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Opportunities In Asia’s O&G Sector Amid A Weak Oil Price Environment

Umang ParikhSenior Oil & Gas Analyst

June 2015

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Key Themes

Bright Spots In Asia’s E&P Amid Low Oil Prices

Positive Consumption Story Will Drive Energy Demand

Transportation Sector Growth Positive For Gasoline Trade

LNG Trade Will Open New Opportunities

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Oil Prices: Short-Term Weakness Ahead

We expect renewed weakness in prices over the course of H215 as ample supply interacts with stable demand.

• Supply: OPEC remains committed to its output target of 30mn bbl/day amid a well-supplied global market.

• Iran wildcard: A breakthrough in Iranian nuclear sanctions will bring additional crude supplies into the market — Q116 at the earliest.

• Demand: Global demand will remain stable over the next six months, supported by China’s stockpiling activities.

Jan-

15Ja

n-15

Jan-

15Ja

n-15

Jan-

15Ja

n-15

Feb-

15Fe

b-15

Feb-

15Fe

b-15

Feb-

15Fe

b-15

Mar

-15

Mar

-15

Mar

-15

Mar

-15

Mar

-15

Mar

-15

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15Ap

r-15

Apr-

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May

-15

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-15

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-15

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-15

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-15

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-15

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n-15

40

60

80

Weekly Front-Month Brent (USD/bbl)

Source: Bloomberg, BMI

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Oil Prices: Sub-$100/bbl Ahead

Subdued long-term outlook: Prices to trade below USD75/bbl through to 2019.

• Shale oil will become the new global swing production as US producers improve efficiency to tide over period of lower oil prices.

• Producers under fiscal pressure will continue to pump more oil.

• Production growth will exceed consumption increase up to 2019.

• Output growth to be driven by countries in the Middle East, Atlantic Margin and the US Gulf of Mexico.

2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f20

40

60

80

100

120

Brent Price ForecastBrent, USD/bbl

2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f80

82

84

86

88

90

92

94

96

Global Crude Oil Balance

World oil production, mnb/d World oil consumption, mnb/d

f = BMI forecast. Source: Bloomberg, National statistical agencies, EIA, BMI

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Risk: Long-Term Blow To Asia UpstreamLower oil prices will undercut short-term investment and long-term production potential in certain countries.

• Companies will see lower revenues, a more challenging borrowing environment and therefore cut capex.

• The exploration and development of deepwater and LNG will be affected.

• The countries most at risk are Vietnam, Australia and Thailand.

Chevr

on

Exxon

Mob

il

Shell

Tota

lBP

Stato

il

CNOOC*

Conoc

oPhi

llips

Petro

nas*

BG Gro

up*

Perta

min

a

PTTEP (5.0)

5.0

15.0

25.0

35.0

45.0

2014

2015 target

Changes In Capex (USDbn)

2011

2012

2013

2014

e

2015

f

2016

f

2017

f

2018

f

2019

f

2020

f

2021

f

2022

f

2023

f

2024

f

0

200

400

600

800

1,000

1,200

1,400

Crude Oil & Liquids Production ('000b/d)

Vietnam Australia Thailand

e/f = BMI estimate/forecast. Source: *Company data, National statistical agencies, EIA, BMI

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Asia Upstream Bright SpotsThere will still be bright spots, especially in China’s tight gas production and certain South East Asian producers.

• More sophisticated techniques will allow China to commercialise its vast unconventional sources.

• Improvement in regulatory environment will benefit Indonesia’s E&P.

• Upside to oil prices will reverse Malaysia’s crude oil production decline.

• Australia and Papua New Guinea will see rising natural gas production over the coming years as projects from previous capex cycle come online.

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2012

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2014

2015

f

2016

f

2017

f

2018

f

2019

f

2020

f

2021

f

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f

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2024

f

0.0

50.0

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250.0

0.0

2.0

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China - Natural Gas Production, bcm

China Natural Gas Production (LHS) % chg y-o-y (RHS)

2011

2012

2013

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e

2015

f

2016

f

2017

f

2018

f

2019

f

2020

f

2021

f

2022

f

2023

f

2024

f

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

0.010.020.030.040.050.060.070.080.090.0

Malaysia & Indonesia – Crude Oil & Natural Gas Production

Malaysia Crude Oil & Liquids Production, '000b/d (LHS)Indonesia Gas Production, bcm (RHS)

e/f = BMI estimate/forecast. Source: National statistical agencies, EIA, BMI

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Focus On Cost EfficiencyRenewed focus on brownfield projects with lower cost and greater efficiency.

• Asia has one of the highest production costs in the world.

• Companies will focus on developing competitive brownfield projects and avoid exploration risk where possible.

• Renewed focus on innovation and R&D, Petronas says it will focus investment in enhanced oil recovery (EOR) techniques to increase output.

