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The fork in the road for Asia’s oil and gas demand

Wildly different outcomes for oil and gas if Asian governments accelerate decarbonisation

At the current pace of policy change and decarbonisation, the long-term oil and gas demand outlook for Asia looks remarkably robust. Under Wood Mackenzie’s base case energy transition outlook (ETO), which sees the world broadly on a 2.5-degree warming trajectory, Asian oil demand doesn’t peak until the mid-2030s, while natural gas demand growth powers ahead through to 2050.

But things could play out differently. Our accelerated energy transition (AET-2) scenario offers a view on how to achieve a 2 ˚C world aligned with the upper temperature limit of the 2015 Paris Agreement. The AET-2 scenario is curtains for long-term global oil demand, with consumption falling to 70% below peak levels by 2050. And although Asia’s appetite for oil takes longer to sate, regional demand is roughly half pre-pandemic levels by this time. In the AET-2, oil prices quickly mirror the drop in demand.

The contrast with gas couldn’t be starker. In large part due to coal-to-gas switching in Asia, gas demand proves extremely resilient even in a 2-degree world. And while this also requires policy support for carbon pricing and major investment in carbon capture and blue hydrogen, AET-2 global gas demand doesn’t peak until well into the 2030s, with Asia playing the starring role.

The huge uncertainties surrounding both the outlook for oil demand and the robustness of Asian gas demand have profound implications for energy companies. Who will meet the region’s future oil demand? Does E&P still have a role to play here? How much LNG will Asia really need? And where will this new supply come from?

Gas demand optimism abounds, but attention must also focus on ensuring supply growth

Asian oil demand’s terminal diagnosis in our AET-2 scenario stands in marked contrast to that for gas. Today, Asian gas markets continue to power ahead, surpassing previous demand expectations. Even with prices smashing through traditional oil parity price ceilings, Asia’s appetite for gas looks largely undiminished.

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Of course, the strong demand outlook in the AET-2 is made possible by gas’ lower carbon footprint compared to other fossil fuels and its role in the energy transition as Asia look to reduce its dependency on coal. As a result, AET-2 Asian gas demand remains only 13% lower than the ETO by 2050.

This resilient outlook for gas is also supporting LNG demand upside through coal-to-gas switching and as a backup to intermittent renewable power. And while it’s not all plain sailing for LNG – as recent Japanese policy statements highlight – the focus on the role of gas in reducing emissions reinforces the positive long-term outlook across China, Southeast Asia and South Asia.

For gas suppliers, there is a significant window of opportunity for LNG investment through to 2040 and momentum is building. Yet despite the 45 mmtpa of new capacity already sanctioned this year, the timing of needed additional projects is uncertain.

For many companies, the energy transition is magnifying the risks of developing multi-billion-dollar LNG projects. Historically, LNG buyers were prepared to take price risk in long-term contracts, supporting financing and giving confidence in project returns. But today, the 20-year contract is an endangered species. Despite the overwhelmingly positive outlook for Asian LNG demand, developers are paralysed by caution around committing to expensive new supply. And for Asian governments and buyers, herein lies the paradox: without enough investment in new projects, any future supply crunch will inevitably mean more coal, not less.

Governments in Asia and LNG producers need to collaborate to avoid this. Key policies are required to ensure gas’ role in the energy transition. Carbon pricing, coal retirals and support for CCS and blue hydrogen are all critical. Suppliers must also do more to reduce Scope 1 and 2 emissions, including methane. Management of Scope 3 emissions in partnership with end users must become the future norm. Without these steps, Asia’s resilient gas demand story could start to show cracks.

Asia's Oil and Gas outlook
Under AET-2 Asia’s gas demand (green) shows resilience but oil demand (red) suffers

Asian oil demand highly susceptible to accelerated decarbonisation

While Asia Pacific’s mature oil markets continue their inexorable decline in the ETO base case, demand in the region’s emerging economies largely increases through to 2040. India becomes the engine of regional demand growth, taking over from China after 2025.

China straddles these two trends and will play a pivotal role in flattening and eventually bending the curve of global liquids demand. In the ETO, China’s demand peaks by 2031 at 16.5 million b/d before starting its decline.

The AET-2 scenario presents a far more pessimistic outlook for oil demand in Asia. With stronger support for EVs and the circular economy, the region’s oil demand falls to 52% of pre-pandemic levels by 2050, equivalent to demand destruction of 24 million b/d compared to the ETO by this time.

In the AET-2, there are enough existing resources to meet future oil demand. But while the world won’t need new supply, E&P can still play a role if the new resource is sufficiently low cost and low carbon. A glimmer of hope for upstream operators, but for those with assets in Asia Pacific the big question is do their pre-development projects fit this bill? For many, the answer will be no.

By Gavin Thompson, Wood Mackenzie Asia Pacific Vice Chair

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