Surging global oil prices offer 'significant promise' for Asia's green energy growth - but challenges remain

Saudi Arabia's decision to cut oil production by 1 million barrels a day from next month is expected to hit the fuel's largest consumer Asia, but that move could also be the catalyst for renewable energy development in the region, analysts said.

The voluntary cut pledged by Saudi Arabia comes as part of a broader deal by the Organization of the Petroleum Exporting Countries (Opec) and their allies including Russia to extend production cuts into 2024 to boost sagging oil prices.

Benchmark Brent crude oil prices rose 0.6 per cent to US$76.80 per barrel during Asian trading hours on Monday.

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"Saudi Arabia's decision is bound to increase prices, moving them back closer to the US$80-a-barrel threshold. And indeed, that would impact oil importers in Asia, aggravated by a strengthening US dollar," said Viktor Katona, lead crude analyst at commodities data and analytics company Kpler.

Energy-hungry Asia has faced the brunt of fluctuating oil supplies following Russia's invasion of Ukraine. Two of the top consumers, China and India have tried to cushion the impact by scooping up discounted Russian oil supplies.

Russian oil imports by India - which is a member of a Quadrilateral Security Dialogue that includes the US, Australia and Japan - have invited Western scrutiny. But Saudi Arabia's output cut shows that they may have few alternatives.

The oil-rich nation's move comes just ahead of a visit by US Secretary of State Antony Blinken from Tuesday, his first to the kingdom since Tehran and Riyadh agreed to restore diplomatic relations in a deal brokered by Beijing. Last year, Saudi Arabia rebuffed US criticism of Opec's production cuts.

"The way Saudi Arabia is taking a lead in Opec decisions, it looks like they are not going to be bothered by Western opinion," said Gnanansekar Thiagarajan, director at Commtrendz Research.

Opec is unlikely to heed to Western pressure and could follow through with even deeper cuts to put a floor to prices in case demand starts sagging with winds of recession blowing across the world, he added.

But large consumers like India and China may not be able to replace dwindling oil supplies with increased imports from Russia, as Moscow pledged to cut production by 500,000 barrels a day from February until the end of the year, analysts said.

An ANZ report on Monday said the oil market was expected to tighten significantly in the second half of the year, and Brent prices could potentially hit US$100 a barrel by the end of the year.

With few alternatives, Asian nations would have to bolster renewable energy development, observers said.

"It would encourage them to find alternative sources, either by producing more oil themselves or by accelerating their move to renewable energy," said Christina Ng, debt markets research and stakeholder engagement leader, Asia-Pacific at Institute for Energy Economics and Financial Analysis (IEEFA).

"The challenge for Asian nations, in the short term, is the supply chains aren't quite there yet to push a big renewables roll-out," she said.

The Asia-Pacific region supplies 10-15 per cent of global oil and gas needs, and it's also the largest and second-largest consumer of oil and gas, respectively, according to an IEEFA report released on Thursday last week. Most oil and gas firms in the region lack detailed plans to decarbonise and have a wait-and-see approach to new energy, the report said.

"Oil and gas companies in Asia-Pacific have begun setting net zero targets and revenue diversification strategies, [but most] are in the early stages of decarbonisation and do not have detailed implementation plans," it said.

On the other hand, more financial institutions are joining a global alliance committed to reducing financing for fossil fuel operations, which include forgoing new direct investments in upstream production.

"In the mid to longer term, we think that the market will be motivated to look at renewable energy," IEEFA's Ng said.

However, progress of renewable energy has painted a mixed picture in the region so far with some nations such as China far ahead of the pack.

China leads the world in clean energy investments, about four times that of the US, said Tim Buckley, Sydney-based director of Climate Energy Finance.

India is also gearing up for massive domestic solar manufacturing, but delivery over the last three years has lagged targets. "So delivery needs to be lifted to match the massive aspirations of the Narendra Modi government," Buckley said.

Southeast Asia has a few bright spots, such as Vietnam and the Philippines. On the other hand, Japan and South Korea have fallen behind on offshore wind power, while Taiwan's ambitions have been hampered by lack of land for solar and high costs for offshore wind power, he said.

"So progress is patchy, but the promise is very significant, particularly with the added emphasis of energy security and three years of hyperinflation of all fossil fuel costs," Buckley said.

This article originally appeared on the South China Morning Post (SCMP).

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