Asia net zero pledges reshape energy outlook

China, Japan and South Korea's carbon neutrality goals are likely to boost LNG use, but oil firms are preparing for much smaller markets, writes Kevin Foster

Pledges by east Asia's three biggest oil and gas importers to achieve carbon neutrality in the next 30-40 years have the potential to reshape regional energy flows, even as it remains unclear how they will be put into practice.

China, Japan and South Korea have all committed to net zero emissions targets since late September. The countries together imported 16mn b/d of crude in 2019 — 35pc of global imports — and are the world's three biggest buyers of LNG.

Their carbon neutrality pledges are likely to have the biggest impact on coal. Natural gas demand could benefit over the next decade at least, as part of a switch to cleaner burning fuels. China's state-owned CNOOC expects gas to make up 50pc of its upstream output in 2035, against 21pc now, as it aligns with Beijing's 2060 carbon neutrality target. China's gas use is likely to grow until 2040-45, UK-based think-tank the Oxford Institute for Energy Studies says.

South Korea has provided few details of how it expects to meet its 2050 target, but moves to shut coal-fired power plants could boost LNG use in the short-to-medium term. And LNG importers in South Korea and Japan may buy more carbon neutral cargoes, helping to maintain demand, as part of the move towards net zero emissions, market participants say.

Japan's strategy to reach its 2050 carbon neutrality target is more developed than those of its neighbours. Tokyo is working on action plans covering areas such as hydrogen fuels, battery storage and carbon recycling, according to economy, trade and industry minister Hiroshi Kajiyama. Power demand is still likely to rise in a carbon neutral society, and the government is looking at all options including renewables, nuclear and hydrogen, he says.

Japanese oil companies are already preparing for a smaller market. The country's biggest refiner Eneos, which plans to become carbon neutral at its own facilities by 2040-41, expects a 50pc drop in Japan's total fuel demand and the number of domestic refiners by 2040. Fellow refiner Idemitsu sees a 70pc decline in Japanese oil demand by 2050 and is targeting a 30pc fall in its own emissions by then, using 2017 as a baseline. But it plans to increase oil product exports ahead of an expected peak in Asia-Pacific oil demand by 2030, partly through its 200,000 b/d Nghi Son refinery joint venture in Vietnam.

Capturing the giant

Tokyo does not plan to give up fossil fuels entirely. Thermal power plants will continue to be used together with carbon capture and storage (CCS) technologies, which will also be deployed at manufacturing sites that cannot easily be converted to cleaner electricity, trade and industry ministry Meti says. The scale of the emissions reductions needed to achieve carbon neutrality has left many analysts expecting CCS to be employed more widely, particularly in China.

There are limits to how much renewable power or gas can replace coal in China, trading firm Vitol's chief executive, Russell Hardy, says. He notes that the global LNG market of around 350mn t/yr is dwarfed by coal demand in China alone, which is well over 3bn t/yr. "I see a very specific carbon capture policy as a significant way for the Chinese to move towards the 2030 and ultimately 2060 net zero targets that they've set," Hardy said at the FT Commodities Asia summit this month.

Carbon neutrality pledges will concern exporters. China, Japan and South Korea bought 84pc of Australian LNG exports in the year to 30 June 2019 — about 63mn t. "If three of [Australia's] largest buyers of LNG plan to go carbon neutral in the next 30-40 years, there is going to be a challenge for the gas sector," says Tim Buckley, the director of energy finance studies at the US-based Institute for Energy Economics and Financial Analysis. "They are not markets that can be easily replaced."