What is the future of energy in Asia after Covid-19?
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The scenarios discussed in this week’s APAC Energy Buzz blog come from our latest thought leadership analysis on the impact of the pandemic on the global energy and natural resources sectors. The insight also explores how companies across the oil and gas, metals and mining and power and renewables sectors need to map new strategic directions to thrive post-crisis. Entitled ‘The world after Covid-19’, this timely work can be read here.
The dramatic collapse in global energy demand and prices needs no further introduction. Where gradual relaxations of lockdowns in places such as China and South Korea have raised hopes of a speedy recovery, secondary outbreaks have seen swift moves to re-introduce partial lockdown measures and remind us of the uncertainties ahead.
For ‘The world after Covid-19’, we developed three scenarios to help structure our thinking around the future of the global energy market. Our scenarios are intended to be thought-provoking and consider both the immediate economic impact of the pandemic and longer-term consequences of radically new government policies, advancing technology and changing consumer behaviour.
One scenario models a quick and near-total economic recovery globally, the second considers the impact of a widespread shift towards deglobalisation, and the third sees governments accelerating support for a faster energy transition. All scenarios suggest a lasting impact on energy demand.
But what about in Asia Pacific? Pre-pandemic, we anticipated Asia Pacific would account for 67% of global power demand growth over the next two decades, that China would be the world’s largest LNG market by 2023, and India’s passenger car sales would rise at a CAGR above 7% versus the global average of just 1%. How do our scenarios change the outlook for the region that is the driver of global economic and energy demand growth?
Understanding our scenarios for a post-pandemic future
Condensing the possible pathway for the post-pandemic world into three scenarios is not easy. Multiple variables could blow any of these off course. But they do provide a useful framework for thinking about how energy markets might evolve.
Firstly, a full recovery. Here we anticipate a deep but ultimately ‘v-shaped’ global recession and then recovery as countries are released from lockdown. Critically, an effective vaccine is widely available in 2021. Governments, companies and consumers broadly return to previous behaviours.
Secondly, driven by a backlash against globalisation, we see a scenario called ‘go it alone’ in which the world decisively pivots away from increased trade, travel and immigration. Fuelled by a prolonged recession and lingering public health fears, international tensions rise and supply chains shorten.
Our final scenario, ‘greener growth’, anticipates a quick return to growth but critically sees governments channelling stimulus investment into the energy transition. With populations clamouring for a cleaner, healthier environment, capital is widely available for low-carbon technologies.
- Energy demand starts on its long road to recovery
What this could mean for APAC
Under the ‘full recovery’ scenario, Asia Pacific’s economies – many already among the first out of lockdown – revive their strong economic performance. Energy demand returns to our long-term outlook trajectory within a few years. While China’s coal demand has already peaked, its oil consumption recovers and continues to grow into the early 2030s. Gas demand grows throughout to 2040, reaching around 660 bcm by this time. Meanwhile, India’s primary energy demand rises by around 40% over 2019 levels and in Southeast Asia, Indonesia’s energy demand almost doubles by 2040.
With weaker economic growth, the ‘go it alone’ scenario puts Asia Pacific energy demand on a lower trajectory. Travel restrictions and trade barriers cool the pace of diesel and jet fuel demand in particular. But with a greater emphasis on energy security and cost, coal demand rises in India, China and Southeast Asia.
The ‘greener growth’ scenario is broadly in line with our existing outlook for an accelerated energy transition, as governments commit to radical change to cut carbon emissions. The impact is most profound in China and India as a large proportion of thermal coal is displaced by gas and renewables. The share of hydrocarbons in total primary energy demand by 2040 falls dramatically in both countries, from 77% in China and 76% in India in our ‘full recovery’ scenario, to 66% and 62% respectively under ‘greener growth’.
Which path are we on?
It’s currently difficult to be optimistic about the prospects for economic growth, for travel and renewed human interaction, and for reduced international tensions. And indeed, the risks in our scenarios are weighted to the downside. A full recovery is of course possible though would need rapid progress towards a truly effective vaccine. The world has faced calamitous threats in the past and prevailed.
But it seems clear to me that the post-Covid 19 world will be fundamentally different. Whether due to lower growth, reduced travel and trade, or government policies to accelerate the energy transition, Asia Pacific’s energy markets have been changed permanently. The challenge now is to adapt and thrive through what comes next.
APAC Energy Buzz is a blog by 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.