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May 28, 2020

Upstream impact of Covid-19 and depressed oil prices on Asian NOCs

By GlobalData Energy

With the continuous impact of Covid-19 pandemic and depressed oil prices, it remains of paramount importance that Asian National Oil Companies (NOCs) continue to operate with minimal disruption to safeguard national resources and provide for the domestic economy. A number of factors have been assessed to scale the impact on Asian NOCs upstream business and associated risks under the current economic climate.

For NOCs in Asia, the peer group analysed consists of China National Petroleum Corp (PetroChina), China Petroleum & Chemical Corp (Sinopec), China National Offshore Oil Corp (CNOOC), Petroliam Nasional Bhd (Petronas), PT Pertamina (Persero) (Pertamina), Oil and Natural Gas Corp Ltd (ONGC) and PTT Exploration & Production Public Co Ltd (PTTEP).

All Asian NOCs are highly exposed to a low case oil price scenario with an average reduction of approximately $8/boe on post-tax cash flow in 2020. Among the peer group, Chinese NOCs, including PetroChina and Sinopec, show the most significant upstream impact due to the combination of largely impacted upstream cash flow under the current low oil prices and struggling reserve replacement ratio performance.

Less reliance on the pre-FID projects puts them in a stronger position but it is not enough to offset poor financial aspects. The pair saw their 2019 debt levels increase from 2018 with weakened debt-to-equity ratios. High exploration and production costs in China are undoubtedly driving them to take preventive measures by cutting planned investments and reducing operational expenditures. PetroChina has guaranteed the most drastic cut of nearly 32% from its original planned budget for 2020.

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Conversely, ONGC and Petronas find themselves the lowest-rated, using the upstream impact scorecard, thanks to the relatively lower debt-to-equity ratio and robust reserve lives. It is also worth noting that Petronas has been maintaining its net cash position for years. Both ONGC and Petronas are well-positioned to weather the current oil price volatility and have so far opted to maintain their CapEx guidance for 2020, although several projects could eventually be postponed under the current business environment.

Unlike international oil majors or independent operators, Asian NOCs are usually guided by governmental strategies at a certain level and have significant responsibilities to support their respective nations. The role of the NOCs is likely to continue growing in importance, given the dominant share of reserves under their control. Companies with stronger production outlook are generally better prepared than those looking for future projects to enhance their portfolio.

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