Stepping on the gas

Steve Hamlen

April 1, 2017

While Southeast Asia has suffered during the downturn, a return to natural gas developments could drive sector activity over the next several years. Steve Hamlen sets out the details.

Shell’s Gumusut-Kakap platform operating off the coast of Sabah, Malaysia. Photos from Shell’s Flickr.

Southeast Asia’s upstream offshore oil and gas sector has been suffering in the low oil price environment and even though it seems that few final investment decisions (FIDs) will be made in the region this year, some developments outside of traditional powerhouses Indonesia and Malaysia are making good progress.

Indonesia and Malaysia hit hard

“In terms of South Asia, there are definitely some countries struggling with the current environment,” says Matt Cook, lead analyst for drilling and production forecast at consultants Wood Mackenzie. “Indonesia, in particular, has been hit hard because a lot of the fields there are very mature, requiring secondary and tertiary extraction methods. The country has really struggled with attracting new investment, even before the oil price crash, so it has been compounded because of that.”

“Regarding mature fields, Malaysia introduced an EOR [enhanced oil recovery] production sharing contract (PSC) that offered more favorable terms for those higher extraction costs for the lower volumes you would get out of such a field,” Cook adds. “This could be something that Indonesia might look to do in the future.”

Cook says that the future for Southeast Asia’s offshore sector is natural gas. And, indeed, upcoming projects such as Chevron’s IDD project and Eni’s Jangkrik in Indonesia, as well as the Petronas-operated Kasawari and Rotan floating LNG project offshore Malaysia, are all gas developments.

Gas takes precedence

“The reason behind this is a combination that East Asia and Southeast Asia are very gas and LNG hungry,” Cook says. “These gas fields historically have not been tapped into just because the market has not been there for them. Now, there certainly is the market. Japan is a huge importer of LNG, as is South Korea. These markets are on Southeast Asia’s doorstep.”

“In terms of oil, Indonesia and Malaysia both struggle with it. There have not been major oil discoveries in the region – and there will not be any major oil developments in the next five or six years, for example,” Cook says. “Projects like Chevron’s West Seno, in deepwater offshore East Kalimantan, Indonesia, were the last wave of oil developments offshore. The last few were Shell’s Malikai and Gumusut-Kakap [both off Sabah, Malaysia]. There is nothing of that sort of size coming up for oil in Indonesia or Malaysia – everything seems to be gas-focused.”

Myanmar exploration surge

Shell’s Malikai tension leg platform, offshore Sabah, Malaysia – the supermajor’s first outside of the Gulf of Mexico.

Weak interest in recent licensing rounds and budget cuts are pointing to a bleak year for exploration in Asia-Pacific – with Wood Mackenzie expecting around 50 wells to be drilled this year, which would be a decline of 70% from 2014 levels.

However, Myanmar looks to be emerging as a hot spot this year, amid the forecast drilling downturn. The country opened its doors to foreign investment some years ago and activity is now gathering pace.

Myanmar, which holds some of the last remaining frontier acreage in the mostly mature Southeast Asia plays, could experience increased exploration drilling.

“We expect several wildcat wells to be drilled as several blocks from the hugely successful 2013 bid round are matured through the exploration process. We also expect to see several companies farm down interest in exploration acreage where commitment wells are due to reduce risk and manage budgets,” said Wood Mackenzie’s APAC Upstream: Five themes to look for in 2017 report.

Myanmar is also set for its first deepwater gas development soon from Woodside’s Thalin field, discovered in 2016.

The Australian operator is looking to tieback Thalin to the Shwe field infrastructure. This fast-track development could be onstream by 2019.

“Woodside might have Thalin onstream within a couple of years from now, which – given that it is the first deepwater development in the country – is quite a bullish timeline,” Cook says.

Oil not gone just yet

While most developments in the region will indeed be gas projects in the coming years, Shell is looking to exploit an oil field offshore Brunei by a cross-border development with an existing facility off East Malaysia.

The Geronggong field is a proposed tieback to Shell’s Gumusut facilities across the border in Malaysian waters. The field is 100km offshore Brunei at a water depth of 1000m (3281ft), making it the deepest field off Brunei and the most remote.

These challenges made Shell (operator, 50%) and the Sultanate of Brunei (50%) consider two development options: a tieback to Gumusut, and a standalone floating production, storage and offloading (FPSO) concept.

Shell currently estimates that Geronggong could produce 25,000-42,000 bo/d. The field also holds some natural gas and condensate.

Shell started production from its deepwater Gumusut-Kakap project offshore Sabah, East Malaysia, in 2012. Once Geronggong was deemed commercial, Shell began favoring the tieback option because it is a cheaper solution and could fast-track development.

M&A potential

With many companies suffering during the downturn, many will be considered as prime candidates for mergers and acquisitions (M&As).

“Asia Pacific’s upstream sector holds up to US$40 billion worth of opportunities in 2017, as oil majors continue to divest mature and mid-life assets in the region,” according to a recent Wood Mackenzie report.

“BP, Chevron and other majors have divested tail-end assets within the region over recent years, but that trickle looks set to gain volume as larger assets are sold in 2017. Chevron and Shell hold the largest portfolio of legacy assets in the region, and in the latter half of last year signaled their intentions to sell assets in Myanmar, Bangladesh, Thailand, New Zealand and Malaysia, amongst others,” the report said.

Prasanth Kakaraparthi, senior upstream research analyst at Wood Mackenzie, says that between 2010-2016, national oil companies (NOCs) were the main buyers in Asia Pacific, acquiring over 2 MMboe of commercial reserves.

“This year we expect to see more buying activity from local independents and private equity-backed players,” he says. “Domestic utilities and refiners, Japanese players and Middle-Eastern NOCs looking for growth opportunities are also possible acquirers.”

Rystad: Indonesia, Vietnam to lead FIDs

Rystad Energy forecasts projects holding 512 MMboe of recoverable liquids and gas resources could potentially reach final investment decisions (FIDs) within Australia and Southeast Asia during 2017.

After 2016’s heavy gas binge (88%), 2017 sanctions are assessed to have a slight liquids flavor (58%). Indonesia and Vietnam are expected to lead these regions, accounting for almost 75% of the potential 2017 approvals. Most of the volumes fall within the offshore shelf (up to 125m water depth) segment, though Australia could see more onshore than offshore volumes sanctioned during 2017.

“This would be a significant drop from the 1835 MMboe sanctioned in these regions during 2016, though this trend is skewed by two gas megaprojects – BP’s Tangguh expansion in Bintuni Bay of West Papua, Indonesia, and PetroVietnam’s Block B-O Mon project offshore Vietnam,” says Readul Islam, senior analyst, Rystad Energy.

The two gas projects account for around 75% of the 2016 FIDs in volume terms. The Rystad Energy 2017 FID forecast is the result of balancing project operator/partner/industry expectations versus following recent project news flow to assess candidate projects’ chances of attaining 2017 FID.

Despite lower volumes expected to be sanctioned compared to 2016, the count of potential FIDs is higher in 2017. The greater diversity in project sizes could be a boon, particularly to smaller service players.

“Rystad Energy’s 2017 FID forecast shows that the Australia & Southeast Asia regions certainly haven’t gone into slumber following the price slump. The upside and downside risks to the FID forecast means all stakeholders will be eagerly following the development of 2017 approvals in these regions,” Islam says.