APAC Oil and Gas Firms to Face Tougher Fundraising for New Projects: IEEFA

Oil and gas firms in the Asia Pacific (APAC) region may have a harder time getting financing for new production projects, according to a recent study by the Institute for Energy Economics and Financial Analysis (IEEFA).

More financial institutions are committing less funding for fossil fuel, including in upstream production, according to the report. Most of the world’s major banks and institutional investors have announced policies to exit or lessen their exposure to coal, and oil and gas are likely to be next impacted by the financing sector’s green targets, the IEEFA said.

“Capital support to the O&G sector in the coming years, particularly on expansion plans, could thus become more elusive, ” said Christina Ng, co-author of the report and IEEFA’s Research and Stakeholder Engagement Leader for Debt Markets.

Ng highlighted the Glasgow Financial Alliance for Net Zero (GFANZ) is “attracting an increasing number of climate and environmental-oriented members”. The GFANZ, formed during the United Nations Climate Change Conference in 2021, represents more than 550 organizations from sectors including banking, insurance, asset ownership and asset management. Many members provide capital and financial services to oil and gas companies, and they “recognize the need to limit fossil fuel financing by 2050 and to meet intermediate targets for 2030 or sooner,” according to the report.

As GFANZ membership grows further and net-zero targets are strengthened in the near future, capital raising for new oil and gas production capacity could become harder, Ng said.

APAC oil and gas firms rely more on fossil fuel revenue and have limited exposure to non-carbon assets, according to the study. “Despite net-zero commitments, the top 20 regional producers generate an average of 96 [percent] of their revenue directly from production and related activities, and many still adopt a wait-and-see approach to new energy investments, lagging global peers,” Ng said. Ten companies with APAC growth ambitions represent 14 percent of global future planned capacity, and half of them are based in China and Australia, the study said.

APAC features prominently in the oil and gas sector’s expansion plans. Companies headquartered or planning an expansion in the region make up almost half of the list of the top 50 companies worldwide by planned capacity expansion, the report said.

Financing Sources

Based on IEEFA’s analysis, APAC oil and gas firms are “on average more reliant on equity than debt financing as a critical source of capital, with the aggregate debt-to-total capital ratio of 259 companies at roughly 32 [percent].” However, constraints on debt availability are unlikely to greatly affect production, the report said.

Financing firms considering curbing funding for existing oil and gas operating assets “may also run up against difficult choices, partly because pulling these funding lines too quickly risks affecting bank balance sheets and financial markets more widely,” Ng said.

Meanwhile, many of the APAC oil and gas producers are state-owned and contribute significantly to national gross domestic product outcomes, as they generate around 77 percent of production across the region, the report said. “Their business models rely on oil and gas for revenue generation more so than their industrial peers, and this is likely one of the drivers of slower transition investment in APAC compared to other markets,” Ng said.

The report identified six regional companies with high outstanding borrowings and “significant investment plans” for oil and gas production growth: India’s Oil and Natural Gas Corporation, Santos Limited, Woodside Energy Group of Australia, China National Offshore Oil Corp. Ltd., China Petroleum & Chemical Corp. and PetroChina Company Ltd. The aggregate borrowing of these six firms is made up of 91 percent bond finance and nine percent bank loans.

Debt capital is concentrated within only a few firms, with 27 of 259 companies representing 80 percent of the APAC oil and gas debt market. The borrowers come from mostly China and India, with around $280 billion of debt between them, the report said. However, the APAC membership of GFANZ lacks representation from these two big players, who have “significant” operations and expansion plans in the region.

APAC Oil and Gas Figures

According to the report, APAC holds three percent of the world’s proven oil reserves but comprises 8.2 percent of global production with 7.335 million barrels per day (MMbpd). China is the fifth largest oil-producing nation worldwide. Global oil output declined at a consistent rate of 0.7 percent per year between 2011 and 2021, and the trend held for all the major producing countries in APAC.

The 2022 BP Statistical Review of World Energy showed that, within the APAC region, China was the dominant oil-producing nation, at 3.994 MMbpd accounting for 54 percent of the region’s output in 2021. India and Indonesia, at 0.746 MMbpd and 0.692 MMbpd respectively, are the second and third largest producers. APAC was the largest consumer of oil, at 38.1 percent of 2021 global demand, followed by the United States at 23.7 percent. Within the region, China accounted for 43 percent of oil consumption, followed by India with 13.6 percent. APAC is expected to make up 77 percent of world oil demand growth through 2025, according to a separate study by the International Energy Agency. Regional production is not forecast to meet this requirement, increasing reliance on imports and creating opportunities for alternative fuels.

The IEEFA report showed that gas production in APAC comprises 16.6 percent of global levels, with China as the third largest natural gas producer and Australia the sixth. APAC’s growth in gas production between 2011 and 2021 was 3.1 percent per year, after North America and the Middle East. APAC produced 23.625 trillion cubic feet (669 billion cubic meters) in 2020. The region is forecast to retain high gas demand growth as it continues to urbanize and industrialize, with forecast growth of 2.1 percent per year until 2035.

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