The Edge

The Edge: Asian NOCs, the energy transition and ESG

LNG’s carbon intensity under scrutiny

1 minute read

What’s at the top of the agenda in Asia? Among the numerous topics we discussed at our Forum in Tokyo and Energy Summit in Singapore, three came up time and time again.


1. Energy transition and Asian NOCs

A red-hot topic in the region, but quite what Asian oil and gas companies intend to do about it is another matter. In Europe, investor agitation has spurred action; in Asia, the impetus for change is coming mostly from above. With both energy demand and urbanisation rising, China and India want to tackle air quality as well as carbon emissions. At some point in the next few years Japan is expected to join the UK, Germany and France in the ranks of the G7 nations with the goal of being net-carbon neutral by 2050.

Each of these three Asian countries has a strong incentive to reduce import dependency. Renewables are high on the list, while energy storage and green hydrogen – earlier-stage technologies – are also seen as part of the eventual solution.

Corporates across the region are wrestling with the challenge of how to adapt. Asian NOCs’ remit is to maximise oil and gas production, but none have the operating capabilities of the Majors. Disclosing and reducing Scope 1 and 2 emissions will be the primary focus. Adapting for a sustainable future means building structural resilience into the portfolio, reducing carbon intensity and positioning lower down the cost curve.

The bigger question is whether Asian companies go into the new energy space in a meaningful way. One or two have targets – INPEX wants 10% of its assets in renewables by 2040, ONGC’s is 10% of earnings by 2040. Some NOCs can build on existing exposure to biofuels, geothermal and carbon capture and storage (CCS). PETRONAS made its first renewable acquisition, a Singapore-based solar business, in April.

Max Petrov, Corporate Analyst Asia Pacific, reckons that unlike the European Majors, there is little strategic direction or appetite to commit to the power value chain. Some NOCs have the attributes to diversify into the space – project development skills, trading, logistics, brand and strong balance sheets. At this early stage, though, it’s more about the NOCs absorbing what the Majors are doing and weighing up whether to follow. The answer will vary from NOC to NOC.

Trading companies in the region may have a distinct advantage over NOCs. Some have power and renewables already core to their business, sitting alongside LNG, trading and E&P. These building blocks could be integrated in time to constitute an ‘all-round’ portfolio for the energy transition, complemented perhaps by grid edge and other emerging technologies.

2. Green LNG outlook

LNG’s environmental, social and governance (ESG) credentials are a big talking point in Japan, in particular. The carbon intensity of gas combustion (Scope 3) is relatively low. But Scope 1 and 2 emissions push some LNG projects up into the ‘high’ intensity category.

The industry needs to sort it out if it is to cement LNG’s place in the transition. That means reducing methane leakage, cutting out CO2 venting (CCS and/or carbon offsets) and using zero-carbon renewables to power offshore facilities and the energy-intensive liquefaction process. Sustainability comes at a cost.

But it should prove a worthwhile investment. Nick Browne, Director LNG Research Asia Pacific, says buyers are starting to discriminate by carbon intensity. BP has sold cargoes of ‘green LNG’ into Europe, the molecules’ provenance and carbon intensity verified using blockchain technology. Shell has offset emissions from two cargoes sold into South Korea and Japan using carbon credits from land management projects. The Europeans may be blazing this trail, but Japanese, Korean and Australian players are close behind.

Geopolitics and trade tensions

Asia is at the centre of it all, the region’s export-led economies vulnerable to fragmentation in the global trading system. As well as the US-China dispute, Japan and South Korea are embroiled in a narrower, though no less vociferous, stand-off on trade that highlights the fault lines between two of Asia’s most mercantilist nations.

In a trade war, everyone loses. The US-China spat has led the US to substitute imports from China for goods from third countries: Japan, Taiwan, Vietnam and Korea. But those economies that appear to be benefiting, are actually worse off on balance – the contraction in their exports to China more than offsets the increase in exports to the US. For those four Asian economies, exports to the US increased US$22 billion in the first seven months of 2019, but exports to China fell by US$33.5 billion over the same period.

As the long-established rules and structures of global trade come under threat, so concerns mount around higher associated costs for commodities and finished goods. Fears of slower economic growth add to the challenges for Asian governments and energy companies grappling with the energy transition.

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