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We have spent a lot of time in recent years adjusting to the oil
price crashes seen in 2008 and 2014. We were just getting ourselves
nicely adapted to the "new normal" of oil prices in the $50-$70
range and the early 2020's was shaping up to be when we all started
to get back to work. There were a number of significant and key
final investment decisions (FID's) being lined up in the APAC
region that would have provided a much-needed boost to service
companies and the industry as a whole.
Then our twin black swans arrived, with simultaneous shocks on
both the demand and supply side of oil markets.
The first black swan event was on the demand side in the shape
of the coronavirus disease 2019 (COVID-19). The initial outbreak,
with its epicentre in Wuhan, China, had a significant impact on
China's oil demand but was more limited globally. However, with a
global pandemic now declared by WHO, the on global demand impact
can expect to be far larger and there remains significant
uncertainty to the scale and duration of the impact.
The second black swan event was on the supply side, when the
Vienna alliance (OPEC + selected non-OPEC) broke down due to
diverging views of the oil market, the perspective of US
unconventional production and the impact of COVID-19. Following
which, Saudi Arabia increased oil output, offering deep discounts
to customers. The resulting price war has led to a collapse in oil
prices to levels not seen since the global financial crisis of
2008. Again, the full scale and duration of this event is not
understood.
It is not just the oil markets that have had a significant
shift, global gas markets have also seen massive change. COVID-19
saw anticipated demand from China disappear, resulting in the spot
LNG cargoes trade below US$3/MMBTU. The global impact of the
COVID-19 pandemic is still to play out but global gas demand has
already been impacted and the scale is set to grow as economies
slow.
Oil company reactions
We don't have to look too far back to understand the short-term
reaction of oil companies to lower oil and gas prices. However, as
central banks are discovering, there is only so much more that can
be done when you are still enacting measures in response to the
last crisis. Figure 1, below, shows some of the typical reactions
we saw in response to the 2014 oil price crash.
Figure 1:Company strategies in response to low oil
prices and impact on their upstream portfolios.
For this article, we want to focus on the short-term impact,
which is very much the bottom-left quadrant. The immediate reaction
of oil companies is to review any discretionary spend, with a view
to it being suspended or deferred. Then, once the dust settles,
there are three main reasons that the projects will be further
delayed:
The economics no longer stack up for the project.
The project partners may struggle to fund, or access funding,
for the developments.
The partners may see M&A as a better proposition than
funding new developments, especially if distressed companies can be
acquired at a discount.
The below analysis is not a comprehensive list of all projects
and, for now, we have focussed on projects in Australasia and SE
Asia.
Australasia FID's
2020 was going to big a big year for Australia, with a lot of
the upstream CAPEX being sanctioned on the basis that they would be
providing feedstock gas as backfill to existing LNG liquefaction
plants and even some to support new liquefaction trains. In
addition, we have onshore gas projects targeting the domestic
market and an exciting new liquids play. Figure 2, below, shows
some of these key projects, followed by some commentary on each
project.
Figure 2: The economics of LNG backfill projects in
Australia will be challenged by the low LNG prices and
demand.
Barossa (to Darwin LNG): the development of
the Barossa field will provide feedstock for the Darwin LNG plant,
currently supplied by the Bayu-Undan field which is nearing the end
of field life. FID for the Barossa project had been expected in Q1
2020. However, in their 2019 annual report, released in February
2020, Santos announced a delay in the planned FID date to Q2 2020,
citing the need to close the deal to acquire the assets from
ConocoPhillips prior to sanction. However, it was also acknowledged
that the marketing of the gas was proving challenging in the
current market. The news this week was more positive, with Santos
announcing that it had agreed to sell a 25% interest in Darwin LNG
and Bayu-Undan to SK E&S, helping to better align the Barossa
partners.
Scarborough (to Pluto LNG T2 + NWS LNG): the
development of the Scarborough field will provide feedstock for a
new (2nd) train at the Pluto LNG plant, with additional gas also
supplied to the Karratha gas plant (NWS LNG) through a planned
interconnector pipeline. The project was going to be the flagship
FID for Woodside in 2020 but is increasingly looking likely to be
delayed due to challenges in marketing the gas. In addition,
Woodside have openly stated their desire to farm-down their
interest in Scarborough and Pluto train 2 to about 50%. Whilst they
have stated this is not a prerequisite for FID, it certainly
increases the chances of a delay.
