Evaluating Southeast Asia ExplorationBy Nick Holloway
This article on exploration in Southeast Asia is based on a keynote paper presented at the SEAPEX conference in Singapore on 5 April 2011.
Many characteristics of the exploration scene in Southeast Asia, such as good subsurface qualities and a broadly business-friendly environment, have attracted a wide range of E&P companies over the decades including majors, state companies and independents of all sizes. However, as the region has matured, some of these qualities have begun to fade a little. For instance, the oil-rich basins of western Indonesia are reaching an advanced state of maturity as evidenced by decreasing success rates, smaller discovery sizes, reserve adds and levels of exploration drilling. Figures 1 and 2 show these trends and, of these, the decrease in oil discovery size and reserves adds is the most critical.
Figure 1. Southeast Asia drilling trends
Figure 2. Southeast Asia reserves adds
However, the situation is partly mitigated by continuing liquids discoveries in the less mature areas of offshore Vietnam and the East Malaysian state of Sabah. Downward trends for gas have been less marked given continuing sizeable discoveries in the Kutei and Bintuni Basins in central and eastern Indonesia respectively. Also, further gas volumes continue to be added offshore Sarawak.
The major underexplored areas of Southeast Asia comprise several basins offshore eastern Indonesia, the Philippines and central Vietnam. Most of these basins, while possibly offering large targets, are considered relatively high risk and predominantly gas prone. From a commercial viewpoint, the East Asian LNG market is expected to remain strong with attractive prices. However, in each frontier basin, sufficient gas volumes will need to be discovered to support stand-alone LNG schemes.
So where does that leave Southeast Asia in terms of its attractiveness to E&P investors? A clue can be found in acreage holding trends of different categories of companies over the last 20 years (Figure 3). Very noticeable are three phenomena:
- A steady drop in acreage holdings by the majors (large IOCs); the slight rise since 2005 reflects some acreage awards in high risk, eastern Indonesia and CBM block awards
- The appearance of significant holdings by the international arms of state oil companies (INOCs) since 2000
- The rapid rise of holdings by independents since 2005
Figure 3. Southeast Asia net acreage holding by different company categories
To a degree, both the INOC and independent trends may be the result of filling a vacuum left by departing large IOCs. However, the INOC trend is a phenomenon that has been seen around the world as part of those companies’ drive for supply security for their owners’ rapidly growing and energy-hungry economies. Most notable are the INOCs of China and India. In Southeast Asia, there has also been a regional effect where the spread outside their own borders of local state companies such as Petronas, Petrovietnam, Pertamina and PTTEP has magnified the impact of the arrival of the Chinese companies.
So the question as to how attractive Southeast Asia still is to upstream investors is more complex and nuanced than at first sight. However, the question can be addressed and useful insights can be gained by using the IHS Global Window™ strategic planning and business development platform to analyse the situation more closely. Global Window models nearly 500 exploration, exploitation and unconventional gas “locations” around the world taking into account subsurface quality, prospectivity, cost, commercial viability (including profitability) and above-ground environment and risk aspects. This modelling and analysis allows scores to be assigned to a total of 18 key parameters. Deriving these scores draws on the whole spectrum of the IHS information base and extensive insight skills as well as some external sources. Layered upon this are the specialist experience and judgements of the Global Window team.
One of the key Global Window outputs is the location scorecard. A typical scorecard is shown in Figure 4.
Figure 4. Global Window score card for Indonesia, Kutei Basin, deepwater gas
Locations are defined as basin scale regions that have both subsurface and above-ground consistency. As an example, six locations are modelled in the Niger Delta to cover both oil and gas lying in onshore, shallow water offshore and deepwater offshore settings. While the Niger Delta represents essentially a single petroleum system, the above-ground issues of costs, operating environments, fiscal terms and product values vary widely.
Figure 5. Global Window strategic matrix (Boston Plot)
In all locations, scores for the two sets of parameters are averaged and plotted on a Boston Plot or strategic matrix (Figure 5) such that the most desirable locations appear in the top right quadrant and the least desirable in the bottom left. A very important refinement in this analysis is that each of the scored parameters can be weighted according to their relative importance to a given company. This allows Global Window to look at Southeast Asia through the eyes of two contrasting types of E&P organisation: a reserves-hungry major IOC or INOC on the one hand and a cost-conscious independent on the other.
