More for Asia: Rebalancing world oil and gas

The oil and gas industry is set to undergo a decisive transition over the next 10 years as global balances of demand and investment shift towards Asia and away from Europe and North America. These are sectors where geography matters and such a transition will have major geopolitical implications and a profound effect on industrial strategy.

Oil and gas companies and their governments also face unprecedented uncertainties over a growing range of issues, including the development of low-carbon policies, shale gas, questions about Iraqi oil production, and surging demand in China.

Asia will account for 60% of global oil deficits by around 2030. Its oil demand is already beginning to exceed and outstrip the net surpluses available from the Middle East. Europe will no longer be able to rely on Middle East surpluses to meet its oil deficits. It will instead have to look to Russia as its default supplier of oil, while competing with Asian importers for supplies from areas such as West Africa, Northern Iraq, Central Asia and Eastern Siberia which are pivotal between Asian and Atlantic markets. This is a development that will carry major policy implications: the EU needs a stable political and security relationship with Russia within which energy trade and investment can develop, while also developing policies that combine or pre-empt the policies of individual member states in relations affecting gas and oil supply from Russia and the pivotal supply areas. In contrast to Europe, where falling North Sea production will cause its import dependency to increase, North America’s imports of oil are unlikely to grow, as the slow growth in demand for liquid fuels can be met by the expansion of offshore and non-conventional oil supplies.

These shifts are likely to alter the character of the global oil market, as Asian markets grow in importance, and investment in increasing supplies from the Middle East, Russia and the ‘pivotal’ areas is dominated by state-controlled exporting and importing companies in these markets. The strategies of governments and businesses will therefore have to incorporate these new realities.

Overall, gas presents a more complex picture than oil. Although the liquefied natural gas (LNG) trade will increase in both the Atlantic and Pacific regions, the development of shale gas in North America will limit its global growth. Shale development will mean that North America is likely to become self-sufficient, while European deficits will be met mainly by LNG from North and West Africa. The possibility of a global gas price remains problematic. Although up to 20% of European gas supplies may come from internationally traded LNG, most of continental gas imports are priced according to oil-related formulae, and more than two-thirds of global LNG is traded in the Asia-Pacific region, it is unlikely that gas prices there can be maintained by formulae linked to spot oil prices on commodity exchanges in New York and London. But there is no alternative in sight.

The growth of Asian LNG markets will enhance the market power of countries – Saudi Arabia for oil, Qatar for gas – that are low-cost, state-controlled producers, able to vary production and investment plans relatively easily, and to divert marginal exports to the European and North American markets in order to support prices in their prime markets in Asia. The importance of this shift should not be underestimated as it changes the balance between the private sector, diverse and open markets and a less competitive system in which governments and state companies play a larger role.

These shifts raise questions about the security of supply for importers (and of demand for exporters) and about the role of the private sector in investment and trade – which is not the same question. In ‘normal times’ the diversity and flexibility of international trade provide security both for importers against disruptions of supply, and for exporters against sanctions or discriminatory import policies. In ‘abnormal’ times it is the overall political relationship between the governments concerned that is likely to prevail over business investments and contracts – and the sovereignty of governments over their resources is absolute. Given that times are seldom wholly ‘normal’ everywhere, companies and governments need to recalibrate their strategies and policies to recognize the impact of Asia’s larger share of the world’s oil and gas in the future.

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