Oil & Gas Block- Photo by Energy and Mineral Resources Ministry

JAKARTA (TheInsiderStories) – The Asian National Oil Companies (NOCs) will largely focus their capital projects on adding refining capacity and increasing upstream production, Moody’s Investor Services reported on Friday (01/04). But at the same time, the volatile oil prices become a major concern for the producers to implemented it.

Assistant Vice President Rachel Chua for Moody’s rated, in 2019, the producers plan to increase capital spending to support growing domestic fuel needs, in line with national energy policies and rationalizing capital investments,

She said, fuel demand continues to grow in Asia, particularly in China, India and Indonesia, which collectively account for more than 80 percent of the region’s demand growth. Market expectations for continued strong oil demand growth have remained in place, despite concerns about weaker global economic growth, tariffs, and a strong US dollar.

This year, Indonesia’s PT Pertamina (Baa2 stable) plans to spending up to US$2.5 billion for downstream projects and US$3,0 billion in the upstream, to reduce petroleum imports, which currently make up 40 percent of consumption.

As plan, the capital spending plan is 50 percent will be used in the upstream sector, and 22 percent in the downstream. The Pertamina needs US$100 billion over the next 12 years to boost oil output growth.

While, India’s Oil and Natural Gas Corporation (Baa1 stable) and Thailand’s PTT Public Company Limited (Baa1 stable), will spend to boost upstream production to help reduce reliance on crude imports and replenish hydrocarbon reserves.

Furthermore, Chinese NOCs will continue to invest heavily in natural gas production and transmission, given the government’s target to increase natural gas in its primary energy mix to improve air quality. But China’s import of natural gas will continue to increase over the next two to three years, since its incremental domestic supply will still lag double-digit consumption growth.

The Petroliam Nasional Berhad (A1 negative) will pay a one-off special dividend of MYR30 billion to the Malaysian government (A3 stable) in 2019 on top of its annual dividend payment of at least MYR24 billion.

Even though, these companies will have to balance their growth ambitions in an environment of volatile oil prices, increasing shareholder return, soft refining margins and evolving fuel price regulations, which pose risks to their free cash flow generation and credit metrics.

Shareholders will also demand stronger returns from the Asian NOCs after their strong performance in 2018 and a largely supportive operating environment, with oil prices settling into the medium-term price band. Shareholders will likely seek higher dividends to make up for distribution cuts in 2015 – 2017, when oil prices were low.

Asian refining earnings will contract in 2019 as higher regional crude prices drive up feedstock costs, and retail fuel price regulation in some countries will strain marketing profits. They expecting, the benchmark Singapore complex refining margin to stay benign at $5.50/barrel through the end of 2019.

The governments of India and Indonesia have asked their fuel retailers to sell gasoline and diesel to consumers at subsidized prices without reimbursement, and the re-emergence of fuel subsidies could extend to more Asian countries, thereby dampening profits.

Indian oil marketing companies began absorbing an $2.10/barrel price cut in October 2018, and Indonesia has yet to revisit its regulated fuel prices, last adjusted in March 2016, when the Dubai crude price was $35.20/barrel, roughly half its average price in 2018.

In China, an oversupply of refined products following years of capacity additions will also weigh on domestic margins.

While overall oilfield services earnings will increase by 10 percent to15 percent from a relatively low level, most of that growth will likely come only later in 2019 after the heightened oil-price volatility of late 2018.

Distillate margins for refiners will begin expanding from already strong levels in the second half of 2019 and remain strong through at least 2022.

Expected, the medium-term price band for West Texas Intermediate crude will be $50-$70/barrel, and North American natural gas at Henry Hub will average $2.50-$3.50 per MMBTU.

Extended play (E&P) companies have made strides in capital efficiency and commodity prices are higher than in the 2015-16 down turn, but investor sentiment is weak and infrastructure constraints reduce prices that E&Ps receive.

Written by Daniel Deha, Email: theinsiderstories@gmail.com

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