Petroleum industry gauging fallout from Asian crisis

May 4, 1998
Asia has been, until recently, the international oil industry's star demand source, with the region's 10 "tiger" economies accounting for more than 40% of demand growth during 1986-96. Yet this oil demand growth rate could not be expected to continue, as Sheikh Ahmed Zaki Yamani, chairman of London's Centre for Global Energy Studies (CGES), told the CGES annual conference in London last week.
David Knott
Senior Editor
Asia has been, until recently, the international oil industry's star demand source, with the region's 10 "tiger" economies accounting for more than 40% of demand growth during 1986-96.

Yet this oil demand growth rate could not be expected to continue, as Sheikh Ahmed Zaki Yamani, chairman of London's Centre for Global Energy Studies (CGES), told the CGES annual conference in London last week.

Once Asia's current financial crisis passes, CGES expects that the region will see demand rising by 500,000 b/d/year. This is expected to be a comfort to the Organization of Petroleum Exporting Countries (see Watching the World, p. 46).

Kyoto threat

"Asia's role in providing most of the impetus behind global oil demand is just as well," said Yamani, "because oil faces a serious threat over the coming years.

"As a result of the Kyoto protocol, there is a possibility that oil demand growth in OECD (Organization for Economic Cooperation and Development) countries will not only be stifled but actually put into reverse."

CGES predicts OECD oil demand would have to be pegged back to 35 million b/d in 2010 on a pro rata basis to meet the Kyoto agreement targets (OGJ, Dec. 15, 1997, p. 17).

"This means," said Yamani, "that OECD oil demand in 2010 will need to be 6 million b/d below the level prevailing in 1996. To achieve this target, oil product prices would have to rise substantially in most OECD countries, and taxation would be the means."

Yamani said the difficulty in raising taxes sufficiently to choke off oil demand growth could be judged by the fact that the price of gasoline in the U.S. would have to more than double from $1/gal today to $2.14/gal in 2010.

"Because of this," said Yamani, "there are some who believe that the Kyoto protocol will never be ratified by the U.S. and that other OECD countries will follow the U.S. lead.

"But it would be unwise for OPEC to disregard the Kyoto agreement, which means that a large chunk of incremental oil demand may just not materialize."

Aperc viewpoint

Tokyo's Asia Pacific Energy Research Center (Aperc) expects oil to remain the major energy source for the Asia Pacific Economic Cooperation (APEC) region.

Aperc defines the APEC region as comprising: North America-U.S., Canada, and Mexico; East Asia-China, Japan, South Korea, and Taiwan; Southeast Asia-Indonesia, Thailand, Philippines, and Malaysia; and Oceania-Australia and New Zealand.

Keiichi Yokobori, Aperc energy analyst, told delegates that APEC region oil demand is expected to rise from 1.708 billion metric tons of oil equivalent in 1995 to 2.434 billion tons in 2010.

"Oil will contribute about 35% of the absolute increase in energy supply during the forecast period," said Yokobori, "while coal and natural gas will account for 33% and 24%, respectively."

While oil will remain the major energy source for the region, Yokobori predicted oil's share of total primary energy supply will slip from 39% in 1995 to 38% by 2010.

Transportation sector oil demand is expected to grow by 52% and to account for 63% of the increase in primary oil demand, with its share rising to 55% from 52% during the period. Industry's oil demand is expected to rise 33% during 1995-2010.

BHP forecast

When analyzing oil and gas trends in Southeast Asia, the key observation is that oil production is likely to enter into decline early next century.

This is the view of Paul Griggs, vice-president for strategic planning, BHP Petroleum Ltd. Griggs noted that Indonesia and Malaysia are the region's main oil producers, currently delivering 1.64 million b/d and 725,000 b/d, respectively.

These two countries are also the region's key gas producers, with output volumes of 66.5 billion cu m last year from Indonesia and 35.4 billion cu m from Malaysia.

Griggs said that Indonesia's oil output has remained at about 1.6 million b/d since 1992 but is expected to decline to 1.1 million b/d by 2005, with Malaysia expected to show a similar decline.

