Gas development, FPSO use gear new Asia projects

Import-reliant region affected little by currency turmoil

Frank Frazer
Contributing Editor

Production from existing fields in the Asia/Pacific region is dwindling, and many countries are relying upon the development of 54 new fields to stem the slippage. While Indonesia remains an exporter, Asia/Pacific is a net importer. Photo by Chris Salvo, courtesy of Halliburton Energy Services.

Arco Indonesia is shown testing a gas well on the Wiriangar block off Indonesia. Although Indonesia needs new oil reserves, gas continues to be the primary discovery product. Photo courtesy of Arco Indonesia. [11,818 bytes]

Turmoil in currency markets may have prompted some rethinking on the rates of economic expansion predicted for developing countries in South-East Asia. But there has been no apparent impact so far on the buoyant exploration sector as projections point to energy use continuing to grow at levels above the world average.

Faced with demand driven by improving living standards, governments are increasingly responding to pressure for liberalization and deregulation of controlled energy markets to attract the foreign investment which will be essential to meeting supply targets.

The region as a whole will remain heavily dependent on imports from elsewhere to satisfy growing demand, particularly for gas-fired power plants. In the circumstances, the currency realignments of recent months should intensify efforts to maximize on the potential for indigenous production to counteract the negative effects of more costly imports on trading balances.

While there might be some longer-term slowing in the rate of project approvals as energy demand predictions are scaled back by factors such as deferred investment in generating capacity, most investors are expected to be keen to maintain momentum which will secure returns on exploration outlays made in the past.

54 new fields

A study by Wood Mackenzie analysts recently identified 54 new field developments, including 30 on which work had already started, mostly in the offshore sector. The study estimated that investment of $25.5 billion would be required for all the projects which are expected to be put on stream in the next 7-8 years.

The bulk of the spending will be in 17 projects involving total spending of $7.3 billion in Indonesia, but this does not take account of any investment in the huge Natuna gas reserves which could ultimately cost more than $30 billion to develop fully. With the present uncertainties over the marketing of the gas, Wood Mackenzie does not rate the project as a probable development at this stage.

As the only OPEC member in the region, Indonesia has urgent need to develop more oil reserves to replace dwindling output from existing fields. The same is true of China, but for most other countries in the region gas is a more attractive option as a fuel offsetting the need for imports used in power generation.

Projections by British Petroleum, presented at the World Petroleum Congress in Beijing, suggest that annual growth in South-East Asian gas demand over the next 15 years will be nearly 6%, resulting in a rise in consumption from 200 bcm a year at present to 470 bcm by 2010. This compares with estimated world average growth of 2.7%.

Indian sub-continent

Gas potential, coupled with rising demand in the Indian sub-continent, has made Bangladesh one of the exploration hot spots in the last two years on the back of a major offshore find by the Scottish-based exploration group Cairn Energy. The Sangu field, at present under development for start up in April 1998, has rekindled multinational company interest in the country's previously-neglected exploration prospects, as evidenced by the response to the recent invitation to bid for new licenses.

In all, 20 groups applied for 12 out of 15 blocks on offer under a plan to attract $500 million annual investment by foreign companies in the country's oil and gas sector. Cairn was prominent among the bidders in partnership with Shell under a strategic alliance agreed earlier this year to work jointly on developing interests in Bangladesh.

The deal also gave Shell a stake in the Sangu field, further diluting Cairn's originally 100% interest. Earlier, it traded a 25% share to Halliburton which agreed in return to bear half the development costs by providing technical support for the development under a contract-to-produce arrangement.

Approval was given for the Sangu development on the basis that the gas would be sold to meet part of Bangladesh's rising energy demand. But analysts believed that Cairn and Shell jointly hope to find enough surplus reserves on existing and new acreage to start exports to India which faces chronic shortages of the fuel despite its own exploration efforts.

A report produced by a group of experts for Indian government departments has estimated that the country will need investment approaching $35 billion in the period to 2001, with about a quarter of the spending going towards exploration, to optimize domestic production and fund associated downstream developments. Because such resources will not be available from government and public sector sources, the experts have recommended a phasing out of the tight regulatory regime which is regarded as an obstacle to attracting maximum amounts of foreign investment. The group also called for an immediate start to phasing out price controls and a shift towards market-determined pricing of fuel over the next three years.

Under a new exploration and licensing policy introduced earlier this year, companies no longer have to wait for invitations to bid in formal rounds if they want to apply for rights to unallocated areas. The government also signaled the end to compulsory state participation by withdrawing the monopoly rights of Oil & Natural Gas Corporation, which developed India's first offshore field at the Bombay High in 1974, and Oil India, the other state-owned company which has both onshore and offshore interests.

Neighboring Pakistan expects its oil sector investment to reach $2 billion this year. This is according to figures given by government officials who predict further steep growth in energy demand after a rise of 13.5% last year.

South Asia

Exploration is expanding after the issue of about 30 new concessions so far this year with emphasis on finding gas to make up a market shortfall and move towards replacing oil with gas in the power and industrial sectors. Up to 30% of the new field development investment identified by Wood Mackenzie will be represented by developments in Vietnam, Thailand, Myanmar and the Philippines which each have a small number of discoveries with reserves potential greater than 150 million boe.

