Oil Price Downtrend a Boon for Asian Consumers

by Chee Yew Cheang, APAC Editor

Up until the middle of 2014, the oil and gas industry operated virtually in a default mode as far as prices were concerned, where a $100 a barrel oil – a level where it had been trading in previous years – was accepted as a norm, giving producers the upper hand in business deals with consuming countries. But there has been a role reversal in the global market place, including Asia, as oil has now fallen to the high $50s to low $60s a barrel, down at least 40 percent from a year ago.

This sharp turnaround in fortunes is manifested in Asia, home of expanding economies in China, India and Southeast Asia, where a sustained rise in energy demand in recent decades has transformed the region into a major growth market for producers, an observation highlighted by the International Energy Agency (IEA) in its “World Energy Outlook 2014” report released November 2014.

“China overtakes the United States as the largest oil consumer around 2030 but, as its demand growth slows, India emerges as a key driver of growth, as do … Southeast Asia,” the IEA noted in the report.

“By 2040, two out of every three barrels of crude oil traded internationally are destined for Asia, up from less than one in two today, drawing to Asia a rising share of the available crude from the Middle East and beyond,” the Paris-based agency added in the factsheet accompanying the report.

India’s Emergence

Earlier this month, a senior executive of Saudi Arabia’s national oil company Saudi Aramco visited New Delhi, underscoring the growing significance of India to the largest producer in the Organization of Petroleum Exporting Countries (OPEC).

“It doesn’t require much imagination to conclude that the Saudis are interested in expanding their relationship with India, given it is becoming the main driver of crude demand growth in Asia,” Reuters columnist Clyde Russell said June 15 on Saudi Aramco’s Executive Director for Marketing Ahmed Al-Subaey’s trip to India.

However, Saudi Aramco is likely to face stiff competition from fellow OPEC producers – Iran and Iraq – for a share of the Indian market, which imported 3.942 million barrels of crude oil per day during the first four months of 2015, Russell said.

The changed relationship between consumers and producers in the oil and gas industry was illustrated in an interview given by India’s Oil Minister Dharmendra Pradhan to Reuters published June 13 in which he explained that the country will move beyond asking for additional import barrels in talks with exporters to seeking deals to strengthen India’s economy and create jobs.

According to Pradhan, India’s new oil diplomacy aims to:

  • buy oil and gas acreage
  • source imports on better terms
  • increase investment in sectors such as pipelines and refining
  • get business for engineering and construction companies with jobs for skilled Indian labor

“South Korea lifts slightly more oil than we buy from the Middle East but its participation in engineering and construction business is doubled than ours,” Pradhan said.

South Korean contractors, comprising Samsung Heavy Industries Co. Ltd., Hyundai Heavy Industries Co. Ltd. and Daewoo Shipbuilding & Marine Engineering Co., Ltd., are actively involved in the Middle East engineering, procurement and construction market.

Asian Interests to Own Upstream Assets Stay High

While a supply glut currently exists, most Asian oil and gas firms still prefer to own upstream petroleum assets, particularly in the region, as acquisition costs fall in tandem with lower oil prices – ownership of producing assets will insulate them against future price hikes and ensure energy supply security.

In Indonesia, a major oil importer in Southeast Asia, the focus of upstream acquisitions is no longer confined to asset sales by foreign petroleum firms. A trend emerging in the local petroleum sector is the competition to take over expiring production sharing contracts (PSC) – a segment now dominated almost exclusively by national oil company PT Pertamina.

Pertamina, which will take over as operator of the Mahakam PSC in East Kalimantan in January 2018, hopes to take over more expiring blocks in Indonesia. The firm has already submitted a proposal to the Ministry of Energy and Mineral Resources (MEMR) to assume operations of East Kalimantan’s Sanga-Sanga PSC from current operator Vico Indonesia when the contract expires in 2018.

But unlike its takeover of the Mahakam block, Pertamina may face competition from an emerging local rival – PT Saka Energi Indonesia, the upstream arm of state-owned gas distributor Perusahaan Gas Negara (PNG) Tbk.

“It’s good if Saka [Energi] farms into Sanga-Sanga block,” MEMR’s Director General of Oil and Gas IGN Wiratmaja Pudja told local industry publication Petromindo June 11, adding that Vico has not applied for extension of the PSC.

Saka Energi’s interest to acquire an interest in the Sanga-Sanga block is understood to be well received by the joint venture as partners prefer to farm out their stakes than to lose it upon expiry of the PSC as in the case of the Mahakam block, Petromindo said.

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