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Asia’s state heavyweights hold firm on upstream spending

With international oil prices at nearly two-decade lows, Asia’s oil and gas developers have begun to review their capex budgets as they strive to weather the downturn

International benchmark Brent crude sank as low as $21.65/bl in trading on 31 March, its lowest level in 18 years. However, while a growing number of independents and IOCs are slashing budgets, Asia’s NOCs are holding out to ensure the energy security of their respective countries.

UK developer Premier Oil—which has operations in Pakistan, Singapore, Vietnam and Indonesiahas said it is looking to reduce capex for 2020 by $100mn. The cut, in conjunction with $35/bl oil, should allow the company to be “cash-flow neutral” this year.

Indonesia’s Medco Energi has slashed its budget for this year by 30pc, to $240mn, “with potential for further 2021 reductions”. At the same time, Indonesia’s eighth-largest oil producer will trim oil and gas production this year by 5,000bl/d oe, to 105,000bl/d oe, with the potential for further cuts in 2021.

Canada’s Husky Energy has said it will delay its Block 15/33 oil project offshore China and the MDA-MBH gas field in Indonesia as part of efforts to reduce its capex budget from a planned $2.6-2.8bn to $1.75-1.9bn. The company intends to proceed with the Liuhua 29-1 gas field development in China.

“Any companies already under financial strain will be pushed to the brink” Harwood, Wood Mackenzie

Singapore-based independent Jadestone Energy will delay the Nam Du and U Minh gas project in Vietnam. The company expects the delay to allow it to cut its 2020 capex by 50pc, to $80-95mm, and allow it to maintain a “strong balance sheet” in the face of low oil prices.

Discretionary spending

Consultancy Wood Mackenzie’s research director Andrew Harwood tells the Petroleum Economist the move to trim discretionary spending is necessary to ensure survival during the oil price downturn.

“Any companies already under financial strain will be pushed to the brink. Revenues and cash flows [will] shrink and sources of new funding will disappear,” he says. “Deferring all discretionary spending and cutting committed spend wherever possible will be the immediate focus. Portfolio resilience will be key: those with strong balance sheets, a low-cost asset base and flexibility in their capital planning will be best-placed to survive this oil price crash.”

Asia’s NOCs, however, have been more reluctant to commit to domestic budget cuts, motivated more by energy security concerns.

NOCs

China’s state majors are not expected to trim domestic oil and gas operations as they strive to bolster an economy emerging from coronavirus lockdown.

“With the coronavirus outbreak seemingly under control at home, Chinese NOCs will be under pressure to support the economy as the country returns to work,” says Harwood. We anticipate China attempting to maintain domestic oil and gas output for as long as it can, perhaps at the expense of international growth.”

This is the strategy adopted by state-owned Cnooc, which announced on 25 March that it would lower overseas production targets while maintaining domestic goals. It also lines up with president Xi Jinping’s 2018 call on producers to raise investment in exploration and production at home to improve oil and gas self-sufficiency.

$3.5-3.7bn – Pertamina’s upstream spend for 2020

Southeast Asia’s leading NOCs are also focused on their respective energy security concerns. Consultancy Rystad Energy’s vice-president of upstream research, Eugene Chiam, tells Petroleum Economist that the various cost-cutting drives of regional NOCs following the 2014 oil price crash meant they had greater room to manoeuvre in the low oil price environment.

Both Indonesia’s Pertamina and Malaysia’s Petronas have said they intend to keep their spending plans unchanged. Pertamina, which said in November 2019 it would invest $3.5-3.7bn in upstream this year, said in March that its drilling plans would remain unchanged. Petronas, meanwhile, has said it will push ahead with plans to expand domestic capex to MYR28bn ($6.46bn) this year.

PetroVietnam has said it will look to reduce production costs and optimise operations, while Thailand’s PTTEP has not revealed any changes to its plans to invest $21.35bn across 2019-2023.

Chiam, however, says the NOCs are expected to review their budgets by mid-year if low oil prices persist and that riskier investments would be the first to be delayed should budgets be trimmed.

“Based on the breakeven price charts, if the oil price continues to stay at the low $20-30/bl until mid-year, this will trigger a ‘cautious call’ to the regional NOCs and lead them to trim substantially their spending for 2020, he says.

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