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Navigating the murky waters of Southeast Asia’s offshore market

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Oilfield Technology,

OSEA2018 Conference speaker, Thom Payne, Director, Westwood Global Energy Group shares his insight on the timing of a substantial market recovery in Southeast Asia and the mid-long term outlook for regional E&P activity amid macroeconomic forces shaping higher oil prices.

It has taken three years since 2014’s fall in oil prices and protracted down cycle that saw the exit of oil majors from Southeast Asia and subsequent collapse of the value chain that left the oil & gas sector in disarray, for the region to finally begin seeing a notable uptick in new offshore project sanctioning.

Underpinned by unprecedented levels of consumption, the Brent barrel continues to trade at around US$70-75 and has prompted a swift recovery in the US shale industry. However, longer cycle markets such as offshore haven’t quite felt the impact of higher commodity prices, with jack-up and deepwater floating rig counts remaining in the doldrums with global utilisation currently at 62% and 54% respectively.

In Asia, soaring demand for gas from China as part of the government’s mandate to curb pollution and healthy economic growth across the region, has seen a well-documented shift towards offshore gas production. Over the past 12 months, improved oil & gas industry sentiment combined with significant industry cost rationalisation has seen projects such as ONGC’s R-Cluster in India, Mubadala’s Pegaga in Malaysia and Cooper’s Sole field in Australia get the green light.

In Southeast Asia specifically, numerous world-class projects are in the pipeline – these include IDD and Abadi in Indonesia, Kasawari in Malaysia and Block B in Vietnam. Geographically, the Rakhine basin in North Myanmar has been something of a bright spot for new frontiers, and it has seen significant investment in both exploratory drilling and onshore infrastructure.

In total, the region has 47 crude and natural gas projects expected to start operations in six countries from 2018 to 2025, with key projects expected to contribute about 197 000 bpd of global crude production and about 8219 million ft3/d of global gas production.

Bearing that in mind, we have to remember that as with many gas projects across Southeast Asia, the negotiation of complex commercial terms between governments and foreign E&Ps may be a stumbling block to future activity. Also, despite local E&Ps budgeting for increased levels of capital spending in the region as recent cost efficiency measures improved operating cash flows, and major service companies such as Schlumberger expecting double-digit revenue growth mainly from offshore and exploration related activities across international markets in 2019, we don’t expect significant improvement in the near term. This is because local long-cycle offshore developments will take time to translate into substantial volumes of work for the supply chain. Additionally, the offshore supply chain is not just reliant on E&Ps to stimulate demand but also the banking and investment sector to provide and restructure debt to finance expansion. A steady, robust rate of growth is needed to thaw the frosty, negative mindset the financial community currently holds on offshore oil & gas.

It is also critical for regional players to fully grasp the global geopolitical and macroeconomic environment currently shaping higher oil prices to effectively navigate the local landscape. Outside Southeast Asia, it has been something of a rollercoaster over the past nine months with various push and pull factors. OPEC may begin to taper the 1.8 million boe/d of current production cuts which could inflate supply, while at the same time, the US administration is looking to reintroduce sanctions on Iran, threatening access to 2.1 million boe/d of crude oil exports.

Venezuela has also been a geopolitical wildcard where the fallout from the ongoing political crisis has seen crude production fall from an average of 2 million boe/d in 2017 to a reported 1.3 million boe/d in June 2018. This fall has seen the OPEC member fail in meeting contractual export obligations to key demand centres such as India, which is undoubtedly playing a significant role in the current oil price rally.

With numerous “false dawns” over the past three to four years, what the offshore market needs is a period of stability. If oil prices remain above US$65/bbl over the remainder of 2018, it may start to embolden the industry and trigger increased levels of the investment required to move the needle and improve the fortunes of offshore contractors.

2018 is best characterised as a year of cautious optimism. Any offshore business that has survived the past 48 months has certainly been doing many things right. However, as the industry heats up over the next 12 - 24 months, it will be tempting to adopt more aggressive commercial strategies to improve revenues and earnings. Despite this, we believe that successful businesses in the coming year will remain focused on utilisation in their core areas of competence.

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