Oil and gas are expected to play significant roles in meeting the escalating energy demand as Southeast Asia builds toward the widespread installation of renewable energy. While renewables are the inevitable future, they will be insufficient to meet surging energy demand in the short- to medium-term. With three-quarters of the region’s energy demand over the next decade projected to be met by fossil fields, it is clear that a more efficient and optimized oil and gas industry is vital during the energy transition phase.

Southeast Asia’s oil and gas asset landscape is relatively mature and dominated by national oil companies (NOCs) operating in mature fields with declining production scales. Organic growth will rely on new technologies such as enhanced oil recovery (EOR), digitalization and improved late-life field management to optimize the recovery from existing fields. These technologies alone will not be enough to sufficiently boost oil and gas supply across the region and will require matching growth strategies to address new energy challenges.

The last decade has witnessed international oil companies (IOCs) offloading onshore assets and exiting Southeast Asia, driven by the energy transition, complexity of legal and regulatory frameworks and the dominance of NOCs. Several IOCs have either exited, or have shrunk their regional footprints, and others are carefully reevaluating their Southeast Asia portfolio in the face of these pressures.

Southeast Asia is projected to become a net natural gas importer by 2025, and the bill for oil imports is set to more than quadruple to reach over US$200 billion by 2030. This evolving energy landscape will necessitate growth in fresh fields and consolidated operations to meet growing demand.

Building a resilient energy landscape

Growing energy demand is forcing NOCs to discover or acquire new assets, both within and outside the region, to ensure energy security within their respective nation. To ensure the sustainability of supply and to balance the cost exposure, companies can balance investment through the whole cycle of the oil and gas industry — exploration, discovered resources opportunities and production assets.

Regional NOCs are already taking steps to adapt to growing demand. A large NOC in ASEAN aims to achieve production and sales growth of around 6 percent compound annual growth rate (CAGR) to 2025, increasing the share of natural gas to 80 percent of total production from 71 percent in 2019. It is committed to maintaining the reserve-to-production ratio of no less than seven years, while also reducing the greenhouse gas (GHG) intensity of its operations by 25 percent compared with a 2012 base year.

Another large NOC in the region aims to expand from over 2.2 million barrels of oil equivalent per day (MMboe/d) in 2021 to 2.7 million MMboe/d by 2030. Its three-pronged strategy is targeted at pursuing operational excellence, improving cost management and portfolio high-grading.

Pertamina is adopting a two-pronged strategy, growing both organically and inorganically through mergers and acquisitions (M&A). Its coherent inorganic growth strategy is based on its domestic and regional presence to help build new areas of competitive advantage. The linchpin of this strategy is to pursue opportunities across the full lifecycle encompassing exploration, development and production, and resources and reserves to meet the next decade of energy demand.

Southeast Asia is a natural playground for these operators. NOCs have core capabilities and strengths developed in the region such as technological capabilities, an understanding of basic operating environments, functional capabilities in deep water and the potential to boost the implementation of future technologies such as carbon capture, utilization and storage (CCUS).

While this offers clear advantages, many operators also have a footprint outside the region, opening the possibility of operations in the Middle East or Africa. It’s clear from other regional NOCs moves that such strategies are central to the overall aim to enhance technical and operational capabilities and boost energy resilience in Southeast Asia.

New collaborative partnership opportunities

Physical footprints are critical to an industry like oil and gas, but partnerships are equally important to future growth for NOCs, offering the chance to expand beyond incremental organic growth. At the same time, they provide the foundation for a more attractive ecosystem with improved efficiencies vital to future industry sustainability. Partners can develop new resources, and new capabilities that enhance overall operations across the industry.

There are a range of strategies NOCs can pursue to build capabilities, whether that’s an asset deal that includes critical capabilities and talent, joint ventures with shared talent or intellectual property or more traditional corporate deals.

NOCs need to ensure they position themselves as attractive partners to enable the best strategic proposition. One option is to share operating controls with a partner through structured control mechanisms, potentially including secondment of key leadership. Reserved decision rights for points such as exits and monetization can also appeal to desirable partners. Transaction mechanisms such as favorable payment terms, new creative deal structures including contingent payments or share options can also be included.

Building organizational capabilities

An NOC’s own organizational capabilities are also important, demonstrating the need to champion and enhance internal capabilities to promote future partnerships. NOCs should structure themselves with capabilities that mean they are not always hunting for IOCs to build capabilities, instead building their own organically over time.

Finally, it’s vital that culture is not overlooked as a foundation of success. NOCs can design sweeping strategies for future growth, but such efforts will never be sustainable unless the right culture is embedded in-house. An effective corporate strategy will incorporate both strategic vision and commitment to expanding capabilities in partnership fit for the changing future of energy in Southeast Asia.

As energy demand continues to rise while government and investor pressures intensify, we are about to witness some very exciting M&A moves from NOCs in Southeast Asia. There are five key takeaways for NOCs in this moment of challenge and opportunity:

Capitalizing on regional “home advantage” will be crucial to strengthening and growing their domestic core

A future, capability-led inorganic growth strategy can help develop new technical capabilities as NOCs consolidate and expand their geographical footprint in Southeast Asia and beyond

In an ongoing energy transition, it’s vital to accelerate new capabilities which enable future growth, for example, late-stage management, first-oil cycle time, carbon dioxide (CO2) management, deep-water and frontier exploration.

It is also vital to develop and nurture strategic partnerships to acquire capabilities for competitive advantage, not only in Southeast Asia, but globally

A new culture and way of working is vital to make this sustainable in the long run

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Sharad Parashar is principal at Boston Consulting Group, Henricus Herwin is vice president upstream business development at Pertamina

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