SINGAPORE -- A global focus on rising oil output in the U.S. has overshadowed an important trend elsewhere in the market. Falling oil production in Asia is forecast to accelerate as major fields dry up, which will stiffen demand for foreign barrels and help absorb the global glut. But Asia will be increasingly vulnerable to sudden price spikes as its reliance on imports climbs.
U.K.-based energy research firm Wood Mackenzie says Asia will play an important role in balancing global oil markets because no other region faces such a severe slump in production up to 2020. Its annual decline rate on existing fields is around 7% -- significantly higher than the global norm. At the same time, the region will see stronger growth in oil demand from transportation than the rest of the world as its economies continue to expand and car ownership soars.
Oil output in the Asia-Pacific region is forecast to fall more than 13%, from 7.5 million barrels per day in 2016 to 6.5 million bpd by 2020, says Wood Mackenzie. The downturn is driven by severe cuts to exploration and production spending as weak global oil prices force producers to tighten their belts, particularly at giant aging fields in China and Indonesia.
Gas-focused exploration over the past two decades, which resulted in oil finds making up just one-quarter of total hydrocarbons discovered in Asia since 1990, also plays a significant role, said Angus Rodger, Asia Pacific research director at Wood Mackenzie.
There are too few new oil developments in the region to replace production, and only a handful that will come online by 2020, said Rodger, who is based in Singapore.
China, the world's biggest oil importer, makes up nearly half of the projected drop in production, while Indonesia accounts for just over a quarter, followed by Thailand, India and Malaysia. To keep pumping, operators must employ enhanced-oil-recovery techniques at the super-mature oilfields found throughout the region. But high breakeven costs and cuts to capital expenditure mean that marginal fields are already being shut, particularly in China.
Last year Chinese output fell by 7%, or 300,000 bpd, from a record 4.3 million bpd in 2015. The peak marked the culmination of a remarkably constant expansion averaging 1.5% to 2% every year over the past two decades. But as growth falters, it appears that China's oil production has already entered structural decline, with high-cost aging fields producing below capacity.
Rising offshore production from CNOOC is unlikely to offset declines at the maturing fields of China National Petroleum and China Petroleum & Chemical (Sinopec), analysts predict. This is momentous. The country is not just the world's biggest oil importer, it is also the fifth-largest oil producer, trailing only the U.S., Russia, Saudi Arabia and Iraq.
Judging by the sharp fall in Chinese production last year it is reasonable to assume that output has peaked, but government targets suggest otherwise, said Michal Meidan, an Asia-focused analyst at U.K.-based consultancy Energy Aspects. Oil production is expected to remain flat at 4 million bpd over the next five years, based on the official target.
But the age of China's big oilfields -- they were discovered in the 1960s and 1970s -- means output can only be sustained with a strong expansion in capital spending.
The mature fields operated by China's national oil companies increasingly need enhanced-oil-recovery methods -- hard to justify in a period of weak prices -- to maintain flows, making the official goal ambitious, said Meidan.
But "in China, political fiat can trump economic calculus, so I think the NOCs will strive to reach 4 million bpd, even though they may not achieve that this year," she added.
Philip Andrews-Speed, principal fellow at the Energy Studies Institute of the National University of Singapore, believes the target is overly ambitious given prevailing oil prices. Production has almost certainly peaked unless significant reserves of tight oil, often referred to as shale oil -- the form of reserves that triggered the resurgence of U.S. output -- are found in China, he said.
"The current level of pricing is probably still too low to encourage the NOCs to boost production and field development significantly -- unless ordered to by the government," he added.
Higher oil prices will not help reverse the trend unless China can discover giant oilfields, which have eluded explorers for 10 years, said Gordon Kwan, a Hong Kong-based oil and gas expert at research house Nomura.
If oil prices are sustained above $60 a barrel it is more likely production could recover, but below that level the NOCs will struggle, said Li Li, oil research director at ICIS in China.
High-cost developments have to compete with potentially cheaper sources of supply outside China, said Wang Yushuang, Asia upstream analyst at Wood Mackenzie. "Barring significant intervention from policy makers to incentivize investment in domestic exploration and production, we do not expect the NOCs to keep investment levels high enough to reverse current declines," she added.
Meidan expects China's oil production to fall by 200,000 bpd in 2017 compared to last year, which is likely to lead to higher imports. But falling production is not only a Chinese phenomenon. Taking into account falling output elsewhere in Asia (estimated at 360,000 bpd) stockpiling, and more intensive use of refineries, the region's net shortfall will be higher by 900,000 bpd year-on-year, Energy Aspects estimates.
The combination of sliding national and regional oil supply, coupled with high growth rates in fuel demand, is a major policy issue for governments and NOCs across Asia, said Vandana Hari, founder of Singapore-based strategy research company Vanda Insights.
Despite a push for energy efficiency and alternatives, oil is expected to remain dominant in the energy mix. "This means rising dependence on crude imports, either from the geopolitically challenged Middle East and North Africa regions, or the Americas, which has to travel a longer distance to reach markets in Asia," added Hari.
Security of supply is not a serious concern because most countries in the region have significant coastlines and ports, while China also has import pipelines, said Andrews-Speed. But all countries are exposed to sudden price rises, he warned.
As production falls in Asia the risk of an unexpected price shock remains very real. "While the U.S. oil industry is seeing a revival, the dramatic declines in global oil industry investment over the last two years, and only modest signs of recovery in 2017, mean that it is far from clear that enough projects will enter the pipeline in the next few years to avoid a potentially tight market by 2020, and with it the possibility of a price spike," the Paris-based International Energy Agency said in its latest report, Oil 2017, released on March 6.
The increasing Asian reliance on foreign oil makes energy security a natural concern, prompting major consumers such as China and India to establish strategic oil reserves in recent years. Beijing is far ahead of India in this regard, said Hari.
Even Middle Eastern NOCs are taking up storage space and stockpiling oil in Japan and South Korea to give them an edge over their competitors in the energy-hungry region. Typically, the host countries have first right of refusal over those barrels in the event of an emergency, she added.
"We have not seen similar moves by the Southeast Asian countries, which are relatively smaller oil consumers compared with the region's top four -- China, India, Japan and South Korea -- but some of them have fast-growing consumption rates," said Hari.
Malaysia, Indonesia, Thailand and Vietnam have historically been major producers and exporters of oil and gas. But with no big new oil discoveries and domestic demand soaring, a second wave of countries could launch strategic reserve drives over the next decade, Hari added.
Ultimately, Asian countries need to reduce their reliance on oil. China knows it must diversify its fuel mix and a shift to electric and gas fueled vehicles has already begun. But it remains to be seen how successful China will be -- and whether the rest of Asia can follow suit.