Crux (to Prelude FLNG): the development of the
Crux field will provide feedstock to the Prelude FLNG facility.
Shell have been progressing towards the award of the EPIC contracts
for the Crux jacket and topsides, both of which had been expected
in 2020. There has yet to be any news on the potential for delaying
the project.
Browse (to NWS LNG): the development of the
Browse field will provide feedstock for the Karratha gas plant (NWS
LNG), backfilling as production from currently producing fields
decline. The project had been earmarked for FID in 2020 but has
already been delayed to 2021. The economics of the project are
being challenged by the potential tolling fee through the NWS LNG
plant, with the Browse partners and NWS LNG partners struggling to
come to a viable agreement.
Waitsia (Domestic gas): the Waitsia gas field
came onstream in August 2016, with the initial phase having an
output of about 10TJ/day with FID on an expansion project to double
the output taken in July 2019. However, a full field development
could see the production increase ten-fold from the expanded
capacity. We had seen the key challenge to a full development being
the ability to find a suitable buyer in the domestic Western
Australia market. However, if the above projects (and their
domestic market obligation) get further delayed, this could open a
window of opportunity for a full Waitsia development and even to
other onshore gas projects in the Perth basin. However, it is
likely that domestic demand will also take a hit as a result of the
global economic slowdown.
Dorado: a lot has been written about the
discovery and potential development of the Dorado field. The
initial development of the Dorado field is based on commercializing
the liquid resource within the field. The target FID date for the
initial development is 2021, so Santos and Carnarvon can progress
the project and even enter FEED, as planned in Q2 2020, without
over-committing capital to the project. However, decisions will
have to be made in early 2021, with a decision dependent heavily on
how the oil market changes over the next 6-9 months.
SE Asia FID's
SE Asia has been plagued by above-ground challenges that has
been causing uncertainty and challenging potential FID's. These
factors have been wide ranging and have included: the handling of
expiring production sharing contracts and concessions, significant
changes to fiscal terms, inter-country and intra-country
disagreements on revenue sharing and changes in governments.
Through all of this, oil companies have continued to progress
projects towards FID, even if the numbers were limited. Figure 3,
below, shows some of the key projects that were expected to take
FID in the next 12-24 months, followed by some commentary on each
project.
Figure 3: Even the limited expected FID's are now looking
challenging.
Block 46/07 & Block 51 (Nam Du / U Minh):
the development of the Nam Du and U Minh fields in Vietnam will
supply the domestic market through a tie-in to the PM3-Ca Mau
export pipeline. FID had been pending government approval, which
was expected in early 2020. This didn't arrive and Jadestone has
stated that any potential spend on the project will take into
account the current macro environment. Whilst the project would
deliver gas at a fixed price (not tied to oil price), which helps
with the price risk, we no longer expect the project to take FID in
2020.
Block 15-1/05 (Lac Da Vang): the three oil
fields within the block: Lac Da Vang (LDV), Lac Da Trang (LDT) and
Lac Da Nau (LDN) were to be developed as a cluster, with the gas
also commercialized into the domestic market. The Outline
Development Plan (ODP) was approved in September 2019 and Murphy
had been indicating that the LDV field development could take FID
in 2020. Murphy have reacted to the collapse in oil prices by
announcing CAPEX cuts of 35% and we would expect this development
to be delayed.
MLNG Feedstock projects: 2020 was going to be
a key year to decide on the development of a number of new
feedstock projects for the MLNG plant in Bintulu, Sarawak,
including the Jerun, B14 and
Kasawari fields. The development of new feedstock
projects had already been complicated by the introduction of a
sales tax by the Sarawak state government and, given that all of
the projects will be exposed to oil-indexed LNG prices, we can
expect their development to be further challenged.
Limbayong: the Limbayong project had been
touted as a key potential development for Petronas in 2020, with an
FPSO tender expected in Q1 2020. Our upstream valuations team
already had a conservative view for the potential development of
the project owing to the challenging nature of the reservoir. Our
conservatism will only increase with the collapse in oil
prices.
