Bumpy road ahead as SEA navigates energy transition but opportunities aplenty

Wood Mackenzie, a Verisk business (Nasdaq:VRSK), is organising the 2021 Southeast Asia Energy Forum today. Experts will be discussing key issues and opportunities facing the region’s energy industry over the coming decades.

Southeast Asia is at the crossroads of the energy transition and national governments are faced with the complex task of balancing economic priorities with environmental pressures. 

Commenting on Southeast Asia’s progress in the energy transition, vice president Valery Chow said: “While it would be difficult for Southeast Asia to claim great success at present, there is evidence to suggest hope for the future.”

Recent declarations in Indonesia, Malaysia, Vietnam and the Philippines would suggest an end, or at least a significant slowdown, to the development of new coal-fired power plants. These developments have come on the heels of major financial institutions pledging to end coal-related investments.

Rapid decline in the cost of solar and wind power generation as well as storage options underline opportunities to shift Southeast Asia’s energy sector onto a cleaner pathway. In recent years, there has been a marked uptick of solar penetration throughout the region, albeit from a low base. Thailand, Vietnam and the Philippines have emerged as hotspots for growth. And even Singapore, despite its limited land, has raised it targets for installed solar capacity.

Chow said: “The emergence of affordable low-carbon technologies is stimulating local manufacturing to meet growing regional and global demand. Malaysia and Thailand, for example, are fast becoming global players in solar panel manufacturing.

“Private sector players are increasingly signalling their intent to step-up efforts to mitigate emissions. ESG factors are progressively seen as integral to companies’ license to operate, but companies need to outline clearer pathways to achieve zero emissions.”

SEA governments need to pave the way for upstream investors

Southeast Asia accounts for nearly 10% of global upstream emissions, with Indonesia and Malaysia topping the list for the most emissions vented. The region’s gas supply-demand gap is set to widen this decade, but the pipeline of gas developments looks challenged, with high CO2 content being of principle concern.

Gas demand pressures will present opportunities to upstream operators. With a growing commitment to decarbonise operations, upstream operators will increasingly look towards governments with aligned environmental objectives. However, carbon policy in Southeast Asia remains weak.

Research analyst Lionel Sumner said: “To decarbonise and grow, operators can lead the way with some operational initiatives such as, tackling leakage and improved monitoring. Large-scale change, however, will require government support and involvement. Governments do not necessarily need to be directly involved in projects but introducing best practices and regulations that enable others to do so will be crucial. Without such positive changes, the region can expect to see investors seek greener pastures elsewhere and an accelerated decline of Southeast Asia’s upstream industry.”

Integration into chemicals is key to SEA refiners’ future, industry lags in the energy transition momentum

Besides recovering from the impact of Covid-19, the refining industry faces many strategic challenges this decade including overcoming refinery overcapacity, slower transport fuel demand growth and lowering emissions. Refiners must become more efficient, less carbon intensive and re-configure to thrive as the world moves away from transport fuels that account for more than 50% of refinery production.

Senior analyst Daphne Ho said: “Given these challenges, the only way forward is to have more competitive sites and achieve strategic differentiation from the rest. Deep conversion refineries will survive, but refiners must seek forward integration into chemicals to both capture value from integration synergies and benefit from base petrochemicals demand growth outpacing that of transport fuels.”

Compared to the rest of the world, Asia’s oil demand growth will peak later, in the late 2030s. Southeast Asia in particular, due to the developing nature of its economies, will see oil demand growth extending post 2040.

Ho added: “While Southeast Asia currently lags in its energy transition uptake compared to its European counterparts, the type of investments pushed forward by governments and private companies in the next few years will determine how this landscape will change.”   

Chow concluded: “Societal awareness and concern around climate change impact is rising in Southeast Asia. But the real questions are whether environmental concerns are enough to override consumers’ quest for affordability and convenience? And whether consumers are prepared to make lifestyle changes to save the planet and hold governments and companies accountable for their actions? 

“Southeast Asia is at the beginning of a complex and potentially exciting journey into the energy transition. And while the challenges may appear impossible, the opportunities are even greater.”