The Oil and Gas Industry in Asia – Current State and What Lies Ahead

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The Oil and Gas Industry in Asia – Current State and What Lies Ahead

The Oil and Gas Industry in Asia - Current State and What Lies Ahead

21 July 2021 – by Viktor Tachev

“Asia is the world’s largest and fastest-growing consumer of energy as well as the largest emitter of CO2,” is the opening sentence of the Asia Investor Group on Climate Change’s “Asia’s Net Zero Energy Investment Potential” 2021 report. The continent has become the biggest threat to the net-zero global goals due to a single factor – the complete domination of the fossil fuel industry, with coal as the primary source of energy. Another major contributor is Asia’s oil and gas industry, which will grow extensively over the following decade.

The State of the Oil and Gas Industry in Asia

The Asia Pacific region has seen a notable increase in natural gas and especially oil in the total energy supply over the last four decades.

Total Energy Supply by Source in Asia, 1990 - 2018, IEA
Total Energy Supply by Source in Asia, 1990 – 2018, IEA

However, today, the share of oil and gas in power generation in Asia is much lower than the rest of the world. The continent compensates with coal which attributes to 59% of its total power generation in 2019.

Energy Consumption by Source, Asia vs Global
Energy Consumption by Source, Asia vs Global, AIGCC citing IEA

However, the forecasts for the consumption trends within both oil and liquefied natural gas (LNG) in Asia indicate significant short-term growth opportunities.

What Awaits the Oil and Gas Industry in Asia

Asia is usually a bit behind the rest of the world when it comes to phasing out fossil fuels. This doesn’t make the continent less important for the clean energy transition. Just the opposite, according to the International Energy Agency (IEA), due to the expected increase in energy demand, Asia, and especially the Southeast region, will become a key driver and a proxy for global energy trends over the next two decades.

Short- and medium-term forecasts

For oil, the International Energy Outlook 2019 report projects that refineries throughout Asia will increase by 60% between 2018 and 2050. IEA expects oil demand in the region to go up to 9 million barrels per day by 2040 from 6.5 million barrels per day today.

Growth is also expected for LNG, especially in China and the developing countries in Asia, increasingly looking at it as a transitional fuel.

graphic of Asia Natural Gas Consumption
Asia Natural Gas Consumption, EIA

The future of oil and gas production

According to GlobalData’s report, Southeast Asia will launch a total of 54 oil and gas projects across six countries between 2019 and 2025. Together, they would represent about 223,000 barrels per day of global crude production and about 8.1 billion cubic feet per day of global gas production in 2025.

Long-term forecasts for the oil and gas sector

Like fossil fuels, oil and gas will face the same faith as coal in the long term. They will be reduced to a supplementary role in the global energy mix as the world transitions to a net-zero economy.

What is more important is at what pace will the dawn of the oil and gas industry unravel. The best way to conclude is to look at the path coal has gone through over the last couple of years. Its consumption has peaked globally, and in the more developed Asian countries, while in the developing regions in APAC, imports and demand have remained strong.

Oil and gas reserves and demand: how long will they last?

So, before we talk about the decline of the oil and gas industry, we should first wait for fossil fuels’ demand to reach a tipping point. For natural gas, especially, this might be far in the future considering that many Asian countries rely on it as a transitional fuel to ease the coal-to-renewables switch. However, this strategy is proven to not be in line with Asia’s net-zero goal by 2030 (learn more here).

Yet, even when the oil and gas demand peaks, it won’t fall off a cliff suddenly. It will potentially follow the path of coal, where we will witness a plateau at near-record levels before the downward move.

What do they mean for investors?

While many see oil and gas as a sunset industry, the dawn won’t happen overnight. Such a drastic transition takes time to settle. That is why, for now, investors have the time to think about whether they need to re-focus their investment strategies. Similar to what we see with coal today, once fossil fuels’ demand peaks, investors in oil and gas might also face the risk of having portfolios of stranded assets alongside the accompanying reputational hazard.

Many investors won’t even be waiting for the tipping point but aim to seize the opportunity ex-ante. According to BlackRock, Asia Pacific is tipped to become a powerhouse of renewable energy, accounting for over half of the world’s electricity generation by 2030. Furthermore, the asset management firm expects the region to lead investment activity over the decade.

Oil and gas companies looking to renewables

Even oil and gas industry leaders like BP, Shell, and Eni are planning to back the renewable energy transition in one way or another. Furthermore, the Oil and Gas Climate Initiative has set aside USD 1 billion to support the shift to a low-carbon ecosystem.

McKinsey considers the market dynamics in the oil and gas sector as a pivotal moment for companies to improve their business models, strengthen their reputational resilience and find a way to reposition themselves to take advantage of the accelerating low-carbon transition.

Renewables vs gas industry outlook

The oil and gas industry is bracing for upcoming challenges, including public opposition, skeptical shareholders, and dynamics on the policymaking front. Yet, even with these obstacles, oil and gas remain an integral part of the energy mix and short-term future of the developing regions in Asia.

Looking ahead for the continent, Asia will have to embrace a clean energy-centred approach to the decarbonization challenges successfully.

One is that Asia is becoming a large net importer of oil and gas, threatening its energy independence. According to IEA, Southeast Asia risks facing an annual energy trade deficit of over USD 300 billion by 2040. The high energy costs aside, this increased dependence on oil and gas imports also creates energy security concerns.

Simply put, Asia has one viable way to go forward. The closer it gets to the final destination, the lesser roles oil and gas would play. For now, however, the industry has breathing space. At least until the world phases coal out. Then comes the time for the rest of the fossil fuels to leave the stage.

graphic of fossil fuels, oil and gas

by Viktor Tachev

Viktor has years of experience in financial markets and energy finance, working as a marketing consultant and content creator for leading institutions, NGOs, and tech startups. He is a regular contributor to knowledge hubs and magazines, tackling the latest trends in sustainability and green energy.

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