Simon Crellin, Director of Deloitte Petroleum Services
Director of Deloitte Petroleum Services, Simon Crellin, gives a detailed macro analysis of the trends and changes in the dynamic upstream O&G market of South East Asia, and explains why Singapore will continue to be a core player in a rapidly evolving energy ecosystem
Since July 2010, you have delivered presentations on Asia Pacific Oil and Gas exploration: past, present and future. Within that time period, how has the regional energy landscape evolved?
As reported by IEA’s South East Asia energy outlook, the need for primary energy has augmented over the last three years, and that trend is set to continue. Whereas, with the exception of 2012 which saw 38 commercial discoveries, the level of exploration activity in South East Asia has remained fairly constant, with approximately 30 commercial discoveries occurring per annum.
Today, there is an industry misconception that the size of the discoveries in the region are decreasing, and that the major, low hanging fruit oil and gas fields have all been found. Yet, from a statistical perspective, if one adds up the size of all the annual discoveries and divides that figure by the number of discoveries, the actual size of the discoveries on an annual basis is relatively flat. Of course, such statistics can be contentious and in reality the finding of ‘one or two elephants’ within each year has propped up the ‘average’ discovery size. Nevertheless, exploration is having to move into deeper waters and the more frontier basins to continue this exploration success. There has been recent success chasing known geology and proven hydrocarbon plays into deeper waters in the offshore basins of East Malaysia’s Sabah and Sarawak for example.
Indonesia has experienced acute exploration evolution over the last five years. On the Western side of the Makassar Straits, in the mature Kutei basin, there are many established fields primarily producing gas and some oil. By contrast, on the Eastern side of the Straits in the offshore North and South Makassar Basins, fourteen very expensive, high profile deepwater exploration wells have been drilled in the last few years, none of which resulted in a commercial discovery. In Eastern Indonesia exploration efforts offshore Papua since 2010 have also yielded no commercial discoveries to date, although more commitment wells are due to be drilled. I am fairly confident that exploration Offshore Seram will result in some success.
How has the lack of discoveries from recent exploration efforts impacted foreign investor appetite in Indonesia?
This issue has been compounded by internal headwinds including well-publicized corruption cases within SKK Migas, growing local autonomy issues and nationalistically driven politics. Moreover, the disequilibrium between Indonesia’s declining oil production and surging energy demands only serves to exacerbate the country’s profound energy challenges. As such, the government needs to strike a careful balance between hydrocarbon production exports and domestic market obligation (DMO) volumes, a challenge facing many countries in SE Asia. The introduction of fiscal incentives is also needed to encourage energy companies to explore for and subsequently commercialize reserves.
Malaysia is a pertinent example of an APAC country that in spite of considerable energy demands and declining domestic production, has been proactive in introducing fiscal inducements that seek to entice foreign companies to support the development of the country’s marginal fields and bolster production from mature fields using enhanced oil recovery (EOR) techniques. For instance: Malaysia has recently established RSC contracts, essentially ‘turnkey’ contract arrangements, whereby an oil company operates and develops a field, and in return receives payment out of the revenue generated from production, without owning the field itself. Such top down initiatives aim to abate declining domestic production and strengthen domestic energy security. The importance of such directives is becoming even more pronounced when one considers the huge fuel subsidies in place in Indonesia and Malaysia. Since international crude prices have been approximately 100 USD per barrel for the last five years, the fiscal burden on these Governments from subsidizing fuel for consumers is mounting and this is clearly not sustainable.
Crude oil prices have been remarkably flat, high and stable over the last few years, fueling high levels of E&P investment globally. Considering the myriad of supply and demanding forces shaping the price of oil, can the price of crude stay above $100 over the next few years?
I used to track oil prices in the North Sea from London. Trying to forecast future oil prices is an incredibly challenging process, because the fundamental forces impacting the price of oil are unpredictable. For example, anticipating extraordinary events: weather disruption, natural disasters, global economic health, political strife and regional conflict, all of which impact on oil price, can be impossible.
Through a simple synopsis, despite the global economic crises of 2008, global energy demand is set to rise over the long term as the global population continues to grow. In addition, there are giant emerging markets that are experiencing high levels of urbanization and industrialization and primary energy (coal, oil & gas etc.) is required to fuel these economic shifts. Given such demand forces, and relative supply constraints, right now, I cannot see the price of oil collapsing in the short-term. Nevertheless, the oil market is cyclical and E&P companies must always bear that in mind.
With the commercial discoveries of gas in Asia, unprecedented regional demand and potential LNG export directives from the USA, what do you believe will happen to LNG prices in this region over the next few years?
In terms of gas, Asia is predominately a gas, rather than oil supplier. Over the last decade, domestic gas prices in Indonesia have escalated significantly. Most of the LNG produced in South East Asia feeds into the North Asian market and is being sold at anywhere between 12-18 USD MMbtu. The elephant in the room that has the capacity to overhaul regional LNG prices is the question of huge unconventional gas supplies, potentially streaming into Asia from the US, in the form of LNG exports.
