Craig McMahon, Lead Analyst, & Nicholas Browne, Senior Analyst, Wood MacKenzie, Singapore
Craig McMahon, Lead Analyst of Wood MacKenzie, talks about the evolving energy landscape of Asia Pacific and in particular assess how the ASEAN states are poised to overcome profound energy supply challenges stating that, “as a result of Asia’s inability to supply its own considerable energy demand forecasts, Asian states, through NOCs, have strategically diversified their international assets in an attempt to bolster their internal energy security and abate augmenting supply constraints. As a result of this increase in global activity and expanding tangible presence, the emergence of Asian NOC’s is reshaping the balance of power in the O&G industry.”
Despite the center of gravity of the global energy system shifting from West to East, Southeast Asia is beset by internal fiscal and political issues, constraining supply potential. Can the region meet rapidly growing energy demand forecasts?
Craig McMahon: The future global energy demand story is heavily focused on Asia. For instance, looking ahead to 2020, rising energy demand emerging from the US and Europe is relatively modest compared to that of Asia. In particular, China and South East Asia are two core driving engines transforming the global energy demand landscape. Indeed, countries in South East Asia are revamping the regional LNG market, diversifying demand dynamics away from traditional LNG hubs such as Japan, South Korea and Taiwan.
Over the last decade a fundamental development within the industry has been the international expansion of hydrocarbon assets owned by Asian National Oil Companies (NOC’s). As a result of Asia’s inability to supply its own considerable energy demand forecasts, Asian states, through NOC’s, have strategically diversified their international assets in an attempt to bolster their internal energy security and abate augmenting supply constraints. As a result of this increase in global activity and expanding tangible presence, the emergence of Asian NOC’s is reshaping the balance of power in the O&G industry.
Assessing the upstream South East Asia environment, where are you currently seeing a lot of E&P activity and what markets have you earmarked as those with potential?
CM: The relatively mature markets of Indonesia, Malaysia, Vietnam and Thailand all face their own unique and common energy challenges. One shared challenge is that all these markets have rapidly rising domestic energy demand needs, which will profoundly inhibit their export potential.
Malaysia is the shining exploration success story in South East Asia. In 2012 Malaysia discovered the fourth largest amount of hydrocarbons—the first time a South East Asian state has been in the top 10 for many years. Indeed, Malaysia is a symbolic example that a mature hydrocarbon market does not mean a dead market. With the advancement in 3D seismic technology, previously dormant fields can be revitalized. Indonesia is almost the antithesis of Malaysia. It is a traditional hydrocarbon giant, with a vast deepwater basin that has been grossly under-explored. Unfortunately, the regulatory, government and fiscal environment is hindering the titanic exploration potential of Indonesia’s hydrocarbon market.
We are witnessing a ‘fire-sell’ of South East Asia assets, particularly from US independent players such as Hess and Anardarko, who are retracting to areas where returns are higher. Institutional investors are becoming far more active in strategic decision-making and capital allocation is unquestionably the buzzword across the sector, investors want justification on investments implemented. As the return on some South East Asian assets are not comparatively competitive to the domestic US market, the region must ensure it instills fiscal inducements and attractive regulatory measures to restore competitiveness.
What could be the impact of future US LNG export directives on Asia’s LNG market?
CM: As a result of the scale and speed of the unconventional hydrocarbon boom, the US looks set to be a major player in the LNG arena, although perhaps not as significant as what has been widely suggested. Indeed, the number of projects in the US currently being proposed is greater than the entire global market—a tenet which is clearly unrealistic. As a result, we should be cautious not to overstate the potential of this considerable market force.
As a consequence of the gas glut in the US market, the price of gas has been persistently low. Moreover, considering evolving technology continues to unlock new gas sources, gas prices at Henry Hub, the pricing point for natural gas futures, arguably look set to be relatively low. Ultimately, as Asian demand requirements are gargantuan, Asian states are seeking to tap into cheap sources of LNG, such as from the US. Nonetheless, the core question is just how cheap is this gas by the time it reaches the Asian market. In a nutshell we believe: it will undercut the rest of the market for the next few years but by the end of the decade, the marginal costs would have increased and the competitive pricing advantage of Henry Hub gas would have narrowed.
