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Asian NOCs eye upstream build amid low oil prices

With oil prices low and forecast to remain that way, governments are looking to strengthen their hand through acquisitions

Lower oil prices are creating opportunities for bolder Asian national oil companies (NOCs) as they seek to reverse falling production over the next five years.

Analysts expect the number of opportunistic asset deals to rise towards the end of the year, as international oil companies (IOCs) rationalise and more distressed sellers emerge. Individual deals are expected to be in the region of $1bn to $5bn.

India’s Oil and Natural Gas Corporation (ONGC) and Thailand’s PTT Exploration & Production (PTTEP) are the most likely buyers, but China’s NOCs are also looking around.

In early September, ONGC struck a deal with Rosneft to buy a 15% stake in Russia’s prolific Vankor oilfield with a price tag estimated at $1.275bn-$1.35bn. The company has planned an aggressive $180bn global investment push to take on Chinese rivals and drive up foreign production sevenfold by 2030 to meet surging demand at home. Low oil prices should help ONGC accelerate overseas expansion.

Meanwhile PTTEP has been linked to a potential $1.2bn deal to acquire BG’s producing Bongkot project in Thailand. The Bangkok-based player is scouting deals in southeast Asia as the IOCs start rationalising their portfolios.

Moves from China’s NOCs should not be ruled out either, reckons Valerie Marcel, an expert on NOCs at UK think tank Chatham House. To some extent their deal-making activity will be dictated by Beijing’s policy priorities as China’s slowing economy adjusts to the ‘new normal’, as well as government investigations into corruption. But they are still cash rich and there are super opportunities for them, she told Petroleum Economist.

CNPC has struck a number of preliminary deals with Rosneft and is in talks for a 10% stake in the Vankor field too.

Marcel said the Chinese NOCs needed some successes on a smaller scale before following Cnooc’s deal to buy Nexen. “They’ve not been that successful and have overpaid in the past. They could be looking at smaller deals, particularly technology, rather than commercial investments, related to shale or service providers,” she added.

Despite low oil prices squeezing cash flows, many Asian NOC balance sheets are in relatively good shape, particularly Malaysia’s Petronas, PTTEP and China’s CNPC and Cnooc, all of which have relatively low gearing ratios of around 10% or less, Norman Valentine, a corporate specialist at energy research firm Wood Mackenzie, told Petroleum Economist. Petronas and CNPC, including financial assets, are net cash positive.

Several Asian NOCs need more than $60/barrel for upstream cash flow in order to break even in 2015, but they are still better placed than many IOCs, added Valentine. PTTEP needs less than $60/b, which compares favourably with the average of nearly $80/b needed by the IOCs. Petronas needs around $80/b to break even this year, one of the highest among the Asian NOCs, which is partly due to an $8bn government dividend and its continued investments in floating liquefied natural gas projects, as well as a major LNG scheme planned in Canada.

The NOCs are responding to lower oil prices by cutting upstream capital spend, but by less than the industry average. In aggregate, Asian NOCs will cut exploration and production spending by some 16%, or $16bn, well below the industry average of 28%, data from Wood Mackenzie shows.

Still, Asian NOCs were among the top explorers in 2014. Cnooc made deep-water discoveries in China, Gabon and the US Gulf of Mexico. Petronas made many strikes in Malaysia, while ONGC hit gas at home and in Mozambique.

The average Asian NOCs investment rate, which is the amount spent on exploration by yearly production, was $7/boe in 2014, above the majors (with $4/boe) and large international players (with $6/boe). But they remain under-exposed to key exploration provinces and the low-oil price environment offers an opportunity to build international exposure. Mexico offers a range of opportunities, including deepwater, and most of the major Asian NOCs have expressed an interest, although none of the bids were accepted.

As Russia pivots towards Asia, further long-term energy trade deals and financing could open more doors for the NOCs. Struggling with hefty debts and lower oil prices and barred by sanctions from raising fresh funds in western capital markets, Russia’s state-backed oil companies have been courting Asian investors. Indian and Chinese NOCs look set to capitalise on the opportunities to secure good prices, as ONGC’s Vankor deal shows.

In Brazil, financial distress at Petrobras could open opportunities. The opening of Iran’s oil and gas sector will also be on the major Asian NOCs radar. 

NOC profiles

ONGC

India, which imports most of its oil, is set to overtake China as the largest source of growth in global oil demand by 2020. To help meet this demand expansion ONGC has planned an aggressive $180bn global investment push to take on Chinese rivals and drive foreign production up sevenfold by 2030. India’s flagship energy company aims to raise its international production from 8.87m metric tons of oil equivalent (toe) last year to 60mn toe over that period.

It has a growing global presence, including projects in Azerbaijan, Brazil, Colombia, Russia, Sudan, South Sudan, Syria, Vietnam, Myanmar and Venezuela. However, international production is still only about 15% of total production. The company pumped 49.46mn toe from domestic reserves for the full year ending March 2015. But domestic production growth has been sluggish as the company has not offset natural field declines. Output from Russia, Venezuela and South Sudan is the main source of international growth. ONGC has set an aggressive target to more than double its production, with 50% of the output coming from international assets by 2030.

