Dropping Oil Price – Bane or Boon for ASEAN

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The oil industry, with its history of booms and busts, has been in its deepest downturn since the 1990. Earnings are down for companies that made record profits in recent years, leading them to decommission about two-thirds of their rigs and sharply cut investment in exploration and production. Scores of companies have gone bankrupt and an estimated 250,000 oil workers have lost their jobs. Southeast Asia as one of the most active area of offshore exploration in the world has suffered from the repercussions as well. Here are some clues on the production, distribution, consumption and trade of oil and gas in the region.

Prices have recovered a few times over the last year, and although the industry has managed to cut costs, many wells remain unprofitable. In Malaysia, Petroliam Nasional Bhd. (Petronas), Malaysia’s state oil company, said profit dropped 96 percent last quarter after it was hit by oil prices that remained sharply lower than a year earlier. Net income fell to 348 million ringgit ($86 million) in the three months through June, from 9.1 billion ringgit a year ago, the company said Monday. Revenue slid 21 percent to 48.4 billion ringgit. Since Petronas contributes to roughly one third of Malaysia’s tax revenues, the plummeting oil price has caused major cuts in government expenditure top cover the huge budget deficit. On the other hand, Indonesia as net importer of oil since 2014 is overall benefiting from the decrease of oil prices, despite declines in estimated nontax revenue from oil and gas. However, the recent suspension of Indonesia from OPEC due to the former failing to comply to the production quota provided by the latter means more trouble for the region as Indonesia fails to help restore oil prices.

The sudden collapse of Swiber Holdings – the first major casualty of a protracted slump in oil prices – has raised concerns over possible spill over into the local economy in Singapore. DBS Group Holdings, Singapore’s biggest lender, said it expects to recover about half of its S$700 million exposure to the collapse of a big Singapore oilfield services firm, as the two other top banks (Oversea-Chinese Banking Corp and United Overseas Bank) flagged mounting concerns about loans to the oil and gas sector. These banks are exposed to the downturn in the energy sector as a result of their lending to local companies which provide construction, shipping and maintenance services to the oil and gas industry. In Myanmar, U Than Tun, an offshore director at Myanmar Oil and Gas Enterprise, said some offshore exploration has now been postponed due to price fluctuations and natural gas exports generating lower income.

Related: The Rise of Finance in ASEAN

Looking on the brighter side, the dropping oil price has caused governments to integrate energy sources. One such initiative is the Trans-ASEAN Gas Pipeline (TAGP) project. From a regional perspective, Southeast Asia has huge gas reserves, but they are unevenly distributed. The (TAGP) project, which envisages the creation of a transnational pipeline network linking almost 80% of the region’s total gas reserves and utilization centers, was planned to solve this problem. The conceptual TAGP masterplan was completed in 2000 and the ASEAN Memorandum of Understanding (MoU) on the TAGP project was signed by all the ASEAN Ministers of Energy on July 5, 2002 in Bali, Indonesia. In June 2004, the MoU came into force. Various bilateral agreements have been signed between Petronas of Malaysia and Pertamina of Indonesia, between Singapore and Malaysia and between Singapore and Indonesia on the sale and purchase of gas. New initiatives to implement the MoU, such as the ASCOPE Gas Centre in Malaysia and the establishment of the ASEAN Gas Consultative Council, have been put in place. With strong political will and support from the ASEAN Ministers of Energy and the cooperation of the ASEAN senior energy officials, the TAGP project is being pursued collectively. However, this project still remains dormant. Significant challenges in realizing the TAGP are to reconcile the differences in pricing and market structures and to harmonize regulations in each country. For example, in Indonesia, because the constitution mandates that the government set the price of gas, prices cannot follow market rates.

Another initiative is the Lao PDR-Thailand-Malaysia-Singapore power trading project [part of the ASEAN Power Grid (APG)]. Laos, Malaysia and Thailand on Wednesday have inked an agreement that paves the way for multilateral trade in electric power by 2018. This represents a push for regional cooperation to enhance connectivity and sharing of resources. Under the Memorandum of Understanding signed by the three neighbouring countries, Malaysia will import up to 100 megawatts of hydroelectric power from Laos, which will be transmitted on the existing power grid that passes through Thailand. The agreement kicked off the initial phase of a multilateral power trading scheme that will eventually include Singapore, as countries in the region seek to enhance electricity connectivity. As the countries involved are connected through existing infrastructure, they will need to sign power purchase agreements before actual transmission can begin. The 10 members of the Association of Southeast Asian Nations have identified 16 projects with investment of $6 billion under the ASEAN Power Grid initiative to achieve cross-border connectivity by 2020. This will allow countries with excess installed capacity to sell to others, not only during massive blackouts but also for industrial production and infrastructure projects. For self-sufficient countries such as Malaysia, the hydro power purchasing will help reduce the need for fossil fuels in power generation. The initial capacity of 100 MW could be increased in the future under a commitment to boost the share of renewable energy in its fuel mix.

Despite these projects, the progress of the energy sector seems unable to keep pace with the acceleration of the ASEAN Economic Community (AEC). The current working plans for the energy infrastructure are not sufficient for achieving the vision of APG and TAGP that are stated in the AEC Blueprint. Even all the action plans are realized, it is still impossible to trade electricity and natural region-wide because APG will not be ready and TAGP, although technically ready, has no indigenous natural to be transported. Another key reason is that the progress in terms of institutional infrastructure is lagged behind that of the physical infrastructure and region-wide trade is not feasible even assuming the physical networks are completed. Therefore, major works for APG and TAGP will be left for the next stage (beyond 2017) of AEC building. For the future AEC building, development of the physical infrastructure should be continuously moving forward. The development plan for infrastructure, however, needs to be reviewed and revised periodically, taking into account of economic principles, technical changes, and market instruments. Institutional infrastructure should be accelerated to keep pace with the physical infrastructure. Private sector participation is required to address the shortage of funding. Some mechanisms, such as BOT (build-operate-transfer) and PPP (public private partnership) may be used by the government to facilitate the private investment. The coordination of policy in promoting potential interconnection projects among the related member economies and implementation of regional plans in each member country will be important for tackling the barriers that hinder the achievement of APG and TAGP for an integrated ASEAN.

Written by: Vicknesh Rajkumar

Vicknesh is an Associate at Aseanite and currently reads Accounting and Finance at the University of Warwick. Previously, he worked with the Central Bank of Malaysia under the tutelage of the Assistant Gorvernor. Vicknesh was a coordinator of the Warwick ASEAN Conference and winner of the ICAEW Business Challenge 2017.

Feature Image Credit: Viktor Hanacek on picjumbo


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