Five global transition challenges – the Asian perspective

Asia faces its own unique challenges and opportunities in the energy transition. Gavin Thompson, Vice Chair AsiaPac, and I hosted Wood Mackenzie’s APAC Global Energy and Natural Resources Summit in Singapore last week. The panel debates and interviews with senior leaders from industry and finance offered an ‘Asian lens’ on five key global themes.

1. Rock solid demand – but should buyers be concerned about supply?

There are few non-believers in the potential for gas demand growth in Asia. And while most agree that decarbonisation means downside risk in the long term, the need for more gas to allow Asia to diversify its coal-dominated energy mix and support renewables is well understood.

Of more concern to Asia’s gas buyers is whether there will be enough LNG supply in the coming years. Investment in new capacity and infrastructure is booming right now, but there are clouds on the horizon. FIDs on LNG projects are currently being delayed by rising engineering, procurement and construction (EPC) and borrowing costs and an uncertain regulatory environment.

As the pace of decarbonisation reduces the bankability of a 30-year LNG investment, both developers looking to monetise gas resources and buyers intent on decarbonising are starting to consider alternatives to LNG, such as blue ammonia.

2. Are we seeing a revival in Asia Pacific upstream investment?

The region increasingly depends on LNG imports, while many of its own gas developments are among the world’s most carbon-intensive. Domestic gas supply has dwindled, and our data shows exploration and appraisal drilling has fallen precipitously over the past decade.

Yet on our Singapore stage, we heard regulators, project developers and financiers sounding upbeat on new upstream investment. Governments, acutely aware of their energy security, have tweaked upstream terms, with swathes of new acreage licensed across Southeast Asia since 2020. Independents are active as ever, and the Majors are mainly focused on deeper water plays. Changes to upstream terms could make India the licensing wildcard of 2023. Australian upstream M&A has just seen a bumper H1.

None of this is expected to reverse Asia’s need for rising gas imports, but the region is working hard to revitalise E&P activity and maximise the resource potential.

3. Has the passing of ‘peak ESG’ eased financing challenges in APAC?

Upstream investment is in an upcycle – E&P budgets are up 10% this year globally – while the necessity of energy security has encouraged banks and investors to adapt their approach to financing fossil fuels. Peak environmental, social and governance (ESG) was in 2021, and though banks won’t return to the levels of oil and gas lending of the past, accessing finance is a little easier than might have been expected.

More varied sources of capital – including private equity, traders and private wealth – are seizing the opportunity to build exposure to the sector.

Rapidly evolving carbon capture and storage (CCS) regulation is another driver of upstream investment. Mature oil and gas producing provinces in Indonesia, Malaysia and Australia see a value opportunity to become sinks not only for domestic carbon but imports from North Asian emitters such as Japan.

But CCS in Asia Pacific is evolving differently to the rest of the world, often without the same levels of incentives. Banks here recognise the importance of CCS to decarbonising oil and gas supply, but it’s a case of ‘show me the money’ before they pile in.

4. Why aren’t the mining majors investing more?

With the energy transition’s need for critical metals well documented, the big question is why the mining majors aren’t committing more capital to new supply.

For most publicly listed miners, capital discipline still trumps ‘speculative’ growth – including investment in greenfield transition metals opportunities. Surplus cash goes back to shareholders as dividends or buy-backs. As recent mega-merger deals have suggested, mine capacity can be cheaper and lower risk to buy than to build.

With the mining majors’ pool of greenfield opportunities coming up short, who is stepping in? A significant change has been the influx of capital from emerging market governments. Unsurprisingly, China leads, investing US$35 billion in Indonesian nickel supply over the past four years alone. But Indonesia, Saudi Arabia, Brazil and India are also to the fore.

Western politicians may have woken up to China’s supply chain dominance, but participation in new supply by Western-domiciled mining companies and banks isn’t matching their rhetoric.

5. Can anyone compete with China in the clean energy race? 

It’s going to be extremely difficult. Renewable energy costs rose through 2022 in most countries, but China’s cost of producing equipment continued to fall. Consequently, Chinese clean energy exports rose by almost 70% in 2022, topping over US$100 billion.

Batteries are a similar story. Even as companies worldwide step up production, most depend on China for the metals and precursor materials needed to produce batteries. Across the board, electric vehicle manufacturers have limited alternatives to Chinese-sourced materials and the technology to build their EVs.
 
Nonetheless, the 2022 US Inflation Reduction Act (IRA) is beginning to shift the centre of gravity for the energy transition away from China. Companies around the world – including many from Asia – are investing massively to access the generous tax credits offered by the IRA.

Nobody is suggesting that China’s dominance will end anytime soon – but it is now being challenged. The IRA has begun that process and will in time provide alternative sources of supply. Asian governments, like those in Europe, need to respond with incentives to build out their own domestic supply chains.