Asia’s NOCs can now move through the decarbonisation gears

Energy security and record revenues provide greater incentives to diversify

4 minute read

As the pressure to cut emissions intensifies, no company can remain above the fray. But while the Majors and other international oil companies face increasing calls to decarbonise, many of the world’s largest national oil companies (NOCs) have so far avoided the same level of scrutiny. This is despite NOCs accounting for more than half of global oil and gas output and having far greater long-term production growth ambitions.

For NOCs in places like the Middle East and Russia, this means continued investment to increase output and exports. But across Asia, it is a different story. Most of Asia’s NOCs face declining production at home and rising imports to meet domestic demand. At the same time, firm emissions reduction targets have been set by governments across the region, while PETRONAS, PTTEP and the Chinese NOCs have each set corporate-level climate goals. With their upstream businesses making record returns and energy security high on the agenda, there has never been a better time for Asia’s NOCs to accelerate their energy transition.

To understand more about the Asian NOC’s developing energy transition strategies and the impact of both the current crisis and record upstream revenues on these, I spoke to Kavita Jadhav from our Corporate team.

Firstly, how important are the NOCs to delivering the energy transition?

Absolutely critical. This is all about scale, with the largest NOCs among the biggest global emitters of greenhouses gases. In our recent Insight on NOC energy transition strategies, just 18 NOCs account for half of all expected upstream emissions (Scope 1 and 2) from 2022 to 2030.

What actions are the NOCs taking and how are Asia’s NOCs progressing?

I think it’s fair to say that globally the NOCs are at varying stages of transforming their core businesses. Many of the larger resource holders have been slow to commit capital to energy transition investments and remain wedded to oil and gas exports as a source of national revenue. This is particularly true for those with the advantage of low carbon intensity and ability to reduce carbon costs.

No Asian NOC falls into this category. We include seven Asian NOCs in our analysis – Sinopec, PETRONAS, PERTAMINA, PTTEP, ONGC, CNOOC and CNPC – with only the latter two expected to see some modest production growth through to 2030. For all these NOCs, production challenges, rising import dependency and energy security are driving the debate between reinvesting in oil and gas or diversifying into new energy. 

All of Asia’s NOCs have begun the journey to decarbonise their portfolios but are at different stages. PTTEP, PERTAMINA and CNPC are continuing capital allocation largely to oil and gas, with an emerging focus on decarbonising projects and carbon capture and storage (CCS) at the planning or pilot stage.

Others with shorter resource lives are more closely mirroring their international oil company peers by diversifying into low-carbon and new energy opportunities that align with existing portfolio strengths. This includes increasing capital allocation to low-emissions fuels, CCS and renewables, with pilot projects already underway and more to follow. PETRONAS leads the pack, with around 20% of capital to be allocated to energy transition investments between 2022 and 2026. CNOOC has committed around 10% of budget through to 2025.

How important is gas to Asian NOCs’ decarbonisation strategies?

Gas is a critical part of the energy transition strategies of all the Asian NOCs. Rising domestic demand is the major trigger as gas plays a critical role in reducing dependence on coal across much of the region. The current crisis should also provide even greater motivation to shift towards a higher exposure to LNG as Europe’s policy to cut dependence on Russian gas is a bullish signal to LNG developers in the US, Qatar, East Africa and beyond.

For PETRONAS, PERTAMINA and PTTEP, maximising existing resources will help fuel their low-carbon transitions. For China’s NOCs, rising investment in domestic unconventional gas is critical to national and corporate carbon reduction goals, as well as a growing role for LNG. All three Chinese NOCs will see gas production dominate their upstream portfolios in the coming years.

Are higher revenues encouraging Asia’s NOCs to invest more in the energy transition?

We think so. Higher oil and gas prices are now generating a wall of cash for the Asian NOCs. In our Insight, we looked at what this means if prices stay higher for longer by using US$70/bbl versus our base case US$50/bbl. The result is the seven largest Asian NOCs generating an additional US$218 billion of revenue through to 2030.

Of course, not all of this will flow into low-carbon investments. Governments are prioritising this additional income for pandemic recovery. At the same time, the NOCs are also deleveraging and increasing investment in domestic oil and gas projects in the near term, as record energy prices and the conflict in Ukraine put a focus on the immediate need for energy security across Asia.

But record revenues should also encourage Asia’s NOCs to think more boldly about matching the Majors in the proportion of capital they allocate to energy transition investments (current projections are upwards of US$25 billion a year by the Majors by the end of this decade). Undoubtedly, domestic and overseas upstream investment will remain core for Asia’s NOCs, but now more than ever governments across the region want to reduce dependence on imported oil and gas and the price volatility that comes with them.

In many countries across Asia, we can now realistically expect stronger policies to incentivise domestic energy supply, with renewables, biofuels, hydrogen and CCS high on the list. With record revenues providing Asia’s NOCs with the financial platform to diversify, greater amounts of capital must flow into these low-carbon opportunities.

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.