Whalesbook
Why Southeast Asia Needs Deepwater Gas
Southeast Asia is launching a major push into deepwater gas, dubbed 'Deepwater 2.0,' to replace output from older fields. This initiative aims to tap an estimated 28 trillion cubic feet (tcf) of gas in Indonesia, Malaysia, and Brunei. Over $20 billion is set to be invested by 2030. Energy security in the region increasingly depends on these complex offshore projects, particularly as global energy markets face disruption and rising costs due to geopolitical tensions.
Tight Margins for New Gas Projects
The financial outlook for 'Deepwater 2.0' is challenging. Analysis shows most projects are likely to yield internal rates of return (IRR) below 15%, less than typical global deepwater projects. This leaves little room for error. Even small changes can have a big impact: a 20% rise in costs, a 20% drop in gas prices, or a 20% production fall could reduce a project's value by about 150%. A three-year delay could cut its value in half. Global supply chain issues and rising inflation, worsened by conflicts, are further pressuring costs and stretching delivery times for necessary equipment.
Key Projects and Companies Involved
Several major energy companies are pushing ahead with key projects. Eni is developing hubs in Indonesia's Kutei Basin, targeting first gas by 2028 from fields like Geng North. Shell is involved in the Gumusut-Kakap-Geronggong-Jagus East (GKGJE) project near the Malaysia-Brunei border and the Rosmari-Majoram development. Petronas and Mitsubishi Corporation are developing Brunei's Kelidang Cluster, set for production around 2030. Mubadala Energy is accelerating its Tangkulo and Layaran discoveries in North Sumatra, with Tangkulo gas expected by late 2028. While operators are fast-tracking plans, success depends on disciplined execution and navigating logistical challenges. Past deepwater efforts ('Deepwater 1.0' from 2008-2017) showed viability but saw uneven progress due to various issues.
Significant Risks Threaten Viability
These deepwater gas plans face significant risks that could sink project finances. The core issue is tight financial margins; any execution missteps, cost overruns, or delays threaten viability. Geopolitical tensions, especially in the Middle East, are driving inflation and lengthening delivery times for essential subsea parts, adding major cost and schedule uncertainty. Regional tax and royalty structures might also not adequately protect operators from these risks. With project values highly sensitive to costs, prices, and delays, even small deviations could destroy billions in investment. Past deepwater projects in the region have also struggled with commercial, technical, and regulatory hurdles, indicating recurring execution difficulties.
Success Depends on Flawless Execution
Ultimately, the success of Southeast Asia's 'Deepwater 2.0' gas push hinges on operational execution. Despite the region's stability amidst global geopolitical issues, the tight economics and numerous external risks mean that any delay or cost increase jeopardizes project viability. Delivering gas to domestic markets and export plants is crucial for regional energy security. The next five years will show if these ambitious deepwater projects can be completed on time and within budget, or if the high costs of failure will outweigh the potential benefits.