As oil prices fluctuate and markets brace for the impact of the end of a US sanctions waiver on fuel purchases from Iran, Asia’s energy companies are making deals closer to home as bigger global players pull away from the region.
Southeast Asia has already seen up to US$2.8 billion in mergers and acquisition (M&A) deals so far this year, according to Wood Mackenzie, a United Kingdom-based consultancy.
Those deals have been led by US-based Murphy Oil selling its Malaysia operations to PTTEP, a subsidiary of Thailand’s national energy company, for $2.1 billion.
Wood Mackenzie predicts that up to $14 billion of energy assets could change hands in the region this year if, as expected, more M&A deals like the Murphy-PTTEP deal are completed.
Big deals such as the Murphy-PTTEP sale represent a significant jump, given that a typical Southeast Asian oil and gas M&A deal over the past five years has been worth a mere $111.6 million, according to S&P Global Market Intelligence data.
Total annual energy deal values in Asia have ranged between $5.4 billion and $8.7 billion in the past four years, according to Wood Mackenzie data.
Wood Mackenzie’s Andrew Harwood said that he expects buyers to be “Southeast Asian NOCs [national oil companies] and smaller regional players” with back-up from “some of the mid-tier IOCs [international oil companies] that retain Southeast Asian ambitions.”
As Southeast Asia’s economies continue to grow, energy needs are coincidently rising. That means that state energy companies such as Indonesia’s Pertamina and Thailand’s PTT will have to spend upwards of $30 billion in the coming years to meet their domestic needs, according to Wood Mackenzie.
The region’s growing energy demands, and the likely need for big capital and technological investments to exploit new fields, could provide an incentive for some IOCs to stick around. But others are more clearly headed for the exits.
“Among majors, Royal Dutch Shell is continuing its divestment plan in the region and is looking to offload its 35% stake in Abadi [an Indonesian liquified natural gas project] up to $1 billion,” said Parul Chopra of Rystad Energy, a Norway-based energy research firm.
Regional NOCs, meanwhile, are increasingly looking closer to home for new projects and assets.
S&P Global Ratings said in an April 23 press release that after expansion to Africa and Western Asia proved disappointing in some cases, “most national and private Asian oil producers are increasing focus on their home markets in their search of production scale and reserves.”
Oil prices have fluctuated wildly in recent months, up 45% now from a low of $43 per barrel (West Texas Intermediate) and $50 (Brent) in December, which in turn was a steep drop from October 2018 highs of $76 and $86 respectively, US Energy Information Administration data shows.
The recent price revival could fuel inflation and put currencies under pressure in Asia’s many net oil-importing economies, where import dependency ranges from about 50% in Indonesia to 83% in India and 90% in the Philippines.
Last year’s oil price surge meant that “currencies of Asian economies with current account deficits (ie India, Indonesia, and the Philippines) were hit particularly hard,” according to a recent report by the research section of Australia and New Zealand (ANZ) Banking Group Limited.
“High oil prices amid supply risks will remain a concern,” the ANZ said. However, the price rebound could boost incentives for deal-making and give a jump-start to regional projects that had been stalled during the global price downturn.
S&P Global Ratings pointed to the example of China’s national oil companies, which “were actively securing overseas assets in the last oil price boom,” including in Southeast Asia.
“As oil prices retreated, there have been no major acquisitions by Chinese NOCs,” S&P added, with the Chinese government said to be emphasizing domestic expansion of oil and gas exploration to supplement its hefty imports, estimated by S&P at 70% for oil and 40% for gas last year.
The peaks and troughs have in part been market reactions to off-on sanctions on Iran, political tumult in oil-exporting Venezuela and uncertainty around whether other major producers such as Saudi Arabia, Russia and the US will cut or boost their supplies.
The US was due to end sanctions waivers on Iranian oil imports on May 2, a move that could curtail Iranian supplies and push up prices. That is if big importers such as China and India abide by American demands to curtail their Iranian imports, a big if particularly in China’s case.
If Beijing declines to go along with America’s renewed attempt to curb Iranian fuel exports, prompting the US to retaliate, it would further upset already uncertain trade war talks between the world’s two biggest economies.
The waivers were introduced to soften the impact of US President Donald Trump’s withdrawal a year ago from his predecessor Barack Obama’s nuclear deal with Iran, which halted sanctions in return for Tehran agreeing to curtail its nuclear program.
Considering the high stakes, America’s sanctions waivers could continue, at least in some diluted form “as there may be scope for imports via barter or non-compliance from the main importers China and India,” according to Fitch Ratings, a credit risk agency.
If Iranian fuel is blocked from global markets, it could motivate the US to ramp up supplies for export to meet market shortfalls, adding incentive for IOCs to dump their lower range Asian assets to local firms and concentrate on bigger projects in America’s now booming oil and gas sectors.
Rystad Energy noted in March that IOCs like “Chevron and ExxonMobil recently announced plans to significantly ramp up production in prolific shale basins, such as the Permian Basin spanning Texas and New Mexico.”
Wood Mackenzie’s Harwood described the $2.1 billion Murphy-PTTEP deal as an example of “portfolio rationalization by the majors”, or exits from regions such as Southeast Asia prompted “by a focus on US tight oil, deep water, large-scale [gas] that offer greater returns and materiality for larger players.”