Traditionally, the midsize global energy player has been conservative, restrained by cautious management and risk-averse political leadership in New Delhi. Frequently, it has lost out on the race to grab foreign oil and gas fields to more aggressive Chinese national oil companies.

But following the launch of a strategy in 2013 known as Perspective 30 designed to bolster overseas operations, ONGC has taken a markedly bolder approach. Since mid-2013 it has spent about $7bn on foreign assets in countries such as Mozambique and Brazil.

Still, its portfolio, dominated by conventional assets, is less diverse than most other Asian NOCs, although Indian deep-water is increasingly important. It’s lagging in unconventional energy and LNG. Talks to invest in the Yamal LNG plant in Russia led nowhere and it was Gas Authority India that signed capacity and FOB deals in the US.

Still, it has a stake in Mozambique’s nascent LNG sector. It is scouting for opportunities in shale gas, coal bed methane, underground coal gasification, as well as alternative energy projects, like solar, wind and geothermal. International deep-water plays in Brazil, the Gulf of Mexico and Mozambique, are of interest too.

It has no plans to cut capital spend in response to low oil prices. ONGC needs about $75/b to break even in 2015 but a strong balance sheet with low gearing offers financial flexibility. Total proved reserves, at home and abroad, stand at over 6.8bn boe.

PTTEP

PTTEP has an ambitious goal to raise production by 66% to 600,000 boe/d by 2020 to boost Thailand’s energy security. This is under review in the volatile oil price environment. But even in this difficult climate, where most other competitors are cutting spending, PTTEP still has a capex plan of $13bn over the next four years. It wants to maintain output in Thailand and Myanmar, as well as to develop projects, such as the Mozambique Offshore Area 1 LNG project, the Mariana Oil Sands Project in Canada, and the M3 gas project off Myanmar. It expects to spend more than $2.5bn this year, peaking at more than $3.7bn in 2017. This excludes potential acquisitions.

Ratings agency Moody’s expects PTTEP to keep buying, particularly producing assets, as foreign upstream players exit emerging south-east Asian plays. It has a large cash balance of $3.7bn and it could lift production and reserves by up to 30% through acquisitions.

PTTEP has a large but declining base of proved oil and gas reserves. At end-2014, it had total proved reserves of 777m boe, a 29% decline from 1,099m boe in 2009. Its proved reserves are expected to fall over the next two years before its longer-dated developmental assets in Mozambique and Canada become reserves.

Its portfolio is dominated by gas-biased assets in Thailand, Myanmar and Vietnam. It has entry positions in Mozambique’s nascent LNG sector, deep-water Brazil and Canadian oil sands. Exploration is focused mainly on proven plays in Thailand, Myanmar, Algeria, Brazil and Mozambique.

Given the volatile market environment PTTEP’s projects at risk include: Mozambique LNG, Parque dos Doces (Brazil oil), and blocks 52/97, 48/95&B in Vietnam.

Petronas

Petronas is a major player in the LNG business, with several new supply projects ongoing. It has a stake in the Santos-led Gladstone LNG scheme, starting up in Australia this year. In August, Petronas took over Shell’s 50% interest in the MLNG Dua plant after the production sharing contract between the pair, for the facility, expired. The NOC now has 100% control of the three-train 7.8m mt/y plant, allowing it to better manage gas production and regional LNG demand. The company is also progressing a ninth train at its Malaysian LNG complex, as well as two floating LNG projects. It has completed a $2.25bn purchase of Statoil’s 15.5% stake in the Shah Deniz gas project in Azerbaijan.

It is also a shareholder in the BG-operated Dragon LNG import terminal in the UK where it also owns the Humbly Grove gas storage business.

The company’s overseas expansion strategy broadens its diversification at the cost of greater risk in execution, particularly in places like Iraq.

Pressure from the government could limit further overseas deals. Its exploration strategy is mainly focused on Malaysia following recent success. But the company is largely absent from most of the world’s leading exploration provinces and could seek to rebuild. Some 73% of its proved and probable reserves lie in Malaysia, but this is partly mitigated by its revenues from exports and other activities overseas, which made up over 70% of total revenues in 2014.

With total resources (2P+2C) of 33.2bn boe and 2P reserves of 14.7bn boe as of January 2015, Petronas is one of the largest global integrated oil and gas companies. In 2014, sales revenue stood at Malaysian ringgit 329bn. In 2014 it reported production of 2,226,000 boe/d, up 4.6% over 2013. Its share of production was 1,681,000 boe/d compared to 1,601,000 boe in 2013.

Like its peers, Petronas’ earnings before tax will remain weak this year. Ratings agency Moody’s expects a 40% fall to between ringgit 75bn and ringgit 80bn given that its operations are skewed towards the upstream. The earnings decline is partly mitigated by the depreciating local currency, a benefit other exporting countries have enjoyed such as Russia.