Block CA2 (Kelidang cluster): the development
of the Kelidang Cluster, offshore Brunei, was key to providing
backfill supply to the Brunei LNG plant. We had already delayed our
development timeline on the project owing to disagreements between
the project partners and Brunei LNG over the optimal production
rates and we do not expect the project to be sanctioned in the
near-term.
Duyung PSC (Mako): the development of the Mako
field in the Duyung PSC offshore Indonesia had been progressing
towards FID, with the partners targeting 2020. The gas production
would feed into the West Natuna Transport System, giving access to
markets in Indonesia and Singapore. Conrad had announced that they
had signed a Heads of Agreement (HOA) with a regional buyer for all
future gas production, with the buyer believed to be Singapore
based. A spanner was thrown into this plan when, in February 2020,
the Indonesian Energy and Mineral Resources Ministry announced that
it would stop gas exports to Singapore in 2023. The project may
still be able to find a buyer for the gas in Indonesia, but the
achievable price may not be as high.
Key expired and expiring Indonesian PSC's:
much has been written about the handling of expiring PSC's in
Indonesia as well as the change in Fiscal regime to gross split.
Pertamina has taken over/will be taking over a number of key
producing contracts including the Mahakam Offshore
PSC and the RokanPSC.
These projects are critical to domestic production and require
significant capital investments to maintain and/or grow
production.
Masela PSC (Abadi): the development of the
giant Abadi gas field in the Bonaparte basin was covered in my last
blog post. The challenges highlighted in marketing the LNG will
only have been amplified by current market conditions and the
potential for delays has grown.
Impact on M&A activity in APAC
The price uncertainty will make it even more difficult to find
willing buyers for APAC assets that are on the market and we may
even see some announced, but incomplete, deals be renegotiated and
potentially fail.
There have been a number of significant assets in APAC, either
in production or nearing FID, that have been announced for sale in
the last 12-18 months or are anticipated to be on the market.
Figure 4, below, highlights some of these assets in
Australasia:
Figure 4: Significant assets on the market in
Australasia.
And Figure 5, below, covers the significant assets in Southeast
Asia:
Figure 5: Significant assets on the market in
Southeast Asia.
We had already seen a challenge in both Australasia and
Southeast Asia with a lack of buyers. Given the shift in market
conditions, we would expect that finding buyers for any of these
assets will now prove very difficult. Even if a potential buyer can
be found, it will be very unlikely that the buyer and seller will
be able to agree on a price, unless a contingent payment structure
can be agreed.
On the second point, the major deals that we see as pending
completion in Australasia and Southeast Asia are:
ConocoPhillips sale to Santos
of their North Australia assets (Darwin LNG, Bayu-Undan, Barossa
and Poseidon) for US$1.39 billion + contingent payments, together
with the planned subsequent Santos sale to
SK E&S of a 25% stake in Darwin LNG and
Bayu-Undan assets for US$390 million. To be clear, we have seen no
indication that this deal will be impacted.
Total sale of Block CA1 in Brunei to
Shell for US$300 million. This deal had already
been put at risk due to the suspension of the Malaysia-Brunei
unitization framework agreement by the Malaysian side, which
disputed the revenue share between the Geronggong-Jagus East field
in Brunei and the Gumusut-Kakap field in Malaysia. This deal will
not be able to complete until the above is resolved and the change
in oil prices would likely bring the two parties back to the
negotiating table.
Coro Energy's farm-in from Conrad
Petroleum of 15% interest in the Duyung PSC (Mako field)
for US$4.8m in cash and shares. Again, we do not see any reason why
this deal won't complete.
Finally, it can also be expected that a number of new
opportunities, individual assets or entire companies. could emerge
as oil companies become challenged by a lack of cashflow. As my
favourite Warren Buffet quote says, "Only when the tide goes out do
you discover who's been swimming naked", and the tide has gone out
a long, long way.
Where now?
Sadly, we have again been dealt the card that says, "go directly
to jail, do not pass go, do not collect $200". It will be a while
before we get to the "new, new normal" and we will have to see
where we are at that point. For now: be sensible, stay safe and
look out for each other.
Want to discuss a project with our team of experts? Contact us
for a conversation.
Robert Chambers is a Director for Upstream Asset
Valuations at IHS Markit.
