Oil and gas in the capitals
World Oil wanted a view from the trenches on how the continued slump in oil prices has impacted E&P in Southeast Asia, so we reached out to KrisEnergy Ltd, a longtime Southeast Asian E&P pro, for an interview. Richard Lorentz, executive director and director of business development, kindly said yes.
For background, KrisEnergy holds working interests in 19 contract areas in Bangladesh, Cambodia, Indonesia, Thailand and Vietnam, and it operates 13 of the licenses. It has been operating exclusively in Asia since 2009.
World Oil: In light of the downturn in oil and gas prices, what’s the regional E&P situation?
Lorentz: Most operators in Southeast Asia have cut Capex in 2016, although there are still wells being drilled and seismic programs being undertaken. Inevitably, there has been some deferral in exploration, appraisal programs and discretionary activities, but some work is continuing as operators with sufficient free cash take advantage of lower costs for seismic vessels, rigs and associated services. Development activities will depend on whether it is oil or pipeline/LNG gas and individual project economics. Operators already committed to developments will review drilling plans to ensure maximum efficiency. Some project sanctions are likely to be put on hold until market conditions improve. Enhanced recovery spend is also likely to be reduced, due to project economics.
World Oil: Against the price situation, is there anyone looking for discounted E&P deals?
Lorentz: There are many international E&P companies in Southeast Asia, some already established and some looking to grow businesses. There also is a lot of private equity financing looking for management teams and/or suitable assets. To date, since the downturn commenced in mid-2014, the biggest hurdle has been to match buyers’ and sellers’ price expectations, as there has been a wide gap between the two. This may narrow the more prolonged the downturn.
World Oil: How are the National Oil Corporations (NOCs) dealing with the downturn—like PetroVietnam, Petronas, etc.?
Lorentz: NOCs are also coming under increasing pressure to reduce Capex and G&A (General and Administrative) costs, given that government revenues have declined, as well, in parallel with the general commodities’ price slump.
World Oil: Is Asia’s natural gas market doing better than oil, or is it fairing the same?
Lorentz: In Asia, there are two distinct markets for natural gas: pipeline gas and LNG. LNG prices have come under considerable pressure in the last 12 months, due to additional production capacity in Papua New Guinea and Australia, as well as from the Middle East and the prospect of exports from North America.
Pipeline gas is generally developed, once long-term take-or-pay contracts are in place. These contracts are either at fixed prices over the contract life, or are based on a formula in which one variable, among several, is linked to the substitute fuel, such as medium- or high-sulfur fuel oil. The latter formula contract is usually adjusted every six or 12 months and will include an annual escalation factor based on inflation. For example, KrisEnergy is a non-operating JV partner in the Block A Aceh gas development project onshore Sumatra, in Indonesia. In January 2015, the operator signed a 13-year gas sales agreement at $9.45/MMbtu. This is a fixed price GSA for the life of the contact, and is considerably higher than Henry Hub future at approximately $2.00/MMbtu.
World Oil: So what is KrisEnergy’s strategy for coping in this price downturn environment?
Lorentz: For KrisEnergy, we have cut capital expenditure this year to a little over $50 million, a substantial 78% reduction from 2015, when we were committed to two new oilfield developments. In fact, this is the lowest annual Capex budget since the company was established in 2009. We have no immediate commitment Capex requirements in the near-term, therefore, we have the flexibility to defer exploration and appraisal work programs, thereby preserving cash.
For this year, we intend to focus Capex on producing assets to maintain production and maximize cash flow.
We also reduced G&A costs by one-third in 2015, and we continue to look for additional cost savings without compromising EHSS. As well as reduced compensation throughout the company from board-level down, we have, unfortunately, made some cuts to staffing levels where appropriate.
We have no plans to shut in any production at our five existing fields, four of which are in the Gulf of Thailand, and one is onshore Bangladesh.
Since inception, our business model has been based on diversification to manage the myriad of risks inherent in the upstream oil and gas industry. One of our strategies is to have an equal mix of oil to gas in the portfolio, including in production and in reserves, and resources to mitigate our exposure to volatile international oil markets.
At the beginning of 2015, our working interest production was approximately 7,600 boed, with an oil-to-gas production ratio of 20% to 80%. During the course of the year, we brought onstream two new oil fields in the Gulf of Thailand, and by early 2016, our working interest production had risen to just over 19,000 boed, with an oil-to-gas ratio of 68% to 32%.
Currently, we are working on two gas development projects in Indonesia, which, when onstream in 2018, will swing the pendulum back to an approximate equal mix of oil-to-gas. This will change shortly thereafter, with the completion of two further oil developments within KrisEnergy’s existing portfolio of development projects. 
