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Graham Tyler

Will the Rooster wake up Southeast Asia's energy markets?

BY GRAHAM TYLER

Monkey proved to be a subdued year for the Southeast Asia energy sector – so will the Rooster wake up the region from its slumber?

The global economy struggled in the wake of the commodity markets collapse of 2014/5 and uncertainty on international trade with the US Presidential election and Brexit. This uncertainty has led to many commentators to predict that 2017 will be another tough year.

Reasons to be cheerful
History tells us that the turnaround in economic activity can be quick, and that it can be hard to spot when it is happening. Therefore, here are three reasons why we may have some optimism for 2017:
1. More certainty.
2. Capital availability.
3. Long-term fundamentals.

More certainty, or at least less uncertainty
Many of the uncertainties that characterised 2016 have now become clearer. The UK is heading for a “hard Brexit”, meaning that it is opting out of the Single Market. The US elected Donald Trump and he has, as promised, pulled out of the Trans Pacific Partnership; whilst hinting at implementing other protectionist policies.

OPEC may not be fully tested on oil supply discipline, but most players in the market now have a clearer sight on oil pricing. This should allow for better investment decision making and asset valuation, and therefore deal flow. This time last year there was a large variation in oil price forecasts, leading to a large gap between seller and buyer’s views of asset value. In these respects, 2017 provides less uncertainty.

Capital availability
We are aware of investors and funds interested in Southeast Asia’s energy sector. But there is a shortage of credible, bankable projects. To overcome this mismatch, investors need three factors to make projects bankable.
• Credible off-takers and fuel supply.
• Predictable long-term returns.
• Coherent energy policy and stable regulatory environments.

Long-term fundamentals
The long-term fundamentals remain strong, even if the brakes are being applied to global free-trade. Southeast Asia on aggregate remains a region with low energy intensity levels, and a strong burgeoning youth and young-adult workforce. This combination of demographics and increasing energy usage will continue to drive demand over the next decade. Indeed, the current under-investment in energy infrastructure will mean that energy shortages are likely to threaten countries like Myanmar, Indonesia, and Vietnam going forward.

Rooster's prospects
So what should we look out for in 2017?

Increase deal flow
We may see an uptick in deal flow, especially in the oil sector as the spread between oil price expectations has narrowed compared to a year ago. As Southeast Asia’s upstream sector matures, we are likely to see more of the large and mid-cap companies make way for smaller niche players.

Project implementation
An increase in successful project implementation across the region’s energy sector would suggest that many of the delayed decisions from last year have not been shelved. Suggesting a slow return to business as usual.

Policy alignment
Southeast Asia’s governments can assist investor confidence by setting out coherent long-term energy policies, aligned to carbon abatement and clean air initiatives.

Currency risk
For Southeast Asia, one of the biggest risks in 2017 is the strengthening of the dollar; if as expected the US ends quantitative easing. This would increase project costs and asset valuation in local currency terms.

Conclusion
The year ahead is expected to be challenging, but some of the uncertainties of 2016 have eased. The long-term fundamentals for Southeast Asia remain strong based on demographics, and low energy intensity levels across the region. There are funds available to finance projects, but there is a mismatch in bankable projects. As many projects involve long lead-times, better clarity on long-term energy policies and environmental initiatives would help.

Whatever transpires in 2017, I wish you a prosperous and healthy new year. Gong xi fa cai. 

The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Power. The author was not remunerated for this article.

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Graham Tyler

Graham Tyler

Graham has worked 25 years in the global energy sector, joining Galway Group in October 2015. He is an experienced consultant in the gas and power sectors. Prior to joining Galway Group, Graham worked for Wood Mackenzie, moving in 2007 to Singapore to lead the Wood Mackenzie’s Asia gas and power research team.

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