Asia’s top 20 upstream companies have traditionally invested in mature conventional plays and are facing production declines of 20 per cent over the next decade, which may force them to reconsider U.S. resource plays.
Asian buyers spent US$20 billion on U.S. unconventional plays between 2010 and 2013, but deals have dried up since 2014 when the oil prices collapsed.
A report from Wood Mackenzie this week highlighted how this absence of major Asian companies from the U.S. tight oil boom will likely change as Asia's largest upstream players are forced to diversify and grow production in the future.
Output from the tight oil-driven U.S. unconventional plays, such as the Permian, is expected to continue growing exponentially over the next decade. This play type, however, only represents about one per cent of the portfolio of Asia’s top 20 producers.
The huge commercial resources and comparatively low break-evens of U.S. shale oil are a compelling combination, with assets actively traded in the biggest and most dynamic upstream M&A market in the world, according to Wood Mackenzie.
By comparison, most Asian upstream projects lack scale and are located in countries with tougher fiscal terms.
“U.S. tight oil offers huge volumes and rapid development cycles, so if Asian players want to grow, they cannot continue to ignore this sector," said Adrian Pooh, senior research analyst for Wood Mackenzie’s Asia upstream.
Further arguments in favour of Asian investment include the fact that Asian investors come from positions of financial strength, with healthier cash flows and lower leverage and gearing than many international and U.S. oil companies.
Cost inflation in U.S. tight oil will likely further erode margins and increase funding pressures.
If the oil price weakens, more struggling players will turn to asset sales to free up capital.
All of this could create opportunities for Asian buyers to enter the market.
“The key is identifying the many financially-stretched tight oil operators looking for capital injections to help realize ambitious growth plans,” Pooh said.
But there are also reasons why many Asian players remain reluctant to get involved in such a hot M&A environment.
The fast-moving tight oil marketplace is particularly challenging for larger Asian companies, which traditionally have long lead times for decision making.
Also, Asia’s 2010-2013 investments into U.S. shale plays mostly failed to generate expected levels of value and returns, according to Wood Mackenzie.
“While there is room for more U.S. exposure, there also needs to be a clear strategy to navigate through the risks and challenges,” Pooh said.