IHS Markit Upstream colleagues recently published our annual paper that bring forth our perspectives on the top issues facing the upstream sector. Colleagues in Asia Pacific wanted to take an opportunity to reflect on the themes covered in that paper, and put forward our perspectives and insights for this region.

Energy Transition in Asia Pacific

Companies within the Asia Pacific region are starting to take a more proactive stance towards Energy Transition, given a large set of countries within this region, have large energy import needs to deliver energy security. With Asia Pacific governments setting net zero mandates in 2020, there has been an immediate trickle-down effect on how companies within their sphere look to enact on those targets. Separately, even if all countries haven't set net-zero targets, the linkage between energy supply needs and energy transition are very compatible, which is therefore leading to a wide range of upstream companies in this region setting their own emission targets and new energy business lines. Another key differentiator, is that National Oil Companies contribution to government revenues in this region is relatively insignificant, when compared to Middle-Eastern NOCs. This important distinction allows them greater strategic autonomy to pursue new energy mandates, so as to achieve the broader goal of energy security.

Portfolio & Financial Resilience

Upstream companies that have a nascent government policy on energy transition, will put greater emphasis towards oil and gas in the near/medium term, even as that share declines in other parts of the world, notably in Europe. Therefore, non E&P players will do the heavy-lifting on low carbon activities, which will reduce the burden on upstream companies who already have challenging mandate on the domestic E&P front. However, for countries where the pivot towards low carbon has begun, E&P players (typically the NOC) will have to take the lead, but concerns will exist whenever in-country E&P investments declines. Declining investment is already a big issue within this region, as large GIOCs and independents have largely exited the region, thereby putting considerable burden on regional NOCs to undertake more exploration and development activity. Put simply, there simply isn't much financial flexibility to pursue numerous agendas at the same time.

On the portfolio front, we are seeing a gradual recovery in the E&P activities, with majority of the companies specializing and focusing spend on their core basins, but attracting capital into new areas is still very challenged. Exploration will continue to be concentrated on proven basin upside, with companies still targeting major plays, but also looking at under-explored plays. Near field exploration will continue to be prominent, with short cycle barrels incorporated in exploration strategies. Successes are starting to emerge (ENI - Large Ken Bau gas and condensate discovery in Vietnam; PTTEP - Successfully appraised the Lang Lebah field in Malaysia; PETRONAS - Oil discovery in the East Java Basin in Indonesia). In line with Energy Transition mandates, we are also seeing companies develop new projects with CCUS or CCS in mind. Australia has Santos looking to push FID for the Moomba CCS project, which is aimed to be a CO2 storage hub. In Malaysia, Petronas is looking at CCS for the Kasawari project, with the M1 field targeted as the storage site. Finally in Indonesia, Pertamina, Repsol and BP are looking to assess CCS and CO2 EOR for their gas projects in the country.

License to Operate and Sell Hydrocarbons

There is a growing consensus that future license to operate and sell hydrocarbons will be increasingly tied to emissions reduction. In Asia Pacific, countries are looking to plug gaps between emissions and their commitments, especially as a growing number are moving towards more significant net zero goals. Regulations on upstream emissions are expected to tighten in many countries, but will be dependent on the country type (Diversified economies; Net importers). Diversified economies in the near term will have greater flexibility to follow through on regulations, as a number of different sectors contribute to their overall economy. On the other hand, while net importer companies in this region will want to have similar regulation commitments, it will be tempered by the need to secure reliable low cost energy sources, which are still largely delivered by hydrocarbons. However, accelerators to tightening upstream regulations in net importer countries, are not entirely in their hands. It will also be determined by stakeholders, such as key countries who buy hydrocarbons, who want to secure lower-carbon intensive barrels. In addition, partners with net-zero mandates (i.e GIOCs), will also have a much sharper focus on pushing forward projects that have lower carbon intensity characteristics. Hence, supportive policies and incentives that deliver on emissions reduction, will be critical for this region to both operate and sell hydrocarbons.

In terms of focus areas for emissions reduction, companies will largely focus near-term efforts on Scope 1 and 2, as this is directly within company control, and an area they can make a meaningful contribution to upstream sector's GHG emissions. Some scope 3 execution plans are emerging, but generally multiple decades away as pathways and technology to achieve those emissions reductions remain unclear. Hence, when looking at Scope 1 and 2, IHS Markit assessment shows that deployment of currently available technologies can enable emission reduction by 40-60%. It is important to caveat, that no one size fits all approach - impact depends on emissions source and lifecycle phase of each field. For example, North America unconventionals will require more focus on methane for instance, while transport and logistics will be key drivers for offshore. However, the central source of emissions for all play types, will be power and fuel consumption use, given they are the largest emission contributors for Scope 1 and 2 (if routine/significant flaring and venting is not occurring).

Host Governments - Attracting and Retaining Capital

Host governments will continue to be in a tight spot, as a large host of governments across the globe are competing for fewer exploration dollars. Before the March 2020 oil price collapse, we observed host governments making improvements to procedural and contractual terms, which was further followed with a host of temporary changes, post March 2020. Under continued uncertainty, more needs to be done to retain and attract capital, so we are likely to see more permanent changes materialize across APAC. Malaysia is leading the way on this through introducing greater flexibility to terms through new contract types.

Is it too little too late? The first clear answer here is that the NOCs will be in the lead, certainly by choice and definitely by design, to backstop any decline in local private or foreign investor capital in the E&P sector. On the other hand, we are also seeing the re-emergence of private capital in the APAC region. This time in the form of smaller, nimbler 'asset specialists' which are focus on near-field opportunities and on a supportive E&P regulatory environment. If prices continue to remain at around $60/bbl through 2021, there will be greater incentive for companies to scale up. However, the jury is still out on whether NOCs and this new form of investor capital will offset IOC exits or subdued IOC activity in many parts of this region.

In terms of which countries will emerge as sources of capital sink, it will be those that have established infrastructures or markets that will allow quicker monetization paths, and supplemented by existing players that are growing their core areas. China would clearly be on that list, given their every increasing energy security needs, and hence they will continue to be aggressive in exploring and developing their proven basins. Australia will have a greater development focus (particularly onshore), but will also have some key exploration wells planned offshore during the second half of 2021. Malaysia will definitely see significant uptick in activity, with key exploration wells by the major players in the country - Petronas, Conoco Phillips, Mubadala, Shell and PTTEP. In addition, development drilling and related activities are expected to pick-up, with first production from Mubadala's Pegaga gas field in Sarawak to provide backfill volumes to the MLNG facility. Shell's further phase development of Malikai and Gumusut-Kakap, will also be welcome additions to sustain Malaysia's oil production levels. Finally on Indonesia, there is both a focus on improving terms, and developing concrete plans to achieve 1 MMBOPD of oil by 2030, which will necessitate exploration activity - this will have a more medium term impact. However, on the near-term, a high impact well (Rencong-1), to be drilled by Repsol in the deep water portion of the North Sumatra Basin, is generating interest, with recent awards to Premier and Mubadala. Rencong 1 will target an unproven carbonate ramp over a basement high, and if successful, it will open up the area for further exploration. So, overall, while the region doesn't attract the capital levels when compared to other hotspots, we will see an upturn in activity in 2021, which will be most welcome by all stakeholders vested in the Asia Pacific region.

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Posted 31 March 2021

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.