We anticipate that by 2020 there will be a healthy spread of LNG supply options able to compete with US LNG delivered to Asia. The one regional supply growth story is Australia, indeed, the country is emerging as an LNG powerhouse. They exploited a unique market window, when there was little supply competition, through managing to get a number of substantial projects sanctioned in a short period of time. Ultimately, a supply foundation has been laid and we believe, despite well-documented domestic sector challenges, Australia by 2020 will be the largest global LNG exporter. In addition, Canada is a gas market of vast supply potential and is actively positioning itself to serve the burgeoning Asian demand market, particularly since it has a small domestic market. Moreover, East Africa is quickly emerging as a powerful exporting gas hub and Russia remains a potent supply player. Clearly an array of diverse competition is emerging in the gas market and therefore the competitiveness of US LNG is not as clear or straightforward as is widely perceived. Buyers have and will continue to have options and will play on these shifting dynamics.
Can Singapore realistically fulfill its ambition of becoming the region’s leading LNG trading hub?
Nicholas Browne: Singapore has well-established ambitions to position itself as the LNG trading hub for the Asia Pacific region. The nation’s low tax incentives, established trading expertise, together with its transparent legal and regulatory environment have already helped to attract a host of companies to launch LNG trading offices in Singapore. Additionally, government-owned Singapore LNG Corporation has constructed a third storage tank that will provide excess storage capacity and is intended to support trading purposes. We certainly see some potential for Singapore to act as a physical trading hub, where traders could use excess storage capacity to manage supply and demand changes more efficiently and also potentially break bulk large cargoes for resale into smaller regional markets.
At the same time, it’s important to recognise that currently there are limitations to Singapore’s ambitions. These include a small domestic market together with limited LNG supply competition into Singapore, which acts to restrict liquidity. Furthermore, many global market participants remain wedded to pricing LNG based on oil prices that will hamper the potential for Singapore to develop as a LNG pricing point. Although we expect that some of these constraints will be overcome, it will clearly some way off before a fully functioning and liquid LNG hub develops in Singapore.
Considering profound regional energy shifts, what is the future role of Singapore in this energy hungry region?
CM: In terms of Singapore’s role as the financial energy hub of South East Asia, Singapore has some fundamental advantages over its regional competitors. Firstly, it has a mature and well established fiscal infrastructure and thus is already respected as a major player. In addition, Singapore’s government has a longstanding reputation for crafting a highly conducive and stable business environment, which is a huge draw for oil and gas companies looking to establish a strategic headquarters in the region.
NB: Singapore is aware of potential competition and the incentivizing measures these states have in place. For instance, Malaysia has made efforts to increase the attractiveness of its commodity trading infrastructure and Singapore responded by implementing the tax inductive Global Trader’s Scheme. Ultimately, Singapore never rests on its laurels; it proactively responds to emerging competitors.
Considering the evolving energy landscape, what services does Wood Mackenzie Research provide the regional industry?
CM: Wood Mackenzie has a fast growing Asian presence. We have three Asian hubs: Singapore, Beijing and Sydney, in addition to a number of satellite offices across the region. Asia is a significant focus for the company and energy incorporates a large chunk of our business, although, the company also covers a number of other commodities.
Wood Mackenzie’s services are viewed valuably in the region. Considering the fluidity of dynamics in the energy market, there is a real thirst for sector knowledge that focuses on not only Asia, but global shifts and trends as well. This is particularly pertinent to our Asian clients that are broadening their international investment base. We can offer clients an integrated service providing detailed trend and investment research and corporate consultancy on a regional and global scale.
A number of companies provide commodity research analysis and increasingly major companies are building their own research and energy economic teams. What can Wood Mackenzie offer that these internal teams cannot?
NB: We place the highest value on integrity and the objectivity of our analysis and advice, which means we can be trusted to give an honest and independent appraisal of any situation as a third-party, while always remaining accessible to clients.
Our client base includes all the major international and national energy, metals and mining companies as well as financial institutions and governments. We work with a range of diverse functions, from strategy and policy makers, business developers and market analysts, through to corporate finance, risk teams and investors. The breadth and depth of our work allows us to delivery creative and insightful advice that is grounded in deep industry understanding.