Low oil prices have eroded
margins and earnings outlooks for Asia-Pacific oil and gas companies. China, which added the most to global oil demand in 2014, is likely to grow more slowly as it shifts away from heavy industry and becomes less oil-intensive. Plunging crude prices have spilled over into oil-indexed LNG. Seven LNG projects in Australia will come online in the next two years, establishing the nation as the world’s largest exporter of liquefied gas by 2018.
China’s growth is becoming less
oil-intensive as measured by the ratio of crude consumption vs. GDP. China’s economy is shifting away from heavy industry toward services and higher-margin manufacturing. Demand for gasoline is growing faster than diesel thanks to steady increases in car ownership. Yet gasoline growth may weaken in coming years if new car sales slow. China is tightening fuel-efficiency standards to fight pollution from vehicles, which may also slow growth in demand for oil.
Australia, which displaced Malaysia as
the biggest LNG exporter in the Asia-Pacific region this year, is poised to surpass Qatar for the No. 1 spot worldwide by 2018, thanks to a wave of seven projects coming online in the next two years. Companies that have invested billions of dollars in Australian LNG may finally improve their cash flows and balance sheets after the projects start producing. While most of the new facilities went over budget, a weaker Australian dollar may stem further cost inflation.
Oil and gas producers in
the Asia-Pacific region are cutting capital expenditures, increasing efficiency and delaying exploration to cope with a 44% decline in the price of Brent crude over the past year. The plunge has eroded operating margins and forced significant asset impairments. Drillsearch and Beach are among E&Ps hedging their downside risks. Australia’s shale-gas exploration, still in its early stages, is no longer a priority for companies that once hoped to repeat North America’s success with fracking.
Cheap oil benefits Asia-Pacific refiners
because it lowers feedstock costs. Refining margins, determined by the difference between the cost for a basket of refined products vs. crude, have improved. In contrast, cheap oil has eroded margins at upstream oil and gas companies. China has expanded its refining capacity in the past five years while the industry in Australia and Japan is shrinking. The pace of expansion in China may slow, as the country focuses on fuel quality to fight pollution.
The growth of China’s refining
industry is likely to slow during the next five years from the 8.3% CAGR achieved in the past five years. Rapid capacity expansion and the economy’s shift away from heavy industries have made China a net exporter of major refined oil products such as gasoline, diesel and kerosene. China’s net imports of naphtha and liquid propane gas have continued to increase. China will focus on supplying higher-quality fuels with lower sulfur content to reduce greenhouse gas emissions.
China’s oil industry is likely
to become more market-oriented under the 13th Five-Year Plan. China will reduce price controls and remove pricing regulations for some competitive businesses in oil and other natural-monopoly industries. The country now adjusts refined-oil retail prices every 10 working days vs. 22 earlier. The more frequent adjustment-time window can help PetroChina and Sinopec steer clear of large margin swings. China may gradually extend pricing reforms, eventually allowing markets to set prices.
Refinery capacity in Australia and
Japan is likely to continue shrinking. The Australian industry has disadvantages relative to India and other nations, as its refineries have smaller capacities and less-complex configurations. Australia’s higher labor costs also erode its competitiveness relative to India. Since December 2008, Japan has cut over 20% of its refining capacity on diminishing domestic demand and the government’s push to increase the mandatory cracking-to-crude distillation ratio.
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