The art of never letting a crisis go to waste
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Over the past three weeks, Wood Mackenzie teams across Asia Pacific have delivered a wide range of Virtual Series webinars, covering all sectors of energy and natural resources. I was fortunate to chair the plenary sessions and on each of these I asked our experts what they believe governments and companies should be doing to ensure that they emerge stronger from the crisis.
Invest, invest, invest is the mantra
Head of Markets & Transitions, Asia Pacific, Prakash Sharma said: "Covid-19 has widened the gap between haves and have-nots. Income distribution was already uneven, with high concentrations of wealth held by a small percentage of the population. This has worsened due to reduced industrial and business activity caused by the pandemic. A key factor in the income disparity has been the supply deficits, especially in the energy sector, prevailing in much of Asia.
"Governments now have a golden opportunity to close this gap and build a resilient, healthy society. Clean and affordable energy supply can deliver on these goals. Infrastructure across energy, technology, health and mobility will not only create new employment opportunities but also prepare economies for future crises.
"Invest, invest, invest is the mantra to do it. Take a leaf from China’s book in this regard: invest in time to bring forward the economic development. The only caveat is to ensure that capital allocation is efficient and serves long-term objectives of sustainability and climate change."
Addressing upstream’s ‘inconvenient truth’
Research Director, Asia Pacific Upstream, Angus Rodger said: "I have talked a lot through the virtual series about an ‘inconvenient truth’, namely that in volatile times, many major pre-FID projects are not sufficiently robust-enough investments. Many governments across the world look at their undeveloped hydrocarbon resources with a sort of inevitability – however challenged or stranded, they assume they will be developed by Big Oil, no matter what. But those assumptions just don’t hold anymore. Most of the major IOCs are winding down investments in Southeast Asia. They’re also lowering their long-term oil price assumptions, meaning only the most attractive projects can proceed. This is the challenge that many countries now face and it’s not going away.
"Will this crisis spark a response? The big opportunity is for government to push aside its traditionally adversarial relationship with Big Oil and start considering genuine win-win solutions. Projects like Abadi and IDD in Indonesia for example require top-tier industry expertise – and spend – but that won’t materialise as things stand. And if they don’t happen, the loss of government revenue is huge. If governments genuinely want more spend on big developments across the region, they are going to have to fight for it."
Rethinking the role of national oil companies
Principal Analyst, Corporate Analysis, Max Petrov said: "The crisis has reopened questions about the role of national oil companies and their broader societal contributions. Governments in Asia are turning to their state champions to help deal with ballooning budget deficits and economic slowdowns. Regional NOCs are under pressure to raise dividends, maintain employment and protect domestic investments. Coupled with the looming energy transition, Asia’s national companies are facing their toughest balancing act in their strategic priorities.
"In Indonesia, PERTAMINA’s latest dividend was up 7% year-on-year despite higher future capital expenditures and lower oil prices. Meanwhile, PETRONAS has agreed to pay an additional 5% in sales tax to some of Malaysia’s oil-producing states. At the same time, companies are expected to grow their domestic production, invest in new energy infrastructure and attract foreign investment. Governments could be tempted to extract further value by partially listing NOCs. While that could help improve governance, a public listing would also require greater financial and operational transparency and a stronger ESG framework. This would be welcomed by both industry and society – but are governments ready for change?"
Does Asia need all its new cars?
Research Director, Asia Pacific Oils and Refining, Sushant Gupta said: "Most countries in Asia depend highly on imported crude oil and products to meet domestic demand. Asia’s oil production is expected to decline and the gap between domestic production and demand will widen – and so a key priority for Asian companies, especially NOCs, will be to meet this widening gap. Building strategic petroleum reserves is critical at such high import dependency. During the current crisis, few countries in Asia have been able to take advantage of low oil prices to build their strategic reserves. Having more strategic storage capacity is a key lesson learned during this crisis.
"As incomes rise, we expect Asia’s car population to increase by more than 400 million, driving up gasoline demand. Do we need all those cars? There is no doubt that with millions of consumers entering the middle class over the coming decades the demand for mobility will remain strong in Asia. But countries should look at new trends in mobility to transform the transportation sector and meet the demand for mobility. A shift in vehicle ownership from private to shared, a transition in technology from conventional ICE to electric vehicles, and efficient public transport are all possible and will support the energy transition."
Support for gas demand can boost LNG supply
Principal Analyst, Asia Pacific Gas & LNG, Lucy Cullen said: "The current crisis is undoubtedly a challenge for Asia’s gas exporters. Nonetheless, it still creates opportunities and provides important reminders for both sellers and buyers of LNG.
"For LNG producers, the projects best weathering the storm are generally positioned at the lower end of the cost stack. The current crisis though serves as a reminder of the importance of cost advantage. And it may encourage project developers to revisit plans, as others around the world are doing, to ensure that future LNG supply is as well positioned in the global stack to navigate future market cycles.
"Perhaps more important are the demand-side opportunities. For growing markets, the focus is very much on meeting rapid energy demand growth as cost effectively as possible. As a result, cheap coal has been embedded in many countries across the region. Gas is becoming increasingly cost competitive though, with low LNG spot prices for longer and pressure on contract pricing. Lower prices could boost gas’ share of the energy mix faster – by encouraging pro-gas policy changes, progress on domestic market price reform, fuel switching or new consumers. A faster uptick in gas will help accelerate the pace of energy transition."
A push for greater reform to support mining
Global Head, Bulk Commodities, Derryn Maade said: "Across the mining space, I see the need for governments and companies to use the opportunity to continue to push towards a more investor-friendly and efficient industry. This is essential to encourage global capital allocation to find a safe home in markets such as India, driving foreign direct investment into mining and steel as these markets are set to grow substantially over the longer term.
"Key steps include further opening of economies, further deregulation of markets, incentives to invest and stability in policy to ensure returns can be safeguarded. The prize is large – government tax revenue, employment and foreign income all stand to benefit."
APAC Energy Buzz is a 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.