Asia-Pacific energy: 2016 outlook

Lu Wang, Vincent G Piazza, Philipp Chladek

Bloomberg Intelligence analysts
Asia-Pacific oil & gas E&P 2016 outlook
Growth slows for Asia-Pacific oil & gas explorers
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 worlds largest exporter of
liquefied gas by 2018.
Chinas economic shift cuts growth in oil demand
Chinas growth is becoming less oil-intensive as measured by the
ratio of crude consumption vs. GDP. Chinas 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 steps up among worlds top LNG exporters
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 explorers reduce capex to cope with low prices
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.
Australias shale-gas exploration, still in its early stages, is no longer
a priority for companies that once hoped to repeat North Americas
success with fracking.
Asia-Pacific refining & marketing 2016 outlook
Asia-Pac refining industry benefits from cheap oil
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.
China refining to see slower growth, cleaner fuel
The growth of Chinas 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 economys shift away from heavy
industries have made China a net exporter of major refined oil
products such as gasoline, diesel and kerosene.

Chinas 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.
Chinas five-year plan has changes coming for oil
Chinas 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.
Oil refining in Australia, Japan to shrink further
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.

Australias 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
governments push to increase the mandatory cracking-to-crude
distillation ratio.
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