Saturday 25 October 2014

Solving Asia's gas conundrum

By Maria Van Der Hoeven, Published The Straits Times, 24 Oct 2014

TWO intertwined revolutions, both centred on Asia, are remaking our world. The surge of emerging economies has lifted more than 500 million Asians out of poverty so far this millennium. But as that growth expands the global economy, increased use of fossil fuels is leading to higher costs and environmental burdens that call into question the sustainability of that energy use.

Over the longer term, the whole world - Asia included - must shift from fossil fuels to a low-carbon energy system that features more efficient use of energy. But in the medium term, gas can play a more important role in Asia. That shift will be challenging, but the region can overcome those challenges.

First, here is what Asia cannot count on: cheap, abundant gas unleashed by the shale revolution. While some North American liquefied natural gas (LNG) will cross the Pacific - probably sooner than later - it will not be enough to supply the entire region and it will be pricey. New supply-side investment will relieve some of that cost premium, but, at the same time, we can all see the ongoing geopolitical turmoil in Ukraine and the Middle East, either of which could tighten LNG markets.

What shows no sign of ending is growth in Asian gas demand. In fact, the International Energy Agency (IEA) expects Asia to be responsible for about half of all new gas consumption this decade. In the central scenario of our World Energy Outlook, by 2035 the region will burn an additional 750 billion cu m of gas - slightly more than the current US production. Not just shale gas production, but all US production today.

So reliance solely on North American exports is a pipe- dream. The overwhelming majority of shale gas produced in North America will be consumed there. And supply from other markets will prove a financial burden. Gas transportation is subject to the laws of physics: long-distance LNG shipments are costly and so Asia will pay dearly if it remains reliant on gas from faraway places. But Asia has two ways to avoid competing at top price for cleaner-burning natural gas: Use less of it and find more of it. The good news is that both of these solutions can be met in the region.

The IEA estimates that the Asia-Pacific region has almost 10 per cent of the world's conventional gas reserves and almost one-quarter of its shale gas. But even before tapping unconventional supplies, those conventional gas reserves are enough to meet more than 40 years of what we at the IEA expect Asia to need in 2035. But the Asia-Pacific region is, of course, immense, and it is not realistic to expect all of that gas to be tapped or used exclusively at home. So there is no scenario where Asia becomes self-sufficient in gas. But if the region exploits its reserves carefully and takes simple steps to limit growth in energy demand, it can slow the growth of its dependence on imports. The problem is getting more local gas out of the ground. Encouraging new output requires government policy that creates efficient gas markets region-wide. The IEA has seen its member countries through this transition, and those experiences show it can be done here, too.

The first step is to jump-start investment for new production. This is not a problem unique to Asia. The central scenario of the World Energy Outlook sees the need for US$48 trillion (S$61 trillion) in global energy investment through 2035, with nearly half of that spent on fossil fuels. Most of that spending is not for new demand but to offset declining production from the fields everyone relies on to power the global economy. Nearly two-thirds of that US$48 trillion must be spent in emerging markets, but Asia needs more than just investment. To bolster production, it must revisit policies that disincentivise development of supply. These include regulations, licensing, royalties and taxation, but also subsidies, particularly for use of domestic output, that not only encourage waste but also keep producers from bringing new supply to markets. The IEA experience and basic economics show decisively that only when governments clear the way for investment can economies count on the energy security that ensures long-term growth.

Similarly, governments must co-ordinate that liberalisation to encourage regional sharing of supply, including export of domestic output. Europe, for instance, has availed itself of a coordinated approach to create a large and well-functioning gas market, one where the fuel flows freely and the price reflects supply and demand. In Asia, the future role of gas will depend considerably on pricing. While we at the IEA see no credible prospect of cheap gas in Asia, government policy can foster a secure and abundant supply - but only if it commits to competition to encourage new market participants.

Enhancing supply, however, is only half of the solution to maximising Asia's energy supply while minimising its cost. The other half is corralling demand growth. The IEA does not mean to suggest less energy for Asia. Quite the contrary: many economies are expanding rapidly and yet at least 600 million Asians lack access to modern energy services. No, the key is to use energy more intelligently.

Of the US$48 trillion investment in the energy sector cited earlier, US$8 trillion will go to energy efficiency. No energy is more secure, affordable or less polluting than the watt or barrel not used. And, in Asia, opportunities for savings abound. In our analysis, China will provide one-fifth of global outlays for energy efficiency through 2035, but India and South-east Asia will invest only 2 per cent each.

Asia already has 40 per cent of the world's structures, and each year China alone adds up to 2 billion sq m in new buildings. So codes requiring adequate insulation and other efficiencies can build in long-term savings. With vehicle ownership doubling every five years in much of Asia, the transport sector offers similar opportunities. Asia's emerging economies can avoid mistakes made in developed economies by being efficient from the start, rather than having to fix existing systems. In South-east Asia, for instance, the IEA has worked with local experts to tailor our 25 Energy Efficiency Policy Recommendations so that Asean members can achieve not just significant energy savings but also a huge increase in living standards.

Asia's status quo for energy is inefficient, expensive and potentially unsustainable. Waiting for North American LNG is no substitute to running a good energy system. Deregulation elsewhere has channelled new supply where it is needed, while efficiency standards in the building, industrial and transportation sectors can slow demand growth. Member countries of the IEA know from hard experience that economic growth is only as secure as the energy supply that underpins it. It's a lesson Asia should learn the easy way.

The writer is executive director of the International Energy Agency. She will be speaking at Singapore International Energy Week next week.

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