BP, in a joint venture with Norway's Statoil, recently moved nearer to the development of the Lan Tay and Lan Do gas fields in the Nan Con Son basin off southern Vietnam by awarding Brown & Root a contract to carry out front-end engineering design for offshore facilities and a 250-mile pipeline to a shore terminal. The project will be designed to tap reserves of 2 tcf, providing gas for power generation and industry in the region around Ho Chi Minh city. First production is due in 1999 through a gas transportation system that will be designed with extra capacity to carry output from other discoveries in the Nan Con Son basin.

Malaysia, Indonesia

Wood Mackenzie expects investment of about $4.5 billion to be made over the next few years in new fields in Malaysia which will be second after Indonesia in terms of total upstream capital spending in the region. According to a recent announcement, 10 gas fields have been discovered from 20 wells drilled this year by operators with production-sharing contracts for parts of the Malaysia-Thailand joint development area covering territory in the lower part of the Gulf of Thailand in which the two companies have overlapping claims to the continental shelf.

Despite Indonesia's strategic need for new oil resources, significant gas discoveries continue to be the main feature of exploration efforts. Arco recently confirmed two reservoirs with proven and probable reserves of at least 13 tcf but possibly as much as 20 tcf in the Wiriangar and Berau blocks which were said to ensure Indonesia's leadership position in world gas export markets well into the next century.

A few weeks ago, Pertamina, the state oil company, signed seven production-sharing contracts with foreign oil companies - including Total, Unocal, Gulf Canada and Premier Oil - to explore offshore blocks. The state company also later announced it had cut bureaucracy to speed up the process of foreign partners recovering exploration costs, though it stopped short of suggesting special incentives should be available to make terms even more attractive.

Despite skepticism among many analysts about political and economic conditions being achieved in the foreseeable future to justify investment in plans for full-scale development of the Natuna reserves, Exxon and Mobil have signed a memorandum of understanding to undertake fast-track studies on a project at the D-Alpha block which could feed nearly 1 bcf/d of gas for use in West Java. The block - in which Pertamina has a 24% stake with Exxon holding 50% and Mobil% - is 850 miles from Java.

The studies will examine the technical aspects of developing the field, which has a carbon dioxide content of more than 70%, and laying a pipeline ashore. They will also look at the marketing potential for the supply which will be a critical factor in determining commerciality. Regardless of the uncertainties over the extent to which Natuna might eventually be developed as a source of exports, prospects for development in the Timor Sea have improved after the agreement reached earlier this year between Indonesia and Australia on a boundary line.

Western Australia

Oil and gas activity in the previously disputed zone was covered by a treaty signed in 1991. The final settlement on the division of the seabed should mean future investment can be undertaken with more certainty. Prospects for further development of the North-West Shelf off Western Australia were enhanced earlier this year when BP confirmed the discovery of the Perseus gas field - wedged between the existing North Rankin and Goodwyn producing fields - with reserves of about 10 tcf. This increased total known reserves in the area by about 50% to 30 tcf.

Authorities in Western Australia have been promoting the concept that North-West Shelf developments, along with activity in the Timor Sea off the Northern Territories, should be regarded as part of the wider South-East Asian exploration province. For that reason, they suggest that Perth, the main administrative center for operations on the North-West Shelf, could also serve as an international base for contracting companies wanting to take advantage of the easy access to other countries in the region.

LNG shipments from Western Australia last year were about 7.5 million tons and are expected to rise by about 9% this year. The exports at present represent about 14% of supply to countries in the Pacific Rim and are expected to rise to 25 million tons by 2005.

China

Among countries in the region, China is expected to experience the largest growth in energy requirements in terms of volume. With domestic production stagnating, estimates presented at the World Petroleum Congress in Beijing suggested there could be a 20% shortfall in supply by 2000, with the deficit rising further to 30% of total demand over the following 10 years.

But China is also the country which poses the greatest problem for both companies and analysts trying to assess prospects for upstream investment. Despite bullish sentiments by state officials on the scope for cooperation in opening up the offshore sector to greater participation by foreign companies with technological and financial resources to tackle the challenges, most potential investors are still waiting for signs of tax breaks and other incentives.

There is also concern among oil company executives that the acreage which China is prepared to farm out is not always the best that is available. The lack of protection for intellectual property rights is another deterrent to companies which could provide the latest technology and substantial capital to achieve fast-track exploration and development of prospects.

Despite the obstacles, most multinational companies believe it is important to establish a footing in China. Wood Mackenzie's study identified eight potential projects, mostly in the offshore sector, which could require total funding of about $3.3 billion in the next 7-8 years, making the country the region's third largest market for oil and gas investment after Indonesia and Malaysia.

The survey also showed a decided trend for the region as a whole towards the use of floating production systems for offshore projects. Such systems will be used for 14% of potential projects identified in this year's survey, compared with 7% a year ago.

Stand-alone subsea technology is expected to be used in about 15% of projects, while the bulk will be developed using conventional technology to install fixed platforms on the seabed.