Asian Oil and Gas Markets in a Carbon Constrained WorldPresented by:
Dr. Fereidun Fesharaki, Chairman
40th JCCP International Symposium
27 January 2022

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Ten Commandments for Oil and Gas for JCCP

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Ten Commandments for Oil and Gas
1. The market is tight, and OPEC+ is in the driver’s seat.
•Omicron has the oil market worried, but demand recovers to surpass pre-COVID levels by March 2022.

•Inventories remain very tight in first quarter 2022, with prices US$80/bbl+…and prone to spikes.

•By spring 2022 inventories begin to rebuild slowly and prices should ease a bit.

•Oil prices depend more on supply and less on demand. As such, OPEC+ is critical for stability.

2. Talk of a pre-COVID peak in oil demand in 2019 is nonsense. Oil demand will grow by 8 mmb/d between 2022-2030,
before slowing. Gasoline and diesel will peak in 2034 and then slowly decline. Total oil demand peaks in 2037.
3. With ESG pressures inhibiting producers, the oil market looks tight through the mid-2020s. OPEC spare capacity
will be nervously watched—any supply outage globally can trigger a price spike.
4. The refining business has no OPEC to control output, but refiner’s pain eventually leads to gain. A painful
period of low margins has prompted 2.6 mmb/d of refinery closures during COVID. This is set against 1.6 mmb/d of
new capacity—thus global capacity has shrunk by 1 mmb/d. Moreover, China’s export of gasoline and diesel haveshrunk from 1 mmb/d in 2019 to around 400 kb/d in 2022, boosting margins.

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Ten Commandments for Oil and Gas
5. Beyond a 2021-23 wave of capacity, there are no serious new plans for building grassroots refineries anywhere in
the world. Expansions, upgrading, and petrochemical integration will happen, but worries over peak demand arescaring off new investment.
6. With continued demand growth, no major grassroots refineries, and significant refinery closures, there will be
another golden age of refining during 2024 to 2030—this will surprise the market.
7. LNG demand has a long life, growing till the late 2040s, then peaking and remaining flat for years. LNG has a muchbrighter future than oil.
8. Recent extreme LNG price spikes have shocked the markets.
•European supply issues are currently pushing Asian JKM prices, but LNG spot prices have also risen structurally. Oil indexed
pricing will be more stable and generally lower than spot prices through 2025.

•The CPC-Chevron deal and Qatar’s sales have moved the oil-linked LNG price slope down to 10.5% or lower, but oil-linked
price slopes are firming on supply worries. The opportunity to secure very low LNG price slopes has passed.

9. The LNG market faces four distinct cycles. Long market 2019-20, short market 2021-25, long market 2026-28
and another short market from 2029. We are now in a tight market phase.

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Ten Commandments for Oil and Gas
10. Carbon issues are critical in today’s oil and gas markets. There are several points to note:•Promises of zero carbon neutrality by 2050 are useful political statements but practically extremely hard to achieve. 2070-80
might be possible!

•Europe should not always be looked at as a model to follow. Europe is driven by its own unique politics. Asian countries needto position relative to others in Asia, and to a lesser extent the US.

•Hydrogen and ammonia have become politically popular, and investment will happen. But green hydrogen economics arechallenging until the 2030s.

•Carbon neutral LNG is becoming more popular, but it is still a drop in the bucket. It is likely to grow substantially in the next 23 years, but long-term growth options are limited without clear standards and a global carbon price. CCS is the long-term
future, but economics are challenging today.

Overall, the future is promising, but we need to remain realistic and practical when it comes to carbon issues. We

must remember that redirecting the oil and gas market is like turning a big tanker around—the turn canhappen, but it takes time.

