Navigating the murky waters of Southeast Asia’s offshore market
September 11, 2018 | Singapore | OSEA2018 Industry Insights
Speaking at the OSEA2018 International Conference, Thom Payne, Director, Westwood Global Energy Group will arm his audience with a firm understanding of the macro-economic environment currently shaping higher oil prices, as well as the mid-long term outlook for regional E&P activity and the timing of a more substantial market recovery.
Thom Payne, Director, Westwood Global Energy Group
Q: Tell us more about yourself and your role with Westwood Global Energy Group.
A: I’ve been with Westwood for 12 years now and have spent the past 8 years in Singapore, building and developing our capability across Asia-Pacific and providing market intelligence, commercial insight and strategic advice to the regional energy industry. I also provide global leadership for offshore oil & gas market research & analysis, focusing on offshore marine, subsea/SURF, floating production and rigs.
Q: What is the current state of the oil and gas industry and where is it heading?
A: There probably hasn’t been a better time to ask that question since 2014 – at least for the Upstream sector. Underpinned by unprecedented levels of consumption, the Brent barrel continues to trade at around US$70-75. This has already prompted a meteoric recovery in the US shale industry, but longer cycle markets such as offshore haven’t quite felt the impact of higher commodity prices.
Jack-up and deepwater floating rig counts remain in the doldrums with global utilisation currently at 62% and 54% respectively. Despite this, improved industry sentiment combined with significant industry cost rationalisation has seen a notable uptick in new offshore project sanctioning. Over the past 12 months, projects such as ONGC’s R-Cluster (India), Mubadala’s Pegaga (Malaysia) and Cooper’s Sole field (Australia) have all gotten the green light.
Q: Any notable trends on your radar? If so, what impact should be expected?
A: The region’s shift towards offshore gas production has been well-documented, and this is set to continue with numerous world-class projects in the pipeline – think IDD and Abadi in Indonesia, Kasawari in Malaysia and Block B in Vietnam.
Geographically, the Rakhine basin in North Myanmar has been something of a bright spot with regards to new frontiers, and it has seen significant investment in both exploratory drilling and onshore infrastructure. However, as with many gas projects across South-East Asia, the negotiation of complex commercial terms between governments and foreign E&Ps may be a stumbling block to future activity.
Q: What has been the effect of recent geopolitics on crude oil prices?
A: Significant. It has been something of a rollercoaster over the past 9 months with numerous push and pull factors. On one hand, OPEC may begin to taper the 1.8mboepd of current production cuts which could inflate supply. On the flipside, the US administration is looking to reintroduce sanctions on Iran, threatening access to 2.1mboepd of crude oil exports.
Venezuela has also been a geopolitical wildcard where the fallout from the ongoing political crisis has seen crude production fall from an average of 2mboped in 2017 to a reported 1.3mboepd in June 2018. This fall has seen the OPEC member fail in meeting contractual export obligations to key demand centres such as India, which is undoubtedly playing a significant role in the current oil price rally.
Q: Could market volatility present valuable opportunities for industry players?
A: It’s somewhat fashionable to look for opportunities in a crisis, but what the offshore market really needs is a period of stability. We have seen numerous “false dawns” over the past 3-4 years. If oil prices remain above >$65/bbl over the remainder of 2018, it may start to embolden the industry and trigger increased levels of the more “speculative” investment required to really “move the needle” and improve the fortunes of offshore contractors.
In addition, the offshore supply chain is not just reliant on E&Ps to stimulate demand but also the banking/investment sector to provide/restructure debt to finance expansion. A steady, robust rate of growth is needed to thaw the frosty, negative mindset the financial community currently holds on offshore oil & gas.
Q: Exploration & Production spending has been on the rise. What’s your view on it?
A: At the backend of 2017, local E&Ps had generally budgeted for increased levels of capital spending in the region as recent cost efficiency measures improved operating cashflows. This sentiment has also been echoed by major service companies such as Schlumberger who are expecting double digit revenue growth across international markets in 2019; with much of this coming from offshore and exploration related activities.
However, despite more positive news-flow we don’t expect a major improvement in local offshore activity in the near term as new project sanctioning (mainly long-cycle offshore developments) will take time to translate into tangible volumes of work for the supply-chain.
Furthermore, there is a sense of “having your cake and eating it” as new project sanctioning generates more work. However, it has been largely driven by supply-chain efficiency and lower industry costs. This likely means that pricing for contractors in the drilling and offshore marine markets will remain suppressed for the next couple of years.
Q: Any advice for the market to deal with current market conditions?
A: I would say that any offshore business that has survived the past 48 months has certainly been doing a lot of things right already. 2018 would probably be best characterised as a year of cautious optimism.
However, as the industry heats up over the next 12-24 months, it will be tempting to adopt more aggressive commercial strategies to improve revenues and (perhaps more importantly) earnings. Despite this, we believe that successful businesses in 2018/19 will remain focused on utilisation in their core areas of competence.
Q: You will be speaking at the OSEA2018 International Conference. What do you think will be the most important takeaway for your audience?
A: A firm understanding of the macro-economic environment currently shaping higher oil prices, as well as the mid-long term outlook for regional E&P activity and the timing of a more substantial market recovery.
If delegates are able to leave the event armed with the above then they should have a solid foundation for navigating the murky waters of the Southeast Asian offshore market over the next few months.