Asia Pacific May See $1bn Cut in Exploration Spend: WoodMac

The oil price crash and the Covid-19 outbreak will lead to a cut in exploration spend in the Asia Pacific (Apac) of up to $1bn from an expected level of $4.5bn this year, Wood Mackenzie Asia Pacific vice-chair, Gavin Thompson said in a note March 17.

“Our Apac exploration team had been expecting around 200 exploration wells in the region in 2020. This could now fall by up to 30%. Most explorers will delay campaigns where a rig has not yet been committed or if the well economics at $35/b fail company thresholds,” Thompson said. At time of press, Brent crude was trading at $30/b.

Only around one in seven prospects in Apac breakeven below $35/b, and most of those are smaller near-field prospects. With fewer wells drilled, Asia can expect a rising import requirement in future years, he said.

A sustained period of low prices will delay most upstream final investment decisions (FID) in the region. The biggest blow will be felt in Australia where companies are aiming to sanction large, strategically important backfill LNG investments in 2020. Significant projects in southeast Asia will also be pushed back, Thompson said.

Among those projects targeting FID in 2020, Australia's Scarborough, operated by Woodside, and Barossa, operated by Santos operated, account for 52% of unsanctioned spend and 48% of reserves. 

“Prior to the oil price crash, Santos and Woodside were already looking to farm-down their respective equity exposures to ease capital requirements. This will be challenging in the near-term as companies roll out capital management plans to control or delay discretionary expenditure. All projects vying for FID but requiring a farm-down in equity exposure will be challenged,” he said. “Looking across the Apac, close to $35bn of pre-FID and development spend is at risk in 2020-2022, and that's before we consider potential cuts to existing spend on producing assets.”

Global oil demand growth in 2020 at risk

The demand risk comes mainly from weaker demand outside China now that coronavirus is a pandemic. Historically, low oil prices stimulate oil demand, but the extent to which low oil prices will help demand to recover this time is limited by obvious coronavirus containment measures, Thompson said. The upside in refining margins is contingent on a recovery in oil demand. 

In addition to coping with weaker oil demand, refiners are now adapting to lower oil prices and a large increase in OPEC production starting in April. From next month, Saudi Arabia will slash its official selling prices to Asian refiners by $4-7/b to protect market share against competing crudes from the US, Russia, and Africa.

“A large increase in Opec crude will lead to a wider crude price differential between Dubai and Brent. This is advantageous for complex and deep conversion refiners such as Reliance and Nayara Energy in India and Sinopec and PetroChina in China. In the current environment of high oil product inventories and lower margins, refiners will be more selective on the crudes they process to gain an advantage on refining margins,” he said.    

Is there upside to LNG demand from low oil prices?

According to Thompson, the Asia Pacific gas demand was already under pressure as coronavirus impacted consumption in China and the continued downside is expected as the world struggles to contains the virus.

“Low oil prices are a mixed blessing for LNG markets. Sustained lower oil prices will bring down LNG contract prices in Asia, which have been at a premium recently, but also create greater competition from oil itself,” he said.

In Japan and South Korea, lower prices for oil-indexed purchases should support coal-to-gas switching economics in the power sector. South Korea has seen some switching in recent months. High oil-indexed contract volumes dominate the weighted average cost of gas, resulting in strong 2019 prices around $10-12/mn btu. But with the oil price fall, prices are set to halve over the next three to six months, bolstering the case for gas, Thompson said.

For China, at $35/b oil, contracted LNG arrives at a lower cost than domestic wholesale price benchmarks.

“While there is a strong incentive for NOCs to retain the benefits, the import cost reduction will be partially passed through and allow the government to push lower gas prices to end-users. This will help coronavirus-affected business resume operations but stimulating new coal-to-gas switching will still require further policy support,” Thompson said.

In other markets such as India, lower oil price could slow the shift from oil to gas in the industrial sector, as heating oil, LPG and naphtha compete with contracted and spot LNG, he said.