However, Southeast Asia's gas reserves, amounting to more than 200 tcf, are expected to ensure that local supply continues to exceed incremental demand: "This supply will service both domestic requirements and be a major source for the gas needs of other countries within the Asian region."

With North American oil consumption increasingly being supplied from the Atlantic basin, said Griggs, the Middle East is the obvious major supplier to the Asian economies.

"Asian import dependence," said Griggs, "is expected to change from less than 60% in 1996 to approximately 80% by 2010. The Middle East is anticipated to supply 80% of these imports."

With gas, Griggs expects the trend to involve exports from Southeast Asia, including Australia, to Northeast Asia: "Increasingly, the picture will become more complex with new markets (China and India in particular); new supply sources in Southeast Asia, Australia, and the Middle East; and a growing indigenous pipeline market in Southeast Asia."

LNG warning

Griggs warned that continuing low oil prices would have a knock-on effect on the price of liquefied natural gas (LNG), putting pressure on the economics of new projects.

"Given the volumes available for LNG development," said Griggs, "and based on demand projections in the aftermath of the crisis, not all currently slated LNG projects are likely to be developed.

"This is likely to result in an oversupply of LNG, especially in the medium term, with winners and losers. For instance, expansions to existing facilities-which alone could fuel a 4% demand growth rate-may be favored, due to economic advantages.

"A further factor is proximity to market, which is an advantage enjoyed by existing Indonesian and Malaysian projects. This suggests Southeast Asian projects should be best-placed, although the recent rumored postponement of MLNG Tiga (a planned third train at the Malaysia LNG export terminal in Bintulu, Sarawak) raises wider issues.

"Here, another factor is likely to be access to finance. Project finance activity in Southeast Asia has virtually dried up in the light of the Asian crisis. However, from BHP's perspective, there is no evidence of decline in demand for gas as a result of the crisis; expansion of the North West Shelf project is still planned for start-up in 2003."

Griggs said greenfield LNG developments now face far greater uncertainty. Planned LNG export projects in Yemen and Papua New Guinea, Australia's Gorgon project, and Indonesia's Tangguh project have not secured buyers, he said, and the Natuna project is likely to remain "at the back of the queue."

Downstream damage

Falling demand for oil products in Asia has followed hard behind a massive increase in refining capacity in the region, killing off Asia's downstream allure.

This is the view of David Law-Smith, chairman of Caltex Petroleum Corp., who told delegates that the Asia region's deficit for major oil products, which existed for 10 years, has been eliminated, at least temporarily.

"With the elimination of the demand deficit," said Law-Smith, "the pricing premium that has been available for products sold in the region has all but vanished.

"Refining margins in the Asia-Pacific (region) in recent months are now approaching the level of those in Europe, the area long considered the low point for margins in this global industry."

Caltex has trimmed its estimate of Asia-Pacific regional products de- mand and consequently downgraded its estimate of required additional regional refining capacity. The company expects the current oversupply to persist for some time.

"For the oil industry," said Law-Smith, "the crisis has brought to the forefront its greatest weakness, the propensity to overinvest in an industry that is mature on a global basis.

"The problem of excessive infrastructure, particularly in manufacturing and distribution, seems finally to have been driven home. The result is an unprecedented wave of rationalization, amalgamation, and joint use of facilities.

"However, while companies are eager to share refining and distribution facilities, we have not yet seen many closures of excess and inefficient capacity.

"The financial burden of plant closure is enormous, and refiners commonly prefer to limp into the future rather than absorb this impact. The industry must find a way of dealing with this situation or face the threat of financial mediocrity."

State firm concern

Deregulation in the downstream industry has attracted new entrants to a number of Asian countries, with long-term growth potential the main lure.

Law-Smith said that this rush to invest clouds some of the realities of the Asian downstream market, particularly overcapitalization of infrastructure. He also cited government and national petroleum firm policies as a further complication.

"Not all their decisions are based on rational economics," said Law-Smith, "and politics holds considerable sway. There are signs that national oil companies will play a more rational role in the future, but, at this stage, this is more hope than reality.

"A particular concern for industry in this regard is the policy taken regarding refining investment in India and China.

"The demand potential in these countries is the highest in the region, but if they invest to reverse their traditional product deficit positions, refining margins in the region can be expected to deteriorate".

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