New Trends in Asia’s Energy Trading
Experts touched on a range of key developments impacting Asia’s energy markets. By Jeremy Yap
The possibility of China, Japan and Korea coming together to use their combined purchasing power to acquire cheaper energy prices was one of several key topics explored at the SIEW 2018 Roundtable C, which was themed, New trends in Asia’s energy trading: The creation of the world’s largest energy “buyers’ club”.
Led by the Chinese Academy of Social Sciences (CASS) and Institute for the Analysis of Global Security (IAGS), other topics discussed included the impact of China’s Belt and Road initiative on energy flows in the region, and the likelihood that an Asian benchmark price for oil will be set up. Here are some of the other highlights:
Changes in global trading patterns
The big shifts in the trading of oil being witnessed today are caused largely by geopolitics, particularly the US-China trade war and US sanctions against Iran, said Vandana Hari, Founder and CEO, Vanda Insights.
Unilateral sanctions being imposed on Iran’s oil and shipping sectors by the US are due to take effect in the coming months. This single factor has generated substantial volatility and uncertainty in 2018’s oil prices and its effects, while largely unknown, will probably be punitive in nature.
When it comes to fundamentals, the world is seeing a wide divergence in the fortunes and production capabilities of major oil producing countries. Venezuela’s oil production has steadily and sharply declined over the years. On the other hand, Russia and Saudi Arabia are supplying oil at historical highs. Meanwhile, major exporters Libya and Nigeria are plagued with militant attacks and civil strikes targeted at oil infrastructures, resulting in an unreliable forecast of their oil production.
In Asia, emerging markets are suffering from a “double whammy” of higher crude oil prices and sharply depreciating currencies. This breeds a vicious cycle of higher oil consumption and increasing import dependency.
China’s Energy Outlook 2018 to 2050
China’s energy demand increased between 2014 and 2017 largely due to the expansion of the country’s real estate market and the government’s reactive policy changes to maintain its GDP growth rate, said Dr Liu Qiang, Director of Energy Division, Chinese Academy of Social Sciences.
China’s “2050 Vision for Energy Transformation” envisions a gradual reduction in the country’s total primary energy consumption and total primary energy production. China will also see a large transition from coal to natural gas
consumption and imports, which will be used to support a multitude of industrial and non-industrial applications. As a result of this trend, China would need more channels to import LNG.
An Asian gas hub
On the possibility of a gas hub being set up in Asia, Dr Kaho Yu, Senior Research Analyst, Verisk Maplecroft’s Politics said that such a hub would facilitate a robust flow of oil and gas which would, in turn, boost the economic growth and the earning potential of the region.
However, there are various risks associated with a gas hub which would influence a government or investor’s decision to proceed with such a project. These include market risks, policy and regulatory unpredictability, regulatory burdens, infrastructure risks and big power relations, such as trade disputes and tariffs on LNG.
With one of the largest gas markets in Asia and potentially the world’s largest importer of LNG by 2025, China is a possible candidate to create a gas hub. However, China’s risk score for such a venture is relatively poor largely because of the “Rule of Law” and high “Regulatory Burdens”, said Dr Yu.
Meanwhile, the Southeast Asian gas market has grown to become bigger than the Chinese one. Singapore, as a trading hub and arbitration centre for the Southeast Asian LNG market, possesses a relatively healthy risk profile. This is largely driven by Singapore’s good regulatory and market access, strongly supported by the government.