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Mixed fortunes

While the world's attention is drawn to burgeoning energy-demand statistics in China and India, Petroleum Economist asks how those countries' neighbours in Southeast Asia are aiming to meet their own supply needs. Derek Brower reports

CHINA AND India are not the only Asian countries that need more oil and gas to feed growing economies. In the four countries covered below – Indonesia, Malaysia, Thailand and Vietnam – strong economic growth is bringing with it robust growth in demand for energy. How those countries are managing that demand, both from their own population and larger neighbours, varies from the import problems of Indonesia – paradoxically a member of Opec whose most important export could soon be coal – to the export ambitions of Vietnam, a country on the right side of the supply and demand equation.

Indonesia

The country's problem is managing transition, with its economy in a different cycle to that of its energy industry. In economic terms, the World Bank says, Indonesia has largely recovered from the 1997 Asian financial crisis and predicts growth of 7% this year. Yet a string of natural disasters, in particular the tsunami of 2004, which left an estimated 168,000 Indonesians dead, have threatened to overwhelm the country.

Economic growth is bringing increased demand for energy. But Indonesia's domestic energy sector is unable to satisfy these needs. Proved oil reserves are estimated to be 4.3bn barrels, but output has been steadily falling for a decade. It is now around 0.86m barrels a day (b/d), almost half its official Opec quota of 1.451m b/d. When the country became a net importer of oil in 2004, there was speculation that Indonesia would lose its place in Opec.

Behind the falling production is the country's poor recent record upstream, which has coincided with the terminal decline of its largest resources, such as the Chevron-operated Minas and Duri oilfields. Politics has also taken its toll.

The Cepu block, in east and central Java, has the potential to produce 180,000 b/d of oil from reserves of 0.6bn barrels of oil (and 48bn cubic metres (cm) of gas – roughly equivalent to Thailand's total oil reserves and half of its gas). But a dispute between ExxonMobil, which acquired the rights to the block in 1998, and the government over the terms of the licence has prevented development for the best part of the decade. The issues were resolved in March 2006 and ExxonMobil says the field could be on stream in the first quarter of 2009.

Success at Cepu could mask underlying problems on the demand side of Indonesia's oil sector. Historical oil-products subsidies, combined with the economic recovery since 1997, have encouraged demand. Jakarta cut some of the subsidies in 2005, but still shells out money to keep prices lower than elsewhere in Asia. That leaves the government paying high international prices for oil that it once exported – some $10bn has been spent on subsidies alone this year, according to Petroleum Economist's calculations.

Encouraging diversification

One of the government's solutions is to encourage diversification of Indonesia's energy supply. Coal is one option – the country is the world's second-largest exporter of coal. Another is biomass. But Indonesia's most significant remaining resource is natural gas; reserves amount to more than 2.6 trillion cm, according to Cedigaz, and Indonesia is the world's second-biggest liquefied natural gas (LNG) exporter after Qatar, shipping out 29.57bn cm in 2006.

Gasification of the economy, however, is restricted by poor domestic infrastructure. The World Bank predicts that demand for gas-fired electricity will grow by 6% a year to 2012. Beyond then, the figure could be markedly higher, given that 90 million Indonesians are still without electricity. Investment of $4bn a year in the gas sector would be required to meet demand for gas to 2012, the Bank says.

Meeting local demand for gas could mean sacrificing some of Indonesia's export plans, says Keith Myers, an energy analyst at Chatham House. Given the low prices in the domestic market – and the government's new stipulation that at least 25% of a discovery be set aside for domestic use – that will discourage interest in the upstream among international oil companies, says Mike Sinden, products manager of energy markets at Wood Mackenzie, a consultancy.

