Downstream-focused APAC oil and gas (O&G) companies are more vulnerable to sustained high crude costs brought on by geopolitical conflicts and risk of a global economic slowdown in the next 12 months, Fitch Ratings says in a new report. Rising regional petrochemical capacity could also delay recovery in petrochemical margins, if regional demand growth stays soft.

The post-Covid-19 recovery, especially in China, continues to support demand for refined petroleum products in APAC. The regional crack spread for key refined petroleum products has been maintained at high levels. Indian oil marketing companies will likely return to profitability for the financial year end-March 2024 (FY24) after incurring losses on insufficient cost pass-through in FY23. Upstream earnings among APAC O&G producers have remained robust overall, even though they have retraced from the peak in 2022 on lower realised prices.

Capex among rated APAC O&G producers is likely to remain high over next two to three years. Most sovereign-linked issuers will rely on internal cash to fund capex but can still draw on strong financial flexibility, given they are government-related entities (GREs) or GRE subsidiaries. In the private sector, Woodside Energy Limited (BBB/Stable) and Santos Limited (BBB/Stable) have strong growth pipelines but retain flexibility in funding capex through equity reductions in their projects.

Fossil fuels dominate APAC O&G producers’ earnings but tighter environmental regulations are set to drive the shift to cleaner fuels. We expect capex for energy transition to rise quickly from a small base as rated issuers execute their decarbonisation plan.