What does the Glasgow Climate Pact mean for Asian energy companies?
Much has been discussed on the implications of the Glasgow Climate Pact for the global economy and energy markets. Net zero pledges, equitable transition financing and global carbon market development grabbed headlines. And while measurable progress has been made in each field, there is no denying much work remains to be done.
But as governments continue to drive policy on tackling climate change, much of the onus for delivering this will fall on companies. So, what have Asia’s energy companies made of COP26? Where will the Glasgow Climate Pact take them? And what opportunities and challenges does it present for businesses across the region? Nowhere better to head for answers than Wood Mackenzie’s Asia Pacific research teams.
Upstream E&P: A (carbon) neutral verdict
The raft of emissions pledges made before and at COP26 will directly impact many of Asia’s upstream producers. With Malaysia, Indonesia, Thailand, Vietnam, Australia and India among those making net zero pledges, companies must respond with aligned corporate targets. Some of Asia’s NOCs had already done so. More will now follow. After COP26, Australian E&Ps will benefit from synchronisation with government policy on climate targets that they had already set.
Most countries and companies have anchored mainly around 2050, but they need to show more ambition and action within this decade. Only South Korea and Japan submitted updated country-level targets with increased ambition to 2030, so an acceleration can be expected from companies operating in those two countries.
Country-level targets from COP26 will guide Asian E&P corporate targets
Source: Wood Mackenzie Corporate Service
The Global Methane Pledge signed in Glasgow is a tangible decarbonisation step. Given the relative levels of upstream methane emissions by most of Asia’s E&Ps look modest in comparison to other regions this looks manageable (in contrast to the all-too-common venting of carbon dioxide). When we look at the highest methane producers globally in our Lens platform, regional players in the top 20 include Malaysia (14th), Indonesia (15th), India (18th) and Australia (20th).
Refiners: Three major challenges on the horizon
With Asia the largest contributor to refinery emissions globally, the Glasgow Climate Pact was always going to raise challenges for the sector. We see three main uncertainties for the region’s refiners.
Firstly, if the Glasgow Climate Pact results in an accelerated downward trend in oil demand this will inevitably reduce the market size for refined products and lead to worsening refinery margins and, ultimately, some refinery closures.
Secondly, with transportation fuels accounting for more than half of all refinery output, the increasing electrification of road transport will hit this sector hardest and force refiners to reconfigure and shift to petrochemicals (integration will be key).
Finally, with progress on Article 6, the prospect of rising carbon taxes on the refining industry has become starker. But the lack of any uniform carbon tax or policy globally will make it difficult for refiners to pass on carbon costs to their customers. Any inability to pass through carbon costs will have a further negative impact on regional refinery margins.
P&R: The “phasing down” of coal is positive for gas
The commitment to “phase down” coal will accelerate the trend of higher financing costs for the region’s coal-fired power generators. The agreement on carbon accounting will also intensify the competitiveness of low-carbon solutions in the power sector. For much of developing Asia, this will mean gas.
Asia’s renewable capacity manufacturers and generators will clearly benefit from the Glasgow Climate Pact. And with more expensive offshore and distributed solar increasing their competitiveness against coal, investments will accelerate. A further benefit for the sector will be more consumers and industry players looking to lock in low-cost renewable power through grid defection (household or distributed solar) or corporate renewable PPAs (green power). While countries across the region have stepped up their long-term renewables targets through COP26, the economic drive towards renewables has also strengthened in the near term.
Gas and LNG: Asia’s LNG buyers are standing up and being counted
While the Glasgow Climate Pact didn’t deliver any outright recognition of the role of gas in the energy transition, this hasn’t dented ambition for future investment in new supply: Asia’s rising appetite for gas remains undiminished. For the region’s gas buyers, commitments to phasing down coal pave the way for more use of gas in power generation. At the same time, the development of a global framework for carbon pricing should incentivise investment in carbon capture to tackle Scope 3 emissions.
These trends are already supporting investment in new supply projects. Over the past few weeks, Sinopec and Sinochem concluded long-term offtake deals with US LNG developers; China now accounts for almost half of the 19 mmtpa of contracted sales this year, supporting development of new US liquefaction capacity. Meanwhile, Woodside’s FID announcement this week on the Scarborough and Pluto 2 project has been underpinned by confidence in the Asian LNG demand story. Others are set to follow in 2022.
Coal miners: Glasgow has reinforced, rather than changed, expectations
Nothing that came out of Glasgow will have changed the view of the region’s coal producers that exposure to thermal coal is going to get harder, while met coal investment will focus only on the highest quality coals. And despite coal producers printing cash at current prices, we don’t see a material increase in plans for capital investment: a few small-scale met coal restarts have been flagged, but things are deathly silent on the thermal coal front. Existing producers are now in a very strong position. Longer term, of course, all bets are off.
Undoubtedly, Article 6 will impact coal producers, but the big question is when? All producers expect the Glasgow Climate Pact to result in more coherent global carbon markets, which will, in turn, reduce demand for coal in the major economies of Northeast Asia and India. But most also expect the impact probably won’t be felt for some time.
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