Special Report

Renewed Interest in APAC E&P – Are the tides turning for Upstream investment in the region?

8 June 2022 | Emma Shewell, Portfolio Manager, APAC

With sizeable under-explored reserves, and many energy economies poised for rapid growth in response to demand, the E&P industry in the Asia Pacific region has for several years been left frustrated at the lack of international interest in Upstream investment. As IOCs withdraw their support and resources, and traditional sources of project funding prove difficult to harness, the natural resource potential in Asia risks being under-utilised and governments face a potential domestic supply crisis.

The current Ukraine crisis and its associated impact on global energy markets shine a spotlight on this reality, as governments in Asia scramble to decrease dependence on increasingly expensive LNG imports. As is the case with European countries, governments in the APAC region are looking to enhance domestic production both to take advantage of high oil prices and to ensure domestic supply in the face of global competition for scarce energy resources.

Given the current reality of energy markets, there have been several interesting moves by IOCs both in terms of activity in licensing rounds, and in terms of sale of producing assets, that leads one to believe the tides may be turning for involvement in APAC Upstream activity. Could this be the push that international actors needed to remain committed to the region? Or will this be a short-term solution to an immediate crisis that will fall away as soon as European supply chains stabilise?

In terms of licensing rounds there is much opportunity still available in Asia, which until recently seemed to be gaining little traction from international stakeholders. Submissions for the Malaysia Bid Round of 2022 have been delayed from 30th of June to 15th of July reportedly due to lack of interest. With less than 10% of the nation’s total well count having been drilled offshore, there still remains much potential in Malaysia for Upstream development (1).

Malaysia's Total Well Count has been drilled offshore

Petajoules of gas extracted in Australia in the next 5 years

India is 85% dependent on imports to meet oil needs

On the 7th of April 2022 Thailand announced the opening of its 24th Petroleum Bidding Round, the first offshore acreage being offered since 2007 (2). This new round also includes new PSC terms, key features of which include a cost recovery mechanism of up to 50% of gross annual petroleum production, and after-tax profit split of up to 50% for the contractor. At the APAC Assembly this year, panellists speaking on regional M&A trends discussed that given current market dynamics it is likely capital will only be deployed against opportunities which can be brought to market and monetised in a fairly short time frame. It seems Thai regulators have taken this into account by offering acreage close to existing producing fields with well-known geology and readily available infrastructure.

In India, awards recently announced from the Open Acreage Licensing Policy (OALP) Bid Round-VI which closed on 6 October 2021, saw state-owned Oil and Natural Gas Corporation winning eighteen of the twenty-one areas on offer. Two of the remaining were awarded to Oil India Ltd, and one to Sun Petrochemicals Pvt Ltd (3). As the only three bidders for Bid Round-VI there is a clear lack of interest from international stakeholders, which has extended into OALP-VII with only four bidders, all of which are domestic companies and three of which are state-owned. Without commitments from international companies, state-owned producers are stepping in to attempt to boost domestic production for the country which is 85% dependent on imports to meet oil needs, with an oil import bill of approx. USD 119 billion.

However, recently awarded licenses in Indonesia, Timor-Leste and Malaysia show that there may be renewed interest from international stakeholders in retaining a presence on the continent. Following the Second Round of Oil and Gas Work Areas Bid of 2021, the government of Indonesia awarded BP with two blocks, signing a 30-year PSC contract with the IOC on the 18th of March 2022 (4).

In the recently closed Timor-Leste Second Licensing Round, among the seven bidding companies was Eni, which was awarded a license for Block P in April 2022 (5). Finally, on 23 March 2022 Shell subsidiaries signed 3 PSCs with Petronas for oil and gas exploration offshore Sabah and Sarawak. These were awarded in the Malaysia Bid Round 2021 and are cited to form part of Shell’s efforts to reduce dependency on Russian pipeline gas (6).

The fact that IOCs which for many years have been slowly divesting their assets in the Asian Upstream industry are now signing long-term contracts for exploration and production efforts may signify a turn of the tides in this region. This trend also seems to ring true when it comes to M&A of producing assets, an example which is particularly interesting in the case of Shell’s activities in Malaysia.

This time last year Reuters had reported Shell would launch the sale of its stake in non-operated oil and gas fields offshore Malaysia. The reason cited being “part of Shell's strategy to focus its oil and gas production in nine hubs as it gradually reduces output and grows investments in low-carbon energy in order to reduce greenhouse gas emissions” (7). No further information has been publicised regarding this sale suggesting it has been stalled, which coupled with the signing of three new PSCs leads one to believe that the Ukraine crisis has kept Shell committed to its Malaysian E&P operations.

The fact that IOCs, which for many years have been slowly divesting their assets in the Asian Upstream industry, are now signing long-term contracts for exploration and production efforts, may signify a turn of the tides in this region.

ExxonMobil is another example of this, in both its Malaysia portfolio, Ca Voi Xanh project in Vietnam and Kipper field offshore Australia. This time last year, WoodMac included ExxonMobil’s Malaysia portfolio in its expected pending transactions in the APAC region. In 2019, Bloomberg reported the IOC was looking to sell its oil-producing assets in Malaysia, followed by reports in 2020 that EnQuest and Hibiscus Petroleum had been short-listed as bidders for the assets (8). Although this was last reported on before the Ukraine crisis hit, the fact remains that ExxonMobil has yet to proceed with the sale of these assets and continues in its position as operator, despite fairly long-held expectations it would exit the country.

Similarly, regarding ExxonMobil’s Ca Voi Xanh project, WoodMac predicted in June 2021 that it would also be put up for sale, however this intention has not yet been publicly disclosed and the company is in fact continuing progress on its final development plan for the project. A final investment decision has not yet been made, but ExxonMobil has asserted its commitment to the final development plan and expects Ca Voi Xanh will help Vietnam to reduce reliance on imported LNG (9).

Finally, WoodMac also predicted ExxonMobil and its project partner BHP would offload its position in the Bass Strait and Kipper fields offshore Australia. However, in March 2022 the partners announced a final investment decision to increase output from the Kipper field. This is expected to help address the current gas shortage in the Australian domestic market and will see the partners investing approx. USD $291 million to extract an additional 200 petajoules of gas over the next five years (10). All of these examples point to a renewed interest in the upstream opportunities available in the APAC region and suggest the impending energy crisis may push investments back into the regional market.

Whether this activity will prove to support the local populations of countries in the region is another question, as a global shortage of gas may mean high-value resources will be diverted to less price-sensitive markets. However, it does appear to be clear that the rapid divestment in the region of the past five to ten years may be slowing down and potentially even reversing. As one speaker at the 2022 APAC Assembly suggested, with high oil prices and supply shortages, companies may choose to hold on to producing assets leading to less M&A activity, but potentially more licensing interest than seen in recent years.

Whatever the future may hold, we can say with certainty that the APAC Upstream industry is not yet reaching its sunset, and may prove key to meeting regional and global energy demands through the short to medium term.