Africa and Middle East

Canada Asia Europe South and Central America

US0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

Production Costs As A Percentage Of Revenues

2012 2013 2013 Global AverageThis data takes the ratio of production costs to revenues in a particular region of the 75 largest O&G companies during the year. Production costs of these companies include production taxes, transportation cost and production-related general and administrative expenses. Source: EY Global oil and gas reserves study, BMI

Sources: EY Global oil and gas reserves study, BMI

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Opportunities: A Consumption StoryWe see greater opportunities in energy

consumption, rather than exploration and production (E&P).

• Rising urbanisation rates in emerging Asia from 55% to 63% over the coming decade. Lower energy subsidies will increase infrastructure spending.

• Energy-intensive manufacturing sector will average 10.0% growth annually over the next decade.

• Soaring car ownership will create upward pressure on energy consumption.

• Slight shift in opportunities away from China towards South and South East Asia.

2014 2015f 2016f 2017f 2018f 2019f

China 6.9 5.7 5.9 6.2 5.3 5.4

India** 2.5 5.9 6.1 6.0 5.9 5.7

Indonesia -1.8 -6.6 9.7 9.1 8.5 7.8

Philippines 29.5 13.2 8.2 7.8 7.4 7.0

Table: New Vehicle Sales, %

Car Ownership To Soar*

Aust

ralia

Japa

n

Mal

aysia

Taiw

an

Thai

land

Chin

a

Indo

nesia

Viet

nam

Indi

a

Phili

ppin

es

0

100

200

300

400

500

600

Car Density (Per 1,000)

3.2bn People

f = BMI forecast, *Includes used cars. **Refers to Fiscal Year (April-March). Source: National automotive associations, BMI

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Opportunities: Gasoline Trade

Strong growth in transportation sector will provide another opportunity of increased gasoline trade in the region.

• The build-up of refining capacity in emerging markets (EMs) is focused on diesel fuels.

• However, rising car sales will drive regional gasoline demand into deficit and open the door for increased trade.

• Developed markets facing demand stagnation could look to export surplus gasoline production to EMs.

e/f = BMI estimate/forecast. Sources: National statistical agencies, EIA, BMI

2012

2013

2014

e

2015

f

2016

f

2017

f

2018

f

2019

f

2020

f

2021

f

2022

f

2023

f

2024

f

0

5,000

10,000

15,000

20,000

25,000

Asia Refined Fuels Production, '000 b/d

Developed Economies Emerging Economies

2012

2013

2014

2015

f

2016

f

2017

f

2018

f

2019

f

2020

f

2021

f

2022

f

2023

f

2024

f

-2000.0

-1500.0

-1000.0

-500.0

0.0

500.0

Gasoline Supply And Demand Gap, ‘000 b/d

Indonesia India China

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Strong natural gas demand and a lack of regional pipelines will encourage greater LNG trade over the decade.

• Power sectors of countries to switch from other energy sources to gas to reduce pollution.

• Lack of cross-border pipelines will keep LNG dominant in regional gas trade over the next decade.

• LNG demand growth in South and South East Asia from 2018 will be supported by import capacity build-up.

• The fall in prices of oil-indexed LNG contracts will make long-term deals more viable.

Opportunities: LNG Demand

2012

2013

2014

e

2015

f

2016

f

2017

f

2018

f

2019

f

2020

f

2021

f

2022

f

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-50

0

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Net LNG Imports, bcm

Asia Europe Latin America

2015f 2016f 2017f 2018f 2019f0

20

40

60

80

100

120

South & South East Asia - LNG Import & Regasi-fication Capacity (bcm)

India Pakistan Singapore Thailand MalaysiaIndonesia Taiwan Philippines Vietnam

e/f = BMI estimate/forecast. Sources: National statistical agencies, EIA, BMI

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Shifting LNG Export LandscapeRegional LNG demand will be supported by exports from Australia and Papua New Guinea (PNG).

• Investments made during 2010-2014 will see Australia and PNG become significant regional LNG exporters.

• Australia will overtake Malaysia (the current export leader) to become the regional LNG export juggernaut.

• Australian exports will reach countries such as Japan, China, India, South Korea and Taiwan.

• The abundance of LNG supplies will mean that bargaining power still lies with the consumers.

2013

2014

e

2015

f

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f

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0.0

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Net LNG Exports, bcm

Papua New Guinea Malaysia Australia

Table: Net LNG Exports, bcm

  2014 2015f 2016f 2017f 2018f 2019f

Australia 16.3 26.3 44.0 59.7 63.9 64.7

Malaysia 30.1 28 27.2 27.9 26.9 27.1

PNG 4.6 9.0 9.0 9.0 9.0 10.9

f = BMI forecast. Source: National statistical agencies, EIA, BMI

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Summary

Low Oil Prices Will Shift E&P Focus In Asia

Transportation Sector Demand Will Drive Regional Gasoline Trade

Australia and PNG LNG Exports To Create Opportunities