China shows its muscle
The country was at the centre of activity in the Asia-Pacific region, boosting production and imports—though some showed wariness about Beijing’s growing power
Oil companies operating in Asia-Pacific remained cautious about investing in capex in 2018, despite strengthening oil prices and decreasing rig hire rates. In the first half of the year, fewer than 20 exploration wells were drilled in the region, most of them concentrated in Australia, China, Myanmar and Vietnam.
Despite that, the deep-water sector in Asia-Pacific showed heightened activity in 2018, driven by natural gas projects feeding domestic Asian markets or LNG export plants. Increases in Australia and Indonesia took total deep-water production in the region in 2018 to 1.2mn barrels of oil equivalent a day, a big jump from 650,000 boe/d in 2016, according to consultancy Wood Mackenzie.
China has boosted domestic gas production and imports and has boosted gas storage injections. As a result, notes Wood Mackenzie, LNG demand growth in September slowed down significantly. It said Chinese NOCs were reselling winter cargoes in the spot market to correct their previously ambitious purchasing plans. Pipeline imports are on track to grow by 20pc in 2018, which would take them to 36.6mn t for the year.
In September, Chinese LNG imports grew by 27pc to 4.4mn t—nearly half of the average growth rate of 48pc in the first eight months of 2018. Pipeline gas imports grew by 30pc to 3.3mn t and domestic production grew by 8pc to 11.9bn cubic metres—both higher than the average growth rates we saw in the first eight months this year, said Wood Mackenzie.
China meanwhile stood accused of throwing its (considerable) weight around in the disputed South China Sea region, an area of burgeoning global interest—and which includes significant oil and gas resources. Beijing's assertive foreign policy over maritime rights claims is bringing China into conflict with its neighbours. In March, Spain's Repsol was forced to suspend drilling in the Red Emperor block, a $200mn oil and gas development off Vietnam's southeast coast, after state-owned PetroVietnam—reportedly under Chinese pressure—requested a halt to activities. That prompted Repsol to lodge a compensation claim for the suspension of drilling on a field where it has been active since 2009, and which contains 45mn bl of crude oil and 172bn cf of natural gas.
Beijing's assertive foreign policy over maritime rights claims in Asia is bringing China into conflict with its neighbours
Repsol wasn't the only oil company to feel the heat in Asia in 2018. Russia's state-held Rosneft has also found itself in Beijing's sights, after acquiring a block off Vietnam relinquished by Moscow-based TNK-BP. Rosneft's Vietnamese unit started drilling in mid-May at the LD-3P well, part of the Lan Do (Red Orchid) offshore gas field in Block 06.1, 370km south-east of Vietnam. This is also within the area outlined by China's nine-dash line.
Some Asian countries bridled at displays of Chinese power politics. Malaysia's abrupt cancellation of $3bn worth of China-backed pipeline projects, announced in September, represented a knockback so far for President Xi Jinping's Belt and Road initiative. The new Malaysian government's show of independence follows prime minister Mahathir Mohamad's promise to review all of the country's "unequal treaties" with China.
One key trend evident in Asia-Pacific in 2018 was the increasing use of Russian gas, underscoring Moscow's growing pivot to the region. In September, Russian officials hinted at new deals to supply China with gas. Gazprom Deputy CEO Alexander Medvedev told an Eastern Economic Forum panel that month that "we are rounding off our talks on the Far Eastern route and you will soon find out when supplies will begin."
Russian President Vladimir Putin and his Chinese counterpart Xi Jinping discussed potential co-operation across a broad range of economic areas in September, with instructions to Gazprom and CNPC to underpin this by advancing negotiations on the Power of Siberia 2 (Altai) and Far East gas pipeline projects. Wood Mackenzie noted the geopolitical undercurrent behind this arrangement was reinforced not only by the announcement of import tariffs on US LNG on 18 September, but also by the fact that on the same day as the Vladivostok Summit began, Russia and China also embarked on the largest joint military exercise in the post-Soviet era, called Vostok 2018.