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Oil Markets

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Total Demand Close to “Normal”—Huge Variation in Recovery by Product
Change in Global Oil Product Demand (Same Month in 2019 =100)

LPG
115.0

125.0

110.0

120.0

110.0
100.0
105.0
95.0

100.0

90.0

95.0

85.0

90.0

Gasoil/Diesel

110.0

105.0
100.0
95.0
90.0
85.0
80.0
75.0
70.0
65.0
60.0

115.0

105.0

Jet/Kerosene

Gasoline

NaphthaFuel Oil

100.0

90.0
80.0
70.0
60.0
50.0
40.0
30.0

Total Oil

Other

105.0

120.0

106.0

105.0

100.0

115.0

104.0

100.0

95.0
90.0
85.0
80.0

102.0
110.0

100.0

95.0

105.0

98.0

90.0

100.0

96.0

85.0

94.0
95.0

92.0

90.0

90.0

780.0
75.0

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Oil’s Future: Where Do We Go?
• Some say we have already reached the peak: Nonsense!
• Short term:

Global Oil Demand
115mmb/d

110
105

10095

Source: FGE

Global Gasoline and Diesel Demand

28mmb/d2020 demand loss around 8.9 mmb/do

2021 demand gain around 5.9 mmb/do

2022 = 2019 demand• Long term:

9030o

26o

2022 to 2030 = 8.0 mmb/d growtho2030 to 2037 = 2.3 mmb/d growtho2034 gasoline and diesel demand peaks

oTotal oil demand declines after 2037, but very slowly

oIn 2050, demand is still higher than 2019 levels

10+ mmb/d growth2422Gasoline

DieselSource: FGE

Oil is still a huge business! It takes a long time to get ridof it!!

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Reduction in Global Road Fuel Demand Largely Focused on EU & North America
Regional Road Fuel Demand Outlook by Decade
32

10mmb/d-1-2-3-4-5-6-7
Atlantic Basingasoline

Non-OECD Asia
gasoline

ME & AF
gasoline

Rest of the World Atlantic Basingasoline
diesel2019-2030

2030-2040

92040-2050

Non-OECD Asia ME & AF diesel Rest of the World
dieseldieselSource: Google mobility data, FGE

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Long-Run Oil Price Seen at US$70bbl (Real 2021$)—A Reluctance to Invest in“Old” Fuels Raises Costs, Supporting Price
Brent Price Outlook (Real 2021$)
120
110

90
80

70
60
50
40

2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040

US$/bbl100

Source: Platts*, FGE*Prices in this report marked with the source Platts are sourced from S&P Global Platts, © 2021 S&P Global Inc. All rights reserved.
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Green Hydrogen Production Cost Outlook
Green hydrogen in the most suitable locations is set to be cost-competitive with blue hydrogen around 2030.

Green Hydrogen Production Cost Outlook•

Electrolyzer costs are projected to come down by up to 80%.

•Renewable electricity cost will at least halve.

•Higher electrolyzer efficiency.

•

Higher electrolyzer utilization.

•While in most locations, green hydrogen production costs are2-3 times higher than grey/blue, green hydrogen can alreadycome down to below US$3/kg in regions with favorable
conditions, such as above-average (up to 50%) wind power
capacity utilization and low electricity prices.

2•The electrolyzer stack cost accounts for around 50% of theCAPEX cost in alkaline and PEM electrolyzer systems.

1•

Via higher utilization of renewable electricity, surplus electricity
prices can be even negative, reducing the production cost.

0•

Alternatively, running the electrolyzer at high utilization rates
and using grid electricity can reduce the cost per kg ofhydrogen.

76US$/kg

543

Average renewables rangeCheapest renewables range

SMR with CCS
Source: FGE, IEA, IRENA

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Refinery Margins Ahead: Good Winter, Worries in 2H22-23, Golden Age in 2024-30
Good WinterWorries in 2H22-23

Golden Age

Closures Helping: Prolonged
pain from unprecedented weakrefining margins have led to 2.3
mmb/dofrefineryclosuresglobally. This has offset the impact
from 1.6 mmb/d of new capacity.

New Capacity Coming: Somepullback in margins is expectedduring 2H 2022 as China
commissions three new megarefineries and Malaysia’s RAPID
refinery as well as Saudi Arabia’s
Jizan projects ramp up further.

Investment Stalls: Prolonged
weakness in margins, volatility in
oil prices, concerns surrounding
peak oil demand, and clean
energytalks
havedeterredinvestments
intherefining
business.

Not a Disaster: That said,
demand growth and new capacity
look pretty-well matched during2022-2023. Also, China’s regional
impact is driven by productexports, which will be constrainedby quotas.

