Oil and gas security during the energy transition APERC Worksho Chris Doleman, Senior Researcher, APERC Emerging trends 2 Energy security is now at the center of energy policy discussions 50 Monthly fossil fuel prices on an energy equivalent basis, 1997 to 2022 (USD per MMBtu) 40 30 20 10 0 Jan-1997 Sep-1999 May-2002 Jan-2005 Sep-2007 May-2010 Jan-2013 Sep-2015 May-2018 Jan-2021 Asian LNG price Newcastle Coal Brent oil Source: IMF, JOGMEC, EIA, APERC analysis • Pandemic recovery is prompting a rebound in energy demand • Energy supply growth is constrained by several combining factors • Russia-Ukrainian war is reorganizing energy supply chains 3 Severe weather is exacerbating APEC’s energy security challenges Source: MISO • Extreme temperatures elevate demand profiles while challenging fuel supply availability and reliability • Storm surges disrupting just-in-time deliveries, damaging infrastructure • Droughts reducing fuel and coolant availability 4 Governments are putting energy security into their own hands • Prioritisation of domestic energy endowments for domestic use • Energy export bans: Indonesia’s month-long coal export ban (January 2022) • Australia considering gas reservation • China increasing coal productive capacity to rely less on imports • Securing the upstream through direct investments • Japan investing in LNG projects, and natural gas supply in the US • Governments are rethinking their long-term energy plans to reduce reliance on oil and gas imports • Viet Nam shifting long-term power mix away from oil, gas and coal and towards renewables 5 Governments are intervening in energy markets to improve affordability Singapore LNG storage capacity (million m3) Monthly Indonesian gas price – with controls versus spot LNG prices, USD per MMBtu, January 2020 to May 2022 40 35 30 25 20 15 10 5 0 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Spot LNG Original Price Contract Gas policy fixed price Source: GIIGNL, Platts, EMA, APERC Analysis • • • • • • Source: MEMR, IMF, APERC Analysis Governments participate in or guide LNG supply procurement; Singapore is chartering stand-by FSU, FSRU capacity More regulation to wholesale and retail electricity markets Price caps for wholesale natural gas and coal (to in turn reduce power prices) in Australia Regulators mandating the weatherproofing of energy supply chains in the US (with questionable effectiveness) SPR releases to put a ceiling on crude prices Subsidies 6 Long-term LNG contracts are insulating some from high spot prices 50 Monthly commodity prices facing LNG importers (USD per MMBtu), 2020 to 2022 40 30 20 10 0 Jan-2020 May-2020 Sep-2020 Jan-2021 LNG oil index 10 to 15% May-2021 Sep-2021 Asian LNG spot Jan-2022 May-2022 Sep-2022 LNG HH index Source: JOGMEC, IMF, EIA, APERC analysis • Long-term contracts are insulating incumbent importers from elevated, volatile spot prices • China’s short-term contract flexibility, lower demand enabled it to balance global LNG markets in 2022 7 Short-term fuel switching away from gas is difficult in practice Electricity fuel in select APEC LNG importing economies. 2021 and 2022 100% Wind 80% Solar Other Renewables 60% Other Fossil Nuclear 40% Net Imports 20% Hydro Gas 0% 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 China Japan Mexico Chinese Taipei Thailand Singapore Korea Bioenergy Coal Source: EMBER • Technological capacity limits current fuel switching • Sophistication, redundancy and replacement increases fuel switching ability, but do not emerge overnight • Government policy can also play a role in limiting fuel switching (for example, coal-to-gas switching targets) 8 Binding supply constraints suggest a return to the boom-bust oil cycle Monthly producer price index of oil and gas service inputs, 2019 to 2022, 100 = Jan 2019 200 180 160 140 120 100 80 60 40 20 0 Jan-2019 Jun-2019 Nov-2019 Apr-2020 Sep-2020 Feb-2021 Cement Steel pipe and tube Jul-2021 Dec-2021 May-2022 Oct-2022 Industrial sand Source: BLS • Capital discipline, labor shortages, input constraints limiting supply growth, shifting the marginal supplier out of APEC • A decade of demand growth and inelastic supply could spell the return of the boom-bust oil cycle 9 Infrastructure constraints could limit supply growth 250 LNG export capacity potential in the US, 2016 to 2030, Mtpa 200 150 Proposed 100 Under construction 50 0 2016 2017 2018 2019 2020 2021 2022 2023 20