Of course, every individual company will have different strategies, particularly amongst independents, which are all looking for different niches within the business. However, broadly speaking, large IOCs and INOCs will be looking for reserves replacement with large, material volumes in locations with plenty of running room. INOCs will also be driven by the need for supply security. Both types of companies may be willing to compromise subsurface and above-ground risk to achieve these aims. They will also be prepared to tolerate high costs and be able to play the “long game”. Independents will generally be more concerned with combining disciplined cost and risk management with activity in projects that can achieve relatively rapid monetisation. This could be achieved by early and quick discovery development and/or farm-out of equity for significant cost bearing by incoming parties. Independents may also be happy to build material business through aggregation of relatively small discovery sizes in mature areas. To represent these different priorities, two sets of parameter weightings have been selected as shown in Table 1.
Table 1. Parameter weightings for example major IOC/INOC (blue) vs. example independent (red). Key factors are highlighted
Figures 6 and 7 show the impact of these weightings on the distribution of the 28 modelled Southeast Asia locations on the strategic matrix. The analysis indicates that there is limited remaining attraction for the major IOC/INOC category except for a couple of Malaysian locations (offshore Sabah in particular) and the high risk and relatively unproven frontier areas of eastern Indonesia and Vietnam. As mentioned earlier, these areas are also predominantly gas-prone and the future strength of the East Asian gas market is therefore a crucial commercial driver.
Figure 6. Southeast Asia locations with major IOC/INOC weightings
Figure 7. Southeast Asia locations with independent’s weightings
This, of course, is the picture with respect to conventional exploration, but we should not ignore the growing interest in unconventional gas prospects in Southeast Asia, particularly in Indonesia. Leading areas for coalbed methane (CBM) are the onshore Kutei Basin in Kalimantan and the South Sumatra Basin. Both areas have been the subject of special bid rounds with companies now actively exploring in both and yielding encouraging initial results. Shale gas potential is also being actively evaluated at present but only on a pilot, laboratory basis using existing core material from conventional wells. South Sumatra again features prominently in this work. The anticipated large volumes obtainable from these unconventional sources are already beginning to regenerate large company interest in the region, but the challenges in bringing about commercial exploitation should not be underestimated and many above-ground issues will need to be addressed even if the subsurface indications are positive.
For the independent, Figure 7 shows that there is still significant attraction in the more mature and oil prone areas provided these companies are prepared to accept smaller volumes and drill their acreage intensively to aggregate material reserves.
We have reviewed the situation within Southeast Asia. But what about the competition from other parts of the world as seen by our two contrasting company types? Again, Global Window can be used to address this. Firstly, strategic matrix plots have been generated using the same parameter weightings as before to show how the whole world looks to the two company types (Figures 8 and 9 — note highlighting of the Southeast Asia locations). The very different skews to the two distributions are strongly marked. To each of the plots we can now apply a set of filters appropriate to the two company types to identify specific competitor locations using Global Window’s “Chooser” facility.
Figure 8. All Global Window exploration locations with major IOC/INOC weightings
Figure 9. All Global Window exploration locations with independents’ weightings
For the large IOC/INOC, such filters comprise large future discovery size, substantial basin running room, strong net reserves add potential, tolerance to political and fiscal risk, and tolerance of harsh operating environments, long lead time projects and high costs. The result is shown in Figure 10. The competing locations include the current star performers of the global E&P scene such as offshore Brazil, Gulf of Mexico ultra deepwater (not withstanding Macondo), offshore Israel, Angola and northwest Australia. Also note that only a very limited number of Southeast Asia locations survive the filtering process.
Figure 10. Matrix with major IOC/INOC filters indicating competing global locations
The filter set for the independent focuses on good acreage availability without undue access delay, moderate to low costs, high quality petroleum systems and good reservoir quality, no more than moderate subsurface risk, generally low political fiscal and monetisation risk, and fair to good operating environments and project profitability. To achieve these, our example independent may also need to accept relatively small volumes and limited basin running room. The outcome of this filtering process is shown in Figure 11.