Putting the people first

Meanwhile, a large portion of LNG produced at the Tangguh project, a flagship development led by BP and involving China National Offshore Oil Corporation and due on stream in 2009, could ultimately be used to feed growing domestic demand – although 2.6m tonnes a year (t/y) has been pre-sold to China and other sales agreements are in place to export to the US and South Korea. Supplying subsidised local buyers instead of lucrative overseas markets would not be popular with foreign developers. But the persistence of the subsidies suggests Jakarta is putting its own people first.

The conversion of Indonesia from oil exporter to oil importer was bad enough. Rolling back the country's LNG-export capacity could be the next chapter in the story of Indonesia's decline as an energy powerhouse.

Malaysia

Malaysia's fortunes are more mixed. The country remains a significant oil producer and exporter in its own right. But economic growth and the country's development as part of prime minister Abdullah Ahmad Badawi's 2020 vision – the promise to be a first-world nation by 2020 – is making domestic demand a force in Malaysia's energy sector.

Driving domestic demand, especially in natural gas, is increased electricity consumption. Malaysia's Energy Informational Bureau predicts per capita consumption will rise by nearly 20% by 2010 and the energy intensity of the economy is also projected to increase. It has already been rising steadily. The energy ministry says gas demand increased from 46.4m cm/d in 2000 to 61.2m cm/d in 2005 (the most recent available figure from the government). Of that demand in 2005, the power sector accounted for 66%. The gas-distribution system – a series of pipelines connecting Malaysia's disparate parts – was almost tripled in size, from 455 km to over 1,300 km.

That was part of the eighth national energy plan. The ninth, which came into effect in 2005 and will last to 2010, stresses policies designed to promote alternative energy and expand access to energy for rural consumers. It will also increase the gas-distribution system, to more than 2,000 km by 2010. That will push the growth of energy consumption to 6.3% a year to the end of the latest plan. However, the plan says that petroleum products' share of demand will fall to 61.9%, while the share of gas will grow to 15.8%. Of total energy demand during the period, the transport and industrial sectors will account for 41.1% and 38.8%, respectively.

Pushing coal

To meet that demand, the government says supply of all energy will grow to 74m tonnes of oil equivalent in 2010. Petroleum's share will decrease, but coal's share will rise. That points to one of the oddities in Malaysia's energy strategy. Despite rising demand for gas and the country's relatively large reserves, the government wants to encourage coal consumption. But as its reserves of coal are low that will mean importing from Indonesia.

However, as long as coal prices remain comparatively low – and provided Malaysia can increase its exports of natural gas – that should be good news for the country's balance sheet, if not for the environment.

For the time being, it should be a good basis to continue attracting foreign developers to the country's upstream. Over the next five years, the government hopes to maintain oil production at around 0.695m b/d. In exploration for oil, the oil ministry says it wants companies to target deep-water resources. In natural gas, West Natuna and the Malaysia/Thailand Joint Development Area, will see efforts designed to increase production to 11bn cm/d by 2010.

Nonetheless, oil production is in long-term decline, having peaked at 0.793m b/d in 2004. The decline comes despite several new projects, including: Murphy Oil's Kikeh block, Malaysia's first deep-water oil and gas discovery, where output is due on stream at 40,000 b/d in January, before ramping up to 120,000 b/d; Royal Dutch Shell's deep-water Gumusut-Kakap discovery is due on stream in 2010, with output of 150,000 b/d; and Shell also plans to bring on stream another deep-water play, Malikai, in the future. Meanwhile, state-owned Petronas has been active overseas in a drive to source more oil for domestic consumption.

Exploration for natural gas has been even more successful, increasing output to 60.2bn cm in 2006. More will come from associated gas in deep-water fields, such as Kikeh, and from fields being developed offshore Sarawak by Petronas. Analysts say the country hopes to increase its LNG export capacity from last year's 22.7m t/y. One of its three plants is being debottlenecked and other discoveries could be used to develop a fourth – provided, that is, that local gas demand for does not force the government to sacrificing its export plans.

"Malaysia will do what is best for Malaysia," says Wood Mackenzie's Sinden. "If that means exports will one day have to be used to supply the domestic market, then that is what will happen."

