2022 – cheerful or fearful?
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Vice Chairman, Energy – Europe, Middle East & Africa
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After another rollercoaster year that trampled on predictions, the annual APAC Energy Buzz ‘cheerful or fearful’ outlook is back. Chock full of reasons to have a spring in your step as we go into 2022 (plus a few reasons you may want to approach the new year with caution), it’s a bumper ‘what to watch’ read, with predictions from across Wood Mackenzie’s Asia Pacific research team.
Economic outlook: Resurgent global consumption fueling Asian growth, but risks remain
Cheerful: Asian economies – a key component of the global supply chain – are recovering from Delta variant lockdowns. Manufacturing sector recovery, especially across ASEAN and India, will help to ease supply bottlenecks worldwide, in turn abating global inflation.
While China’s economy is slowing, its government has just sent out signals that will help stabilise growth. Monetary policy will remain accommodative in 2022, helping not only the manufacturing sector by easing credit but also aiming to reduce the risk of a real estate sector teetering on the brink of a debt crisis.
Fearful: Unlike most developed economies, saving rates in developing Asia decreased during the pandemic, and there is limited pent-up demand from domestic markets. The recovery of these economies primarily relies on pent-up demand from developed economies. As such, recovery in these countries will lose steam soon after external demand returns to normal.
Yanting Zhou, Head of APAC Economics
Refining and oil markets: Let the recovery continue (please, Omicron)
Cheerful: After rising by almost 7% in 2021, oil demand in Asia is set to continue its recovery. We now anticipate growth of around 5.5% as Asia leads the global oil demand recovery in 2022. Based on this, refining margins are expected to recover further, providing some much-needed respite for the region’s refiners over the next 12 months.
Fearful: A double whammy of the Omicron variant and inflationary pressure could slow or even reverse the expected recovery in oil demand. If Omicron proves severe, then fresh restrictions on travel could last beyond Q1 and threaten the refining outlook. At the same time, Asian refiners are coming under rising pressure from shareholders and governments to reduce their carbon footprint. If the threat of a tax on refinery emissions becomes real in 2022, it could lead to more refinery closures in Asia.
Sushant Gupta, Research Director, APAC Oil Markets
Electricity markets: Power-hungry Asia to see demand growth continue apace
Cheerful: After the boom in regional power demand over the past 12 months, the outlook remains positive: we now expect an impressive 8% growth in 2022. This outlook assumes fears over both Omicron and a collapse in China’s real estate sector are overblown. In fact, I see upside for power demand driven by resilient manufacturing, continued strong export growth and recovering consumer demand – and if I’m right, there will be significant implications for the ongoing energy crisis and prices of coal and LNG.
Fearful: The biggest risk to power demand comes from high gas and power prices, with most consumers in Asia having still not felt the full impact of rising electricity costs. For the region’s major LNG importers, such as Japan, South Korea, Taiwan and coastal China, 2022 will be a year of reckoning. Meanwhile, those markets that rely on a higher share of coal or renewables, including China, India, Indonesia and Australia, will be insulated somewhat.
Alex Whitworth, Head of APAC Power & Renewables
Upstream oil and gas: Exploration is back
Cheerful: After two years of mediocre activity levels brought on by budget cuts and pandemic-related restrictions, we’re going to see an uptick in 2022 as operators work their way through the backlog. Big wells to watch include Harbour Energy (Timpan-1) and Repsol (Rencong-1) chasing deepwater gas off Northern Sumatra, TotalEnergies going deep (Tepat North-1) off Malaysian Sabah, Eni drilling in Vietnam’s Song Hong basin, Western Gas’ giant Sasanof-1 gas prospect off Australia’s North West Shelf, and Santos drilling for oil in the nearby Canning basin.
But it is not all champagne and balloons. This is a temporary surge and not a sign of renewed activity levels for years to come. And for some, it’s the last roll of the dice. If big wells don’t come in for Repsol, TotalEnergies and Eni, among others, it could be the last high-profile exploration wells they ever drill in Asia, drawing a long chapter to a close.