The US Department of Energy (DOE) has approved exports from four projects to date, which do still have various environmental and regulatory hurdles to overcome. Nonetheless, realistically there will be gas exported from the US, as LNG, within the next five years, with prices linked to the domestic Henry Hub gas price. All the major global LNG players naturally state that they do not believe LNG prices will be decoupled from Japanese crude cocktail prices anytime soon, but, they would say that wouldn’t they!
Japanese and other North Asian buyers are already engaging with the potential US suppliers and locking in LNG volumes at lower prices. This is having a knock-on impact on LNG projects due to come on stream within Australia and Indonesia over the next few years, with LNG buyers seeking to renegotiate the pricing in their contracts for off-take from these projects. Clearly, the threat of potentially cheaper gas from the US entering the LNG market in Asia is a major headache for regional LNG developers.
The US DOE has to strike a careful balance as to how much gas it allows to be exported. If too much gas is channeled out of the US domestic market, internal gas prices will rise. As such, if gas prices at Henry Hub rise from four to six USD MMbtu, the trading opportunity with Asia becomes a lot narrower.
With the development of Singapore’s new import terminal, Singapore arguably has ambitions to be a regional LNG trading hub. Considering the country only has one terminal, lacks storage capacity and has a relatively illiquid small domestic market, can these long-term ambitions be met?
Singapore has the advantage over regional competitors such as China, as it is already a global oil-trading hub. As such it has fiscal and regulatory maturity and reliability in place to realize its ambitions. Geographically it is also very well placed to serve as a regional LNG hub. Yet, to become the region’s eminent gas trading hub, it needs to build its domestic storage and trading volumes.
According to SGX data, total market capitalisation of O&G Exploration companies has quadrupled to S$3.6 billion from last year. Yet, this figure is dwarfed by rival exchanges such as London and Australia that have a long tradition of attracting O&G companies. How do you see SGX competing in the future, against these rivals?
Compared to the global exchanges mentioned the SGX is a minnow. Yet, I see this as an advantage. For instance, on the ASX, TSX and AIM, smaller independents have been drilling wells and indeed have a good story to tell. Yet their share price is flat-lining because there are simply too many companies listed—each one is like a tree in a forest, unable to stand out. To be recognised and generate value, the smaller independents need to consolidate.
By contrast, the SGX has a concentrated list of oil and gas E&P companies, and because of this, a good story will get a lot more traction than on the bigger exchanges. As investor appetite in Asia is voracious, the regional energy industry buoyant and the fact Singapore is fast becoming a wealth management hub, I can see the number of E&P companies gravitating towards the SGX expanding.
How is Deloitte Petroleum Services in Singapore positioned to capitalize on South East Asia’s burgeoning growth?
Today, there is an appetite in Asia for energy related advisory services and Deloitte, with its unique array of services, is well placed to capitalize on that desire. The company has been renowned for providing clients with traditional accounting services, yet today, our service offerings have evolved considerably and we see ourselves as a professional services entity. We have a number of specialist groups within our Energy & Resources industry group, one of which is Petroleum Services.
At Petroleum Services we analyze, at a detailed level: E&A drilling, licensing, field development and infrastructure activity across the globe. We have a suite of off-the-shelf products including GIS E&P databases, economic models and reports that are essentially used by our clients as decision support tools and to identify business development opportunities. In addition we use our data and knowledge to support advisory work across Deloitte’s wider service offerings.
Petroleum Services and other specialist teams within Deloitte, such as our Resource Evaluation and Advisory (REA) group, employ geologists, petroleum engineers and economists that provide commercial and technical due-diligence to a level that our big four competitors simply do not offer.
We support clients at every point along the value chain, from strategy formulation at the outset, to post deal consolidation at the end of an acquisition and everything in between. Our capacity to provide such an integrated level of services and support gives Deloitte a significant competitive edge.
With the ascendance of Asian energy entities, how has the make-up of Deloitte Petroleum Services’ client base changed since you joined Deloitte in 2002?
Deloitte serves a wide variety of clients. Recently, I have seen a rise in the number of start-up E&P companies in this region, particularly stemming from Malaysia. A recent prominent trend in the region, has been the exodus of a number of North American companies from South East Asian E&P assets, to re-focus on opportunities within their domestic market. From a more global perspective many of the larger International E&P companies are now elephant hunting in other E&P hotspots around the globe such as offshore East and West Africa and Latin America. Within South East Asia this has presented opportunities for the smaller-mid cap companies. As such, our client base is becoming increasingly diverse.
As Director of Deloitte Petroleum Services, what direction would you like the company to take over the next three years?
I would like to see Deloitte’s Energy & Resources Group continue to go from strength to strength. We must continue to focus on providing seamless cross-border support to our clients, fully leveraging the expertise of our specialist teams to provide the highest level and quality of service. Finally, I want to support our regional clients on their growth journey, so that they can seize and capitalize on the nascent potential of this buoyant energy region.