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Analysts say worst may be over for Asia's upstream sector

Myanmar seen as a bright spot for investors in 2017

Companies, governments moving ahead on selective projects

Singapore —
After a two-year struggle to stay afloat, upstream activity in Asia's oil sector is finally starting to show signs of revival, as a steady climb in crude oil prices is making the market believe that the sector in the region might have reached an inflection point.

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Even if investors may not rush immediately to pour in millions of dollars into exploration activity, leading players in the region are saying that companies are now beginning to at least test the economic viability of exploration and development projects, and some are even ready to seal deals.

Shell's late-January agreement to sell its stake of more than 22% in the Bongkot field in Thailand to state-owned Kuwait Foreign Petroleum Exploration Co. has sent a strong signal that the market is starting to become conducive for signing deals -- companies are more willing to buy assets.

"The worst is over for the E&P industry in Asia," said Gordon Kwan, head of oil and gas research at Nomura. "If oil prices continue to march toward $60/barrel, we should see a gradual increase in E&P spending in Asia, with focus on China offshore and development of previous discoveries in Vietnam, Philippines and Malaysia."



Shell's $900 million agreement with Kufpec covers sale of subsidiaries -- Shell Integrated Gas Thailand and Thai Energy Co. -- which together hold a 22.222% equity stake in the Bongkot field. This is along with the adjoining offshore acreage for blocks 15, 16 and 17, as well as block G12/48.

The acquisition of the Bongkot assets provides Kufpec with 68 million barrels of oil equivalent in proved and probable reserves, and approximately 39,000 boe/d of production from 2016.

Wood Mackenzie said in a recent report that the Asia-Pacific's upstream oil sector holds upto $40 billion worth of opportunities in 2017 as oil majors continue to divest mature and mid-life assets in the region.

"The decline in upstream activity we have seen since the dramatic fall in oil prices seems to have bottomed out in Southeast Asia," said Richard Lorentz, director of business development at upstream oil and gas company KrisEnergy. "Companies in the region are now beginning to test the economic viability of exploration and development projects using a much lower commodity price than prior to the drop of 2014."


TREADING CAUTIOUSLY


Activity in the upstream sector may not have surged yet, but the region is certainly seeing pockets where both government and private companies are willing to take risk and boost spending.

In January, Indonesia started the process of handing out upstream contracts using the new gross split scheme, with the Offshore North West Java block awarded to state-owned Pertamina to develop over 20 years -- the first to be awarded under this system. The ONWJ block contains 309.8 million barrels of crude and 1.114 Bcf of gas.

The government has also appointed Pertamina to develop eight other blocks that are expiring in 2017-2018. The eight blocks include: Attaka, offshore east Kalimantan; South East Sumatra, offshore South Sumatra; Tengah, offshore East Kalimantan; East Kalimantan block in East Kalimantan; North Sumatra Offshore, offshore North Sumatra; Sanga-Sanga block, onshore East Kalimantan; Tuban, onshore East Java; and Ogan Komering in South Sumatra.

Thailand's PTTEP aims to focus on accelerating exploration projects in Thailand and Southeast Asia, while actively seeking merger and acquisition opportunities to enhance oil reserves and production. It plans to allocate 64% of its estimated capital expenditure in 2017 to Thailand, and focus primarily on maintaining production levels at existing projects.

Another 24% will be allocated to projects in neighboring countries, particularly those in production or exploration stage in Myanmar. The remainder 12% will be for projects in Australia, Africa, and North and South America, including the PTTEP Australasia Project and the Mozambique Rovuma Offshore Area 1 Project.

"Between 2010 and 2016, national oil companies were the main buyers in Asia-Pacific, acquiring over 2 million boe of commercial reserves. This year we expect to see more buying activity from local independents and private equity-backed players," said Prasanth Kakaraparthi, senior upstream research analyst at Wood Mackenzie.

"Domestic utilities and refiners, Japanese players and Middle-Eastern NOCs looking for growth opportunities are also possible acquirers," he added.

In China, Chevron is hoping to be able to boost production from its Chuandongbei natural gas project, which would eventually contribute to the company's overall increase in oil and gas production by 4%-9% in 2017.

"In China, to arrest the decline in crude production and for any E&P activity to be sustainable, we will need to see prices rising beyond $65/barrel," said Tushar Bansal, director at Ivy Global Energy, an independent oil and gas research consultancy.

In Bangladesh, the government has decided to award South Korean Posco Daewoo Corp. permission to carry out the first hydrocarbon exploration in deep-water block DS-12, after the cabinet committee on economic affairs February 8 approved the signing of a production sharing contract. Currently, no oil and gas exploration is being carried out in Bangladesh's deep-offshore blocks.

Wood Mackenzie added that Myanmar, which holds some of the last remaining frontier acreage in an otherwise mature region and accounts for the bulk of frontier exploration drilling, would be the brightest spot in Asia-Pacific in 2017.


HURDLES REMAIN


However, all these projects are expected to move slowly, as governments and companies keep a close eye on the oil price trend.

"The macro environment remains challenging, especially in the face of policy uncertainties from Donald Trump's administration and the impact on Asian trade and commodity prices. Oil companies are still very cost conscious," Kwan of Nomura added.

Some analysts were of the view that Asian countries might speed up work on some of the ongoing E&P projects but were still not keen to look for completely new projects within the region. They are instead looking for projects outside of Asia-Pacific region.

"Asian E&P activity is falling out of favor among international oil companies. They are diverting capital to resources elsewhere, for example, to the Middle East and the United States," said Virendra Chauhan, senior oil analyst at Energy Aspects.

"Outside of projects for which investments have already been made in Asia, such as the Malikai project in Malaysia, there are very few large projects which could deliver material growth," he added.

Malikai is Shell's second deep-water project in Malaysia and is located 100 km off Sabah. It comprises two main reservoirs, with a peak annual production of 60,000 b/d. The field is part of the Block G Production Sharing Contract awarded by Petronas in 1995. Shell, the operator, and ConocoPhillips each has a 35% interest in the development, while Petronas Carigali has 30%.

--Sambit Mohanty, sambit.mohanty@spglobal.com

--Edited by Arnab Banerjee, arnab.banerjee@spglobal.com