Demand Growth Ahead: No
mega-grassroots refineries areexpected after 2024, but oil
demand growth of 10 mmb/d is stillahead of us.

Demand is Back: Demand is now
very close to “normal” levels, andproduct inventories have drawn
below the 2019 mark. Margins
have finally found a strong
footing!

Potential Upside: Winter looks
very promising, and margins willremain at current high levels withupside potential from higher
natural gas-to-oil switching.

Another“goldenageofrefining” awaits the downstream
industry during 2024-2030!
Slowdown thereafter, driven byincreasing product length in theAtlantic Basin.

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Asia’s Calm After the Storm—No Mega Refining Projects Post-2025
Asia Refining Capacity Additions (by Country)
1.4
1.2

1.0mmb/cd

0.8
0.6
0.4
0.2
0.0
-0.2

-0.4-0.6
2013

2014

2015

China (net)

2016

2017

2018

2019

India (net)

2020

2021

2022

Japan (net)

2023

2024

2025

Other Asia (net)

2026

2027

2028

2029

2030

2031

Total Net Additions*Weighted for risk of delays.
To understand the probability adjusted capacity and methodology, please refer to Energy Advisory #373, dated April 16, 2014.

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LNG and Gas Markets

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LNG Demand Sees Strong Growth Until the Late 2040s• LNG demand has come through
COVID-19 relatively unscathed.
Demand proved to be extremely
resilient even amidst the severe
disruptions of the pandemic, andwe see limited long-term impact toLNG demand.

Global LNG Demand by Region
900
Forecast

800

700
Americas600• The energy transition poses a100

threat, but LNG still has a bigrole to play. While the rhetoricfavoring renewables and clean
fuels has ramped up significantly inthepastyear,
practical
considerations such as security andreliability of supply are still firmly infavor of natural gas.

0• Asia remains the heart of theAfrica

mt

500
Middle East
400

Europe

300

Asia

2050

2048

2046

2044

2042

2040

2038

2036

2034

2032

2030

2028

2026

2024

2022

2020

2018

2016

2014

2012

2010

200

Source: FGE LNG ODS

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LNG market and drives strong
demand growth. Developing Asian
economies begin to shun coal,further supporting LNG demand.
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The Four Cycles of the LNG Market• Long 2019-2020: Strong supply
growth from the US and Australia
outpaces Asian LNG demandgrowth.

Global LNG Supply vs Demand2029+
New supply needed

900

800

2026-2028
Long market, wave ofuncontracted LNG

700
600

• Tight 2021-2025: Europe pulls

Demand (High/Low)

2022-2025
Balanced market,
Asia tightens

Likely FIDs

mt

500

400

2019-2021
Long market

Under Construction
Operating300
Demand (Base)
200
100

2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035

0

• Long 2026-2028: The wave of
FIDs in 2018/19 fully ramp up in
this period. Qatari expansions andother likely projects add new
supply, creating a highly
competitive environment for sales
into this period.

• Tight 2029+?: New FIDs will be
Source: FGE LNG ODS

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LNG in the early 2020s to rebuild
inventories and make up for
production declines. Towards themid-2020s, a lack of FIDs in2016/17 and construction delays
cause supply growth to dry up.

needed to fill a growing supplydemand gap post-2029.
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Important Emerging Issue: Carbon Neutral LNG
Public Carbon Neutral LNG Deals by Destination

Carbon Neutrality Equation

No. of Cargoes

Carbon Emissions• Upstream Activities• Leakage During Fuel Transmission• Fuel Combustion

CarbonNeutrality

6Spain5

United Kingdom
Taiwan4South Korea

3Singapore

2Middle EastMexico1JapanIndia

0Carbon Reductions

EuropeChina• Reforestation• Energy Efficiency• Carbon Capture Technology•

A carbon neutral LNG deal involves two components: a typical
LNG supply deal, and carbon offsets that reduce carbon
emissions equivalent to the emissions that would haveoccurred from consuming the LNG.

•Carbon neutrality comes at a premium.

•Carbon offsets are still a developing market, with more
standardization required in the areas of accounting and pricing.

Seller17Buyer*Not an exhaustive list

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