The upstream oil and gas sector in Asia is facing unprecedented uncertainty with the continuous impact of the Covid-19 pandemic and the depressed oil prices. A number of factors have been assessed to scale the impact on the upstream business of Asia’s exploration and production companies (E&Ps) and the associated risk under the current economic climate.
For E&Ps in Asia, the peer group analysed consists of INPEX Corp (INPEX), JX Nippon Oil & Gas Exploration Corp (JX NOEX), Japan Petroleum Exploration Co Ltd (JAPEX), PT Medco Energi Internasional Tbk (MedcoEnergi), Sapura Energy Bhd (Sapura Energy), KrisEnergy Ltd (KrisEnergy) and Jadestone Energy Inc (Jadestone).
All Asian E&Ps are very sensitive to a low case oil price scenario on post-tax cashflow in 2020. Amongst the peer group, KrisEnergy has the most significant upstream impact due to its comparatively poor reserve life, RRR performance and high debt to equity ratio. The company remains severely financially stressed and is currently undergoing a proposed restructuring. Jadestone is also expected to struggle due to a negatively impacted upstream cashflow under the current low oil prices and significant production reliance on its pre-FID projects. The company is having difficulties to secure financing on new developments to support its long-term growth.
The current market conditions have forced the Asian E&Ps to slash planned investments and reduce operational expenditures. Jadestone has pledged the most drastic cut of more than 80% from its original planned budget for 2020, Nam Du and U Minh field developments in Vietnam have been deferred in addition to the planned infill drilling on its Stag and Montara oil fields in Australia.
Conversely, Japanese E&Ps, including JAPEX, INPEX and JX NOEX, find themselves the least exposed on an upstream basis thanks to their relatively lower debt to equity ratios, stable production outlooks through previously sanctioned developments and robust reserve lives. As a result, they are better positioned to weather the current oil price volatility. Nonetheless, significant cuts to annual profits forecast are widely expected after Q1 earnings were significantly hit by the Covid-19 pandemic and low oil prices. JX NOEX has recently made an agreement with Petronas for the implementation of a joint study for developing CO2 rich gas fields on CCS Technology, the company will focus on business opportunities in Asia due to the increasing gas demand in the region.
Unlike international oil majors and national oil companies, E&Ps in Asia are particularly exposed to commodity price fluctuations and Covid-19-related disruptions due to a lack of diversity in their corporate portfolios and a particular focus on the upstream business. Little to no exposure to downstream operations or other areas of the oil and gas value chain will exacerbate the downside impact of the 2020 market volatility for the Asian E&Ps. Protecting balance sheets, raising capital where possible and maintaining core operations will help them endure current market challenges in hopes for a recovery in late 2020 / 2021.