Thailand

At least Bangkok's energy worry is straightforward: how to source more hydrocarbons to feed growing demand. Recent successes in finding oil have scarcely made a dent in the country's supply requirement (see Table 1), leaving Thailand importing some 64% of its oil, according to the US' Energy Information Administration (EIA). Its main upstream oil play comes from offshore fields in the Gulf of Thailand, which accounts for 85% of its production. The main producers are Chevron and state-owned PTT Exploration and Production (PTTEP).

The story is similar in natural gas. Although Thailand's estimated reserves are relatively large – 300bn cm, according to Cedigaz – production of 65m cm/d is not enough to meet demand, which is rising in line with economic growth. That has pushed PTTEP overseas in search of more gas. The company is exploring in Southeast Asia as well as in Iran, Oman, Egypt and Algeria.

The country's most important supplier is Myanmar (Burma) and a pipeline has linked the two countries since 1999. Other supply arrangements, including new infrastructure, are planned. But Myanmar's decision earlier this year to export gas from prolific plays in two offshore blocks to China was at least as big a blow to Bangkok's energy-import strategy as it was to India and South Korea, which had also been competing for the gas.

Bad news ... good news

That bad news was softened a bit last month, however, when PTTEP said it had discovered a large gas deposit in Myanmar that it estimated to hold 226.5bn cm. The Thai company says it intends to start producing from the field by April 2008.

Beyond finding more oil and gas to import, Thailand's other options are coal and LNG. Wood Mackenzie says coal is a cheap, but unpopular alternative, given the concerns in Thailand's cities about air quality. That leaves LNG. PTTEP is completing a study into an import terminal that would be built in Map Ta Phut, Rayong. Capacity would be 5m-10m t/y and could be in service by 2011. PTTEP says it is negotiating with suppliers about potential sales agreements. But however much LNG Thailand buys, it will not be cheap.

Vietnam

Of the four Southeast Asian countries profiled, Vietnam's supply and demand balance is the most favourable. With relatively large reserves of oil and gas, the country has emerged as an important upstream province for foreign companies – and an important supplier to other import-dependent nations. BP says Vietnam's oil output averaged 367,000 b/d in 2007, against domestic consumption of 267,000 b/d. The rest is exported, mostly to Australia.

The EIA predicts output will grow to more than 400,000 b/d in 2008, returning it to peaks last seen in 2004. The main upstream plays are in nine offshore fields. While the most important, Bach Ho, is in decline, explaining the dip in production of the past two years, a number of new developments in the Cuu Long basin are due on stream by 2008, including the Su Tu Vang field, which will produce 100,000 b/d. A licensing round launched in April offers seven new blocks holding an estimated 5bn barrels of oil in place. The investment terms have also improved, say analysts.

Vietnam's gas resource is also ticking over nicely, with production of 7bn cm/y meeting domestic needs. With an economy that has continued to grow at more than 7% for the past decade, demand for gas has also increased – but only in line with production. The EIA says demand and supply have both grown by 33% since 2004. Further gasification will most likely follow the discovery of more offshore gas, one of the hopes of the new licensing round. And Hanoi also intends to increase coal use in the domestic market. At present, the country exports over half of the coal it extracts to Japan and China. But the state-owned utility, EVN, plans to build 20 new coal-fired power plants by 2020.

Vietnam's sole dependency problem – a lack of refining capacity that forces imports of refined products – will also soon be mitigated. The state-owned oil company, PetroVietnam plans to bring a $2.25bn, 140,000 b/d refinery on line by 2009. BNP Paribas, one of the banks that arranged financing for the plant, estimates that it will cover 40% of the country's products demand. Another 150,000 b/d facility is planned for the north of the country and there is talk of a third refinery. Expensive to build those plants might be, but wiping out Hanoi's products-import bill – almost $6bn in 2006 and not far off the oil export receipts – will bring large savings.

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