WoodMac pinpoints five global energy transition themes through Asian lens

The transition to low-carbon and green sources, which is sweeping across the global energy sector, comes with its own set of challenges and opportunities that can be universal and region-specific. In line with this, Wood Mackenzie, an energy intelligence group, looks at five global challenges in the energy transition story from the Asian perspective.

Wood Mackenzie’s APAC Global Energy and Natural Resources Summit in Singapore was hosted by Gavin Thompson, Vice Chair AsiaPac, and Simon Flowers, Chairman, Chief Analyst, and author of The Edge last week.

Flowers provides a brief overview of the five global energy transition themes discussed during panel debates and interviews with senior leaders from industry and finance. These challenges are LNG demand, sustaining upstream, new sources of finance, metals investment, and supply chain independence.

According to Flowers, most see the potential for gas demand growth in Asia and agree that decarbonisation presents a downside risk in the long term, however, more gas is required to enable Asia to diversify its coal-dominated energy mix and support renewables.

Therefore, Asia’s gas buyers are more concerned about having enough LNG supply in the coming years, as FIDs on LNG projects are currently being delayed by rising engineering, procurement, and construction (EPC) and borrowing costs and an uncertain regulatory environment.

“As the pace of decarbonisation reduces the bankability of a 30-year LNG investment, both developers looking to monetise gas resources and buyers intent on decarbonising are starting to consider alternatives to LNG, such as blue ammonia,” explains Flowers.

While the region increasingly depends on LNG imports, Flowers underscores that domestic gas supply has dwindled with exploration and appraisal drilling falling precipitously over the past decade. However, energy security concerns have pushed governments to tweak upstream terms. As a result, swathes of new acreage are being licensed across Southeast Asia since 2020.

“Independents are active as ever, and the majors are mainly focused on deeper water plays. Changes to upstream terms could make India the licensing wildcard of 2023. Australian upstream M&A has just seen a bumper 1H. None of this is expected to reverse Asia’s need for rising gas imports, but the region is working hard to revitalise E&P activity and maximise the resource potential,” emphasises Flowers.

Furthermore, Flowers is adamant that upstream investment is in an upcycle, as E&P budgets are up 10 per cent in 2023, thus, even though banks will not return to the levels of oil and gas lending seen before, accessing finance is “a little easier than might have been expected.”

Wood Mackenzie points out that the fast-evolving carbon capture and storage (CCS) regulation is another driver of upstream investment, which would enable mature oil and gas-producing provinces in Indonesia, Malaysia, and Australia to become sinks not only for domestic carbon but imports from North Asian emitters such as Japan.

“But CCS in Asia Pacific is evolving differently to the rest of the world, often without the same levels of incentives. Banks here recognise the importance of CCS to decarbonising oil and gas supply, but it’s a case of ‘show me the money’ before they pile in,” underlines Flowers.

As the energy transition’s need for critical metals is well documented, Flowers points out that China dominates the supply chain, with an investment of $35 billion in Indonesian nickel supply alone over the past four years. Indonesia, Saudi Arabia, Brazil, and India are also at the forefront but participation in new supply by Western-domiciled mining companies and banks is coming up short.

In light of this, Flowers is of the opinion that it will be “extremely difficult” to compete with China in the clean energy race, as the country’s cost of producing equipment continued to fall despite renewable energy costs rising through 2022 in most countries. As a result, China’s clean energy exports rose by almost 70 per cent in 2022, topping over $100 billion.
 
Despite this, Flowers believes that the U.S. Inflation Reduction Act (IRA) is starting to shift the centre of gravity for the energy transition away from China, as global companies are ramping up investments in a bid to access the tax credits offered by the IRA.

“Nobody is suggesting that China’s dominance will end anytime soon – but it is now being challenged. The IRA has begun that process and will in time provide alternative sources of supply. Asian governments, like those in Europe, need to respond with incentives to build out their own domestic supply chains,” concluded Flowers.