Cleaner vs cheaper fuels: Asia's policy dilemma is here to stay -- for now

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Embracing a new energy order will surely come at a hefty cost for Asia, but will it be higher than the price the region pays for its deep addiction to imported fossil fuels?

For more than 1,000 delegates who attended the Asia Pacific Petroleum Conference by S&P Global Commodity Insights in early September, a key takeaway was that Asia today is relatively better placed to strike a balance between providing affordable and sustainable energy, as well as ensuring energy security, compared to where it was a few years ago.

But the biggest headache for policy makers in the region will be that the pace at which Asia can move away from fossil fuels -- oil, gas and even coal -- won't be anywhere near the speed at which the Americas and Europe are embracing the changing energy landscape.

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APPEC delegates were of the view that sustainability no doubt attracted a lot of attention just before the coronavirus pandemic, but the themes of energy security and affordability quickly moved to center stage when energy flows were disrupted and prices skyrocketed following the Russia-Ukraine conflict.

"I wonder what percentage of the population in Asia would be willing to pay huge and increasing prices for the sake of sustainability right now," Prasad K Panicker, chairperson and head of refinery at Nayara Energy, told the conference.

Shifting trends

The conference highlighted some key trends that could reshape the fossil fuels market over the next decade. One of the key themes that emerged was how Asia's long-term oil demand growth center was shifting to India from China.

China has been supporting global crude demand for the past 20 years, but in the coming 3-5 years, its demand is expected to peak and then start to decline. The global market has to look to India or other countries for demand resilience.

"China's demand will taper off a little but countries like India are coming up and the demand is growing. India will continue to require oil and gas maybe for a couple of decades, although it would transition and move over to renewables by that time," said APPEC speaker Vivek Tongaonkar, finance director and CFO at Mangalore Refinery & Petrochemicals.

The view got strong support from analysts at S&P Global who said that China's peak oil demand would come much earlier than India.

APPEC delegates also provided insights on Asian oil demand revival outlook, saying that China would play a key role in aiding that recovery, even though it might fall short of earlier expectations. In addition, tightening oil market fundamentals will also keep prices supported.

S&P Global gave out some projections, saying world oil demand was expected to increase by 2.2 million b/d in 2023, with China contributing about 942,000 b/d. Jet fuel demand, which is estimated to rise 1 million b/d in 2023, will be the main driver of the global oil demand recovery from COVID-19. Asia's total oil demand is forecast to increase 3.8%, or 1.39 million b/d, year on year to 38.1 million b/d in 2023.

Picking up speed

Even though Asia's near-term oil demand is expected to remain intact, APPEC delegates said refiners are rushing to re-draw their long-term strategies.

While renewables, hydrogen and solar have started figuring in their ambitions, a key area of focus for them is to raise their petrochemical intensity to ensure their business models remain profitable in the event electric vehicles and other cleaner forms of energy take a toll on demand for transport fuels.

Therefore, going further downstream may be the only viable option to remain relevant over the longer term.

The conference also threw the spotlight on some key developments in Asia on the new energy space.

For instance, Vitol said its new biofuel bunker barges will be delivered to Singapore in 2024 as it aims to capitalize on the country's growing biofuel demand. These bunker barges will be able to deliver B30 blends to all ships, potentially up to B100 for vessels that can run on them, and even eventually methanol.

In the sustainable aviation fuel space, APPEC speakers said that sourcing feedstock and establishing credibility for its emission offsets claims would be key hurdles before its use in Asia can expand in a big way.

"Neat" sustainable aviation fuel producers like Neste are exploring possibilities of expanding the feedstock pool with prospects like novel vegetable oil and lignocellulosic biofuels. Neat SAF is a jet fuel produced from a blend of biomass materials-based feedstock with a certain percentage of fossil-based jet fuel.

Coming to terms with reality

Highlighting some global trends, speakers from energy majors and S&P Global highlighted that energy supplies are on the way to becoming more secure now that the world is coming to terms with the reality that we have transitioned into a "multiplex global order."

As far as affordability goes, after factoring in global inflation over the past decade, oil markets had rebalanced at around $60/b in 2015 terms, which is quite incredible given the tectonic changes in supply chains. In fact, oil is so affordable that supplies are being held back voluntarily by major producers.

On the energy transition front, a key view that emerged at APPEC is how sustainability has also adjusted to new global economic realities. Dependence on consensus for sustainability is being replaced by a race for technology breakthroughs in a competitive world.

In a nutshell, competition will help to accelerate the speed and scope of energy transition, rather than consensus on its own.

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