Figure 11. Matrix with independents’ filters indicating competing global locations
The competition from the rest of the world is still strong but comprises a very different set of locations including many onshore such as in Egypt, Colombia, West Africa and Australia. Some shallow water offshore locations also feature, such as the post-salt plays in Brazil’s Campos Basin. Were it not for relatively high costs, a number of Northwest European locations would also have featured. It is also instructive that, of the surviving Southeast Asia locations, none is in Indonesia.
Figure 12 shows Global Window “barrel plots”, which illustrate the relative profitability of selected locations within and outside Southeast Asia. These highlight that terms in Southeast Asia are relatively tough and that gas, at least for domestic consumption at controlled prices, is not very attractive. So, for the independent as well, there are plenty of tempting places around the world to invest outside Southeast Asia but many Southeast Asia locations still look appealing.
Figure 12. Global Window “barrel plots” for various locations showing margin on the barrel (Oil price WTI US$70 per barrel or local gas prices, NPV0%) as an indication of profitability and relative severity of fiscal terms
So now we have the outline of an answer to our original question. It would seem that investment interest amongst the large IOCs and eventually the INOCs is likely to decline as it is primarily subsurface issues that will be driving their interest; these are issues over which governments in the region have no control. We have also seen that their interest could be renewed by success in some of the so far underexplored frontier Southeast Asian basins and by the potential for substantial unconventional gas volumes.
And the independents? We have shown that there are still a number of factors in Southeast Asia that remain attractive to them. These include both below- and above-ground aspects. Nevertheless, maintaining that interest will become ever more challenging as the basins, particularly the oil-prone ones, continue to mature. This is where the role of governments and their regulatory authorities have a potentially significant role to play. Given that governments can do nothing about the remaining subsurface potential of their domains, where is it that they can put their efforts to maintain the region’s attractiveness? Drawing on Global Window’s ability to focus on specific below- and above-ground factors, Table 2 illustrates parameters over which governments have varying degrees of influence. Those that stand out as having strong government influence point to some specific and critical issues that governments can control:
- Regular access to open acreage through transparent award processes
- Streamlined facilitation and approval of inter-company transactions (farm-outs, divestments, etc.)
- Absence of government pre-emption
- Fair and stable fiscal terms that have the flexibility to allow for special situations such as marginal fields and EOR/IOR projects leading to attractive rates of return and payback periods
- Optimisation of the operational environment in terms of security; transparent and pragmatic environmental policies and permitting procedures; equitable compensation for surface rights owners onshore
- Third-party access to existing infrastructure
- Well coordinated regulatory authorities empowered to facilitate the timely issue of necessary permits for on-site activity
Table 2. Relative levels of government influence over scored parameters in Global Window
To illustrate how optimising such factors might improve investment attractiveness, the scores for the high government influence parameters were modified in all the Global Window Southeast Asia locations to more closely to resemble those found in Northwest Europe locations. The impact of this exercise, in terms of the example independent’s outlook, can be seen in Figure 13, where it will be noted that the majority of Southeast Asian locations have moved into the most favourable quadrant. Thus, Southeast Asian governments appear to have the key to keep their region attractive with respect to global competition for the investment dollars, at least for the independents.
Figure 13. Influence of substituting typical Northwest Europe above-ground scores on strategic matrix plot positions for Southeast Asia locations
So we can conclude that Southeast Asia nations may be in danger of losing the battle to keep the large IOCs and INOCs investing substantially. But we have also shown that there is much remaining attractiveness to keep independents investing provided governments do what is in their power to maintain that interest. Eclipse is a possible but avoidable outcome!
To learn more, please contact us.
Nick Holloway is the editor of Global Window.
Aberdeen Exhibition & Conference Centre, Aberdeen
6 – 8 September 2011
IHS will be attending and exhibiting at Offshore Europe in Aberdeen. Please visit us at Stand No. 1C11 in Hall 1 to find out how we can help with your business decisions.
Atlantic Ireland Conference
Burlington Hotel, Dublin
17 October 2011
IHS will be attending the Atlantic Ireland Conference in Dublin. Please visit us in the Munster Room to find out how we can help with your business decisions.
Take a tour of the new ihs.com!
This tour is designed to help you learn how to easily find what you need on our new website.