market share."

ASEAN growth

The GDP of the 10-member Association of Southeast Asian Nations (ASEAN) grew 5.2% in 2018, reaching $3 trillion, according to its statistics. These nations spent $74.4 billion in 2018 on their oil imports, with Saudi Arabia and the UAE holding first and second place respectively, and accounting for nearly half of oil imports by value, according to its statistics. Kuwait, which has a refinery in Vietnam, was fourth, and Qatar took fifth place.

Oil product demand in southeast Asia is forecast to grow by over 12% during the next 5 years, the second highest growth rate in the world after sub-Saharan Africa. That compares with oil product demand growth of just over 10% in China in the next 5 years, according to Wood Mackenzie estimates.

"Most of these projects are not only supplying the domestic market, but there is also a degree of exports for some of these products," said Alan Gelder, vice president of refining, chemical and oil markets at Wood Mackenzie. "You have the opportunity for taking some of these products and putting them within their own trading organizations."

Sour crude

The refineries that Gulf states are investing in are geared toward the Middle East's medium sour crude versus US light sweet crude, which should allow Gulf countries to defend their market share.

The PREfChem Aramco project, set to start in the H2 of 2020, includes a 300,000 b/d refinery and 3 million t/year of petrochemical production. Aramco will supply 150,000 b/d, with an option for an additional 60,000 b/d and offtake rights for 50% of production.

Aramco is also looking at Indonesia, and in 2016 signed an agreement with Pertamina to own, upgrade and operate the Cilacap Refinery in central Java.

Abu Dhabi's Mubadala Investment Co., which manages assets of some $230 billion, is also mulling an investment with Indonesia's PT Chandra Asri Petrochemical in a $6 billion project.

Meanwhile, Gulf states political ties with ASEAN members, such as Indonesia, the world's most populous Muslim country, are also helping them expand.

"Within ASEAN, you have some of the most vibrant and fast growing economies in the world," said Giorgio Cafiero, the CEO of Gulf State Analytics. "Some of them are Muslim majority countries where countries like Saudi Arabia have maintained religious and cultural influence for many years."