Bangkok--27 Oct--Moody's
Moody's Investors Service sees a positive outlook for the oil & gas exploration and production (E&P) industry in Asia Pacific, in line with the outlook for the global industry.
"Supporting this positive outlook are robust demand from emerging markets, and the ability of the growth in production to outpace softer oil prices -- with the consequent rise in earnings and margins -- even though operating costs are rising," says Simon Wong, a Moody's Vice President and Senior Analyst. Moody's global pricing assumption for benchmark West Texas Intermediate (WTI) is $90/barrel for 2011 and $80 for 2012, down from $85 originally.
"At the same time, the increasing pace of acquisitions by Asian E&P companies poses risks, while a higher proportion of unconventional reserves may weigh on credit profiles as they do not result in immediate, or even near-term benefits," adds Wong.
Wong was speaking on the release of a Moody's special comment on the outlook for the E&P industry in Asia Pacific, and which looks at key sector trends, including the pace of acquisitions, the outlook for margins, and the impact of a higher proportion of unconventional reserves on credit profiles.
Moody's rates seven E&P companies in Asia Pacific with ratings ranging from Aa3 to B2, and four integrated energy firms, with operations across E&P as well as downstream refining and marketing, and with ratings of Aa3 to Baa1. The report's release coincides with the publication of a separate report on the region's refining & marketing industry.
"The spike in oil prices earlier this year has moderated, with likely increased supply from Libya, Iraq, and Brazil, and expectations of a slowing global economy. However, demand for oil should remain strong from continued economic growth in emerging markets, while a shift to a greater reliance on natural gas in Japan, China, and elsewhere will keep the region's prices for liquefied natural gas robust," says Wong.
On acquisition and development costs, forays overseas -- encouraged in many cases by governments -- incur event risks that tend to have a negative impact on financial profiles in the short-to-medium term, according to the Moody's report.
Moreover, acquisitions of unconventional assets do not result, as indicated, in immediate, or even near-term benefits to production and proved reserves because most such assets are still under exploration and development. These assets require high up-front capital investments, and a longer development period before realization of commercial production.
Finding and development (F&D) costs, therefore, tend to escalate due to the much higher technical challenges in extraction.
But, over the long term, the impact should turn positive if acquisitions boost reserves and production, while diversification from dwindling domestic reserves is another positive.
The report was authored by Wong, Vikas Halan, Kai Hu, Matthew Moore, Mic Kang, Nidhi Dhruv and Nino Siu.
It is entitled, Upstream Asset Acquisitions: Short-Term Pain, Long-Term Gain. It can be found at www.moodys.com