By Robert Guy
Shock and awe: that's an apt description of Joko Widodo's
approach to shaking up Indonesia's energy industry.
Having warmed the president's chair for less than two months,
Joko has moved quickly to stamp his authority on Indonesia's
national oil company, Pertamina, as part of the new government's
plan to reform the corruption-riddled oil and gas industry and
underwrite the energy security of the world's fourth most populous
nation.
The blood-letting has been quick - and brutal. Pertamina's
entire board of directors was dismissed, while long-time cement
industry executive Dwi Soetjipto has been parachuted in as new
chief executive and charged with reviving the fortunes of the
national oil company at a time when Indonesia's production of oil
and gas has fallen. It's hard to believe that the one-time member
of the Organization of Petroleum Exporting Countries (OPEC) has
become an increasing larger importer of foreign oil. Having barely
settled into the job, Dwi announced plans during the week to build
new refineries and upgrade existing facilities to reduce
Pertamina's fuel imports to zero by 2019. If successful, Pertamina
will play a substantial hand in reining in the country's hefty
current account deficit.
But the sharpened focus on energy policy is not unique to
Southeast Asia's largest economy. Policymakers across the region
are addressing all aspects of energy policy, be it fuel subsidies,
the need to boost production of oil and gas, and the embrace of new
technologies to bolster energy efficiency and combat pollution. The
need to increase oil and gas production remains a focus for many
countries in the energy hungry region. While the slump in oil
prices to a four-year low has prompted the gnashing of teeth and a
lot of handwringing in the Middle East and the U.S. shale industry,
many Asian companies - both state-backed and publicly listed -
continue to push ahead with projects that will ensure longer term
energy security.
Given the forecast for Asia's longer term energy demand, it's
little surprise that many Asian companies are continuing to invest
despite the weak price environment. The International Energy Agency
expects China to overtake the U.S. as the world's largest oil
consumer by 2030, with India and Southeast Asia emerging as growing
sources of demand. On a shorter term horizon, JPMorgan expects
Asian oil demand growth of around 500,000 barrels a day in 2015, a
similar level to 2014 as rising demand from China, India and
Southeast Asia offsets weaker demand in Japan. The broker is
forecasting Chinese demand growth of around 300,000 barrels a day,
driven mainly by rising demand for petrol amid increasing car
ownership in the world's second largest economy. India's oil demand
is expected to grow between 3% and 4% next year.
The robust demand outlook helps explain why many Asia-based
producers are pushing ahead with new projects or deals, a stark
contrast to the ongoing debate about who will blink first and cut
oil production, Middle East oil producers or U.S. shale players.
Over the past couple of weeks, we've seen PetroChina (857.HK) and
its partners commit to investing over $4 billion to drilling for
shale in the China's Southwestern municipality of Chongqing.
Meanwhile, the partners in Australia's massive North West Shelf
Project liquefied natural gas project have committed $1.2 billion
to the development of the Persephone gas field. This is the third
major gas development in six years for the country's largest
operating oil and gas project. Two of the joint venture partners
include BHP Billiton (BHP.AU) and Woodside Petroleum (WPL.AU), the
latter being the operator of the NWS, which has exported LNG to
Asia for 25 years.
Meanwhile, India's Oil and Natural Gas Corp (500312.IN) is set
to extend its reach well beyond the borders of the world's second
most populous country. The company, which was recently analyzed by
Barron's Asia's Thomas Streater, is expected to ink an agreement
next week to take a stake in two Siberian oil fields. Timed to
coincide with the visit by Russian president Vladimir Putin to
India, the deal involves Rosneft (ROSN.RU) selling a 10% stake in
the Vankor field, the largest field to have been brought into
production in Russia over the past 25 years. The deal comes quickly
on the heels of an agreement to sell a 10% stake in Vankor to
China's CNPC in early November.
But to be clear, not all Asian energy producers are immune to
the pain being inflicted by low oil prices. Malaysia's national oil
company, Petronas, has delayed a decision on its proposed Pacific
Northwest LNG terminal due to concerns about the project's high
costs at a time when its revenues are being squeezed by lower oil
prices. Meanwhile, Australia's Santos (STO.AU), which is developing
a major LNG project in the Australian state of Queensland,
continues to be brutalized by investors. The stock plumbed to a
10-year low this week after the company announced it had pulled a
EUR500 million hybrid capital raising and said it would review its
spending plans for 2015.
While the low price environment will weed out those projects
with dubious economics, longer term investments in Asian energy
make sense given the robust outlook for demand. It is a point well
appreciated by the many of the region's energy companies,
especially those with political masters who see the value in long
term energy security. Energy stocks may be on the nose among
investors, but seeking out those producers who can withstand the
short term pain of lower prices in order to benefit from the gains
provided by strong Asian demand over coming years could reward
patient investors over the long term.
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Comments? E-mail us at robert.guy@barrons.com
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Comments? E-mail us at asiaeditors@barrons.com
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