But capital expenditure and government dividends will remain high. Petronas is developing a large-scale refinery, dubbed Rapid, that will focus on the production of high-volume specialty petroleum and petrochemical products in southern Malaysia that will see it invest $27bn over the next five years.

On top of that the company is expanding domestic LNG production at its onshore Bintulu complex and pioneering floating LNG schemes.

Aside from Rapid, which is likely to be delayed, Petronas is expected to invest about ringgit 65bn/year in its upstream and downstream projects over the next four to five years. Capital investments could be even higher once the company takes a final investment decision for its Canadian LNG export project, warned Moody’s.

The company is lobbying for a cut by threatening to slash investments. Petronas has signaled it will make a 10-20% cut in capital spending, although specific numbers remain vague, this year.

Pertamina

Indonesian national oil company Pertamina will see earnings and cash flows weaken significantly in 2015 in tandem with global oil prices. Nevertheless, ratings agency Moody’s expects the NOC to show some resilience given the mitigating effects of its gas-focused production profile, rising sales volumes and integrated business model.

Pertamina has halved its capital spending plans over the next four years to $25.8bn as it rationalises investment amidst low oil prices, although this still marks a 50% jump from the preceding four years.

The bulk of its capital spending cuts lie in the upstream reflecting the company’s shift away from aggressive expansion of its production and reserves. Pertamina has also lowered its ambitions to buy overseas oil and gas assets. It is also pacing itself in boosting production from existing reserves, cutting its 2016 oil and gas production target to 681,000 boe/d from the original 876,000 boe/d target. In 2014, it pumped 87.2m barrels of oil and 588.7bn cf of gas.

Cnooc

Cnooc is one of the financially stronger Asian national oil companies and is able to fund near-term spending and dividends at around $65/b oil and gearing of just 11%. It has cut its planned exploration and production capital spending by between a quarter and a third, the steepest among the Asian NOCs.

It can carry out material deals worth more than $5bn but its huge $18.5bn takeover of Nexen in 2013 limits its headroom for very large deals. Scrutiny from Beijing should also limit activity in the near term.

Cnooc had the third-largest net proved reserves within the Chinese oil and gas sector, with 4.5bn boe and an average daily production of 1.1m boe in 2014. It has been acquiring overseas upstream assets – in Argentina, Australia, Brazil, Canada, Indonesia, Nigeria, Uganda, the UK and the US – but the company’s largest market remains China, with 65% of the company’s revenue generated at home. The Nexen acquisition gives it the most diverse functional mix of the Asian NOCs.

CNPC

CNPC is China’s largest oil and gas company and one of its biggest state-owned enterprises. CNPC produced 1.9bn boe barrels of oil equivalent with proved oil and gas reserves of around 23.66bn boe in 2014. In the face of low oil prices ratings agency Moody’s expects CNPC overall capital spend to fall by at least 10% to around yuan 340bn in 2015.

PetroChina is the main operating arm of CNPC. With net debt of $74bn and gearing of 29%, PetroChina’s financial position is weaker than most international oil companies. But parent company CNPC has a strong liquidity profile. It reported net cash of $35bn at year end 2013 and could access further state funds. PetroChina’s cash flow outlook is estimated at $60/b breakeven in 2015.

The NOC is expected to pick up assets as IOCs rationalise their portfolios and distressed sellers emerge. It has signed a number of preliminary agreements with Russia’s Rosneft. Opportunities in the UAE and Mexico are being considered, with opportunities in Iran also on the horizon.

Sinopec

Sinopec, one of the largest integrated energy and chemicals companies globally, is financially the weakest of the Asian national oil companies with net debt of $52bn and 35% gearing. Its organic cash flow outlook is weaker than its peers but a $17bn injection from the 30% sale of its Chinese retail business offers support.

Government spending scrutiny and corruption investigations are expected to limit merger and acquisition activity.

Exploration and production made up 61.5% of the company’s operating income in 2014. It has yearly production of 480m boe, and a refinery throughput of 235m mt/year. In 2014, proved reserves stood at 4.17bn boe, 73% was oil and 27% gas.

KNOC

Korea National Oil Company (KNOC) plays a central role in the government’s plans to boost energy security through the acquisition of overseas oil and gas fields, given the lack of domestic resources.

The national oil company plans to secure average daily production of 401,000 boe/d with proved plus probable reserves of 1.9bn boe by 2018, compared with 214,000 boe/d and 1.3bn boe of reserves as of end-2014. However, foreign investments overseas have been strongly reversed in recent years amid accusations of corruption, as well as high debt levels, which the company is being forced to pay down by the government.

Around 68.9% of KNOC’s reserves lie in North America and South America, and around 9.6% in Europe’s North Sea region and Africa, following its purchase of Dana Petroleum in 2010. The remaining 21.5% sit in Kazakhstan, the Middle East and Southeast Asia.

KNOC also holds a sizable oil stockpile, which can provide 116 days of oil consumption in South Korea.

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