January 2020

What are the 3 main challenges that Asia’s Oil & Gas industry must overcome in 2020?

1. M&A: the ‘For Sale’ signs are still up
Never has there been so much on offer. The Supermajors continue to sell assets in region, the large and mid-caps are following suit and the NOCs seeking financial and technological support on ever-maturing asset all means that there will be no shortage of acquisition opportunities in 2020.
We assess the Majors alone to hold US$18 billion worth of non-core assets in Asia Pacific, providing plenty of potential deals in the pipeline. Divesting late-life assets, low-return pre-FID projects and positions with limited growth potential will be the order of the day. Emissions intensive assets will also But the pool of potential buyers has never been so shallow. For many upcoming or live opportunities, we can count the number of serious contenders on one hand. Regionally-focused players continue to be the biggest buyers, but some of the most ambitious are still digesting recent purchases.

2. A bumper year for APAC FIDs
We expect an uptick in FIDs this year after a slow 2019, providing a welcome boost in major project sanctions across Asia-Pacific. We expect US$35 billion of new development expenditure and 4.6 billion boe of resource to be sanctioned in 2020 – 2019 saw only US$5.5 billion and 1.2 billion boe of new projects getting the go ahead. But it’s not all plain sailing for new investment decisions in Asia. Regulatory delays, uncompetitive economics and political agendas have long hindered final project sanctions in Southeast Asia and this is likely to continue this year.

3. Upstream players wrestle with the energy transition
A heightened awareness of the energy transition across Asia-Pacific through 2019 sets the stage for action and recalibration in 2020. One of the key upstream signposts will be how the NOCs address emissions as to-date national energy needs have usually trumped environmental concerns when it comes to upstream development decisions – faster and cheaper has won out over tougher but greener. But this is changing and we expect more messaging from Asia's NOCs in 2020, as the global upstream industry plots a more sustainable future.

What are the fundamental factors in ensuring a successful acquisition?

Being on the right side of the oil price bet is obviously important, but in the absence of a crystal ball, there are others. Know the region/country, the assets and your value creation strategy. Be willing to pay more for the ‘right’ deals. While having operatorship tends to give a better return, this could be the time to align with those operators with real expertise and with attractive investment plans. Pre-production assets are often the most exciting and tick the box in terms of growth. But risk them accordingly. Ultimately, don’t let over-arching corporate goals erode value.

Will Asia’s Oil & Gas Sector be able to lure Private Equity away from other regions, for example the North Sea? How must Upstream O&G companies and governments adapt their strategies?

Regulatory challenges, tricky fiscal terms and increasingly dominant NOCs have deterred new entrants, particularly private equity. Will more compelling opportunities elsewhere suck up what limited capital there is for M&A? Perhaps, though not guaranteed. But there will be well-priced opportunities to grow in Asia and in particular look out for small players building their niche and late-life specialists expanding which could both drive PE interest.

With Upstream O&G companies facing ever increasing environmental pressure, where are their investments best spent? Do Gas & New Energies offer sufficient upside and sustainable returns?

All oil and gas companies have been working to transform their upstream portfolios in recent years. Key to this has been maximising what they already have, ie lowering costs and breakevens and producing more from within the portfolio. This has been done through laser-sharp capital discipline and efficiency and a greater focus on technology and digitalisation. The result has been falling corporate cashflow breakevens and rising returns from growth projects. Gas, particularly LNG, is critical to this and we are now in the greatest expansion of new LNG capacity ever seen as companies position for a low carbon future. To achieve this, a number of companies – but by no means all – are re-engineering portfolios for resilience, moving down the cost curve and building in climate risk strategies through relevant resource capture, disposals, minimising emissions and moving into low carbon investments. Returns in these areas may not necessarily be as attractive as their core upstream businesses, but this diversification is key to long-term growth and invisibility.

Which Asian market do you believe holds the most potential in 2020? Why?

Indonesia, though the jury is still out. 2019 was a positive year for industry given the stability provided by President Widodo’s re-election and the positive signals offered by the extension of ConocoPhillips' Corridor PSC and approval of the revised Plan of Development for the Abadi LNG project. But was 2019 a one-off, or is Indonesia going to make continued, concrete efforts to woo international O&G investors? I’m hopeful we will see further progress, as the country must compete for investment in an ever-competitive global E&P landscape. To achieve this, the right level of regulatory, legal and fiscal support will be critical in 2020.