Fearful: Two years of subdued activity has consequences. Many essential offshore development and maintenance programmes have been deferred across the region, and we could pay the price in 2022. An early warning sign was gas fields going down in both the Natuna Sea and Sumatra in Q3, cutting off supply to Singapore. This forced the city-state into the LNG spot market at the worst possible time, and several domestic power suppliers went bankrupt. Maintaining supply-side integrity – from LNG backfill to maintenance backlogs – needs urgent attention in 2022, or we’ll see more unplanned outages across Asia.
Angus Rodger, Research Director, APAC Upstream
Asia’s corporates: Tipping point
Cheerful: Asia’s corporates have outlined energy transition goals, and some have gone further to set out strategies and provide capital guidance. 2022 will be a tipping point on the back of more ambitious pledges at COP26 as strategies materialise into investment decisions. Based on corporate guidance so far, 2022 is already shaping up to be a transitional year as decarbonisation takes a firm hold.
We could see a doubling of spend by Chinese NOCs in 2022, for example, from the current US$4 billion guidance. Greater country-level ambition and target setting for 2025-30 will bring forward investments. Based on our Emissions Benchmarking Tool, Chinese NOCs represent up to a fifth of global (Scope 1 and 2) emissions from 2022-30, so there is much reason to cheer action on emission reduction.
Fearful: There was a rare reprieve in tensions between the US and China at COP26, with the signing of the climate deal. But if tensions continue unabated, this will cause Chinese NOCs to turn inwards and phase down climate cooperation. In 2021, the NYSE delisted CNOOC, and the company is in the process of listing on the Shanghai stock exchange along with its existing Hong Kong listing. A reduction in ownership from global investors lowers transparency and financial disclosure on climate risk and slows capital flows towards the energy transition.
Kavita Jadhav and Andrew Harwood, Directors, Corporate Research
Chemicals: Even with strong demand growth, producers can’t ignore rising capacity
Cheerful: The sharp recovery in plastics demand in 2021 was the bright spark amid the worsening global overcapacity in petrochemical markets. As the world (hopefully) moves into the endemic phase of recovery, we are expecting demand to continue its healthy rebound in 2022. We forecast global base petrochemical demand growth to exceed 6% in 2022, supporting feedstock consumption of LPG and naphtha.
Fearful: New petrochemical projects, many integrated with greenfield refineries in China, are scheduled for start-up in 2022. But the base chemical industry has been struggling with oversupply since the start of 2019, and another wave of Chinese supply in 2022 will make it doubly challenging for existing producers with exposure to export markets in Asia. Rising shipping and logistics costs could also persist in 2022, putting additional pressure on those facing thin or even negative production margins.
Darryl Xu, Research Director APAC Chemicals
Thermal coal: A bleak future brings fear and cheer for producers
Fearful: While COP26 didn’t deliver a knock-out blow for thermal coal, the political will to reduce carbon emissions is accelerating, and demand will soon be in long-term decline. More countries in Asia Pacific have joined the net zero race with more aggressive 2030 emission targets ahead of COP26. South Korea specifically approved two scenarios, both assuming zero coal generation by 2050. Vietnam, which released a draft of its new power development plan just a month before COP26 with an upward revision in coal, is now reworking it (again) in the direction of reducing coal use. Indonesia, while still lacking a unified national trajectory for meeting its 2030 NDC and 2060 carbon neutrality goals, is working on a detailed emission abatement roadmap for the power sector and the funding requirement for coal retirement.
Cheerful: With a gloomy demand outlook, hardly anyone is investing in new supply. The majors and publicly listed companies in particular just aren’t spending. The result of this is increased volatility and, as we have seen over the last year, supply squeezes and high coal prices. This leaves those with existing assets and the ability to ride out the volatility in a prime position over the next few years with seaborne demand still increasing. We estimate Glencore could generate over US$2 billion cash flow in the second half of 2021 from its Australian thermal coal assets alone. Even as coal demand starts to decline, if this underinvestment becomes the norm, we could see the coal market remain structurally undersupplied.
Rory Simington and Shirley Zhang, APAC Coal Research
That’s it for 2021. The APAC Energy Buzz will be back in January. Happy holidays!
APAC Energy Buzz is a weekly blog by Wood Mackenzie Asia Pacific Vice Chair, Gavin Thompson. In his blog, Gavin shares the sights and sounds of what’s trending in the region and what’s weighing on business leaders’ minds.