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Slow rise for Asia's deep-water sector

Deep-water exploration in the region is expected to see an uptick in investment in the coming decade

Countries such as Malaysia, Indonesia and Vietnam will seek to offset falling production from established and more accessible fields. It will be a marked change on recent years when low oil prices have curtailed spending on deep-water oil and gas exploration and drilling activity.

The challenge for capital-intensive deep-water developments in Asia Pacific (Apac) will be to stay viable if oil prices fluctuate downwards. The region will also need to keep cost competitive with developments in less expensive regions of the world, including deep-water Brazil, Mozambique and Tanzania, and, to a lesser extent, Mexico and the US.

According to Mei Ching Koay, principal Far East energy researcher at IHS Markit, deep-water exploration activity has been low over the past five years, with only 270 exploration wells drilled, most of which have been "commitment and appraisal wells carried forward from the low oil price period".

"Despite the oversupply of rigs in Apac and low day rates, companies are still cautious in spending on deep-water explorations," Koay says. The first half of 2018 has been no exception, with fewer than 20 exploration wells drilled as of July 2018, most of them concentrated in Australia, China, Myanmar and Vietnam.

Xinhua Huang, Director for Far East energy research at IHS Markit also points out that since 2006, China, together with international oil companies under production-sharing contracts, has drilled 50 deep-water exploration wells in the South China Sea following Husky's LW 3-1 gas discovery. "Currently only one field, LW 3-1, is under production and one gasfield, LS 17-2, under development," Huang adds.

Looking ahead, IHS Markit believes the business case for deep-water developments will remain a challenge "with potential capex inflation and the commerciality of the fields". Nonetheless, Koay expects to see a number of developments fast-tracked over the next few years, including Merakes in Indonesia (Eni), Lingshui fields in China (Cnooc), and KG-DWN-98/2 in India (ONGC).

Wood Mackenzie has a similar view on the outlook for the sector going forwards. "Deep-water in the Asia-Pacific region has at last begun to gain some momentum after a slow period through the pricing downturn, which means we are now seeing rapid growth in both production and spend," says Woodmac analyst Angus Rodger.

Second wave awaited

"This is largely driven by gas projects, feeding into either domestic markets or liquefied natural gas export plants. Gorgon LNG in Australia is currently ramping up production, with gas sourced from deep-water fields such as Io-Jansz, and the Eni-operated Muara Bakau in Indonesia. This has driven total deep-water production in the region in 2018 to 1.2m barrels of oil equivalent a day, a big jump from 650,000 boe/d in 2016," Rodger says.

A second wave of deep-water fields under development in Australia, Indonesia, India, China and Malaysia will then see production jump again to 1.5m boe/d by 2022, says Rodger. These include the Murphy/Petronas floating LNG venture on the SB H block and Woodside's Greater Enfield Project.

"These new projects will lift regional deep-water capex from a low of $3.5bn in 2017 up to $9bn by 2020," Rodger says. "As we look forward into the next decade, possible developments at both Scarborough and Browse in Australia could keep production on an upwards trajectory, if sanctioned."

"The only area we haven't yet seen much of an upturn is exploration drilling," Rodger adds. "The number of deep-water wildcats in our region being spudded is still way down from the heydays of $100 oil. And while we will see wells drilled this year in Australia, Vietnam and Myanmar, achieving the right balance of prospectivity and fiscal attractiveness remains a stumbling block for attracting the world's top explorers to deep-water acreages across Asia-Pacific."

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