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Australian energy: the benefits of being Asia’s next-door neighbour

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In Brief

The global energy map is being redrawn.

The International Energy Agency’s World Energy Outlook 2012 (WEO-2012) projects that resurgent oil and gas production in the United States, which temporarily overtakes Saudi Arabia as the world’s largest oil producer before 2020, to be a key engine of change in energy markets.

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Others include some countries’ retreat from nuclear power, the spread of unconventional gas production and a strong push for energy efficiency gains in some major economies. One important feature of energy markets remains firmly intact during that period: Asia’s dominance as the focal point of energy demand growth and expanding energy trade.

In projecting global energy developments to 2035, WEO-2012 analyses scenarios differentiated by assumptions about policies adopted by governments. In its central scenario, global demand for energy continues its inexorable rise, increasing by more than a third over the period to 2035. Emerging economies account for the vast majority of additional demand, and China and India alone for over half. Asian consumers’ appetite for energy could be an economic boon for exporters, and particularly Australia, which can remain a major supplier of coal to the region and is positioned also to emerge as a key supplier of gas.

Coal remains a cornerstone of Asia’s energy mix. Though its emerging economies will gradually mature away from energy-intensive industries and pursue more diverse electricity generation, demand for coal nonetheless rises substantially in absolute terms to 2035 — by more than 20 per cent in China, which remains the world’s largest coal consumer by a large margin, and by 130 per cent in India. Each must look to imports to close the gap between domestic supply and demand. China imported some 6 per cent of its coal use in 2010. This share is likely to grow in the short term, but imports can be expected to moderate as production expands more quickly than demand. India’s own coal supply is unlikely to keep pace with torrid demand growth, causing its import needs to climb precipitously. By around 2020 it will become the world’s largest coal importer.

Sitting on the geographic periphery of Asia and richly endowed with coal resources, Australia is already the world’s top coal exporter and at the centre of the region’s coal trade. Its dominant position in the market for coking coal (used for steel production) and its fast-growing steam coal exports (used to fuel power generation) make it poised to further capitalise on Asia’s coal boom. Through 2020, we expect to see Australian coal shipments boosted by a quarter, with growth then continuing, albeit at a slower rate. Indonesia, which exports principally steam coal, will see exports grow to 2020, but then hit a plateau. Climate change mitigation policies represent a key uncertainty in the outlook for coal use and exports. The difference in the outlooks for Australia and Indonesia post-2020 can be attributed to such policies, which reduce the role of coal in the power sector, thereby advantaging Australia relative to other exporters for its strength in coking coal.

Gas has bright prospects under a range of assumptions about future policies adopted by governments around the world. Like coal, demand growth will be driven by the emerging economies. It is especially strong in China, where policy support to diversify the energy mix is expected to boost gas use from 130 billion cubic metres (bcm) in 2011 to 550 bcm in 2035. China’s active pursuit to replicate the United States’ experience tapping vast unconventional gas resources — namely shale gas and coal seam gas — ought to eventually put it among the world’s biggest gas producers, but unrelenting demand growth would also likely necessitate substantial import volumes. The balance of global supply and demand prospects more generally are expected to prompt fast growth in international gas trade, particularly shipments of liquefied natural gas (LNG).

Australia looks poised also to play a major part in the global expansion of LNG trade. Relative to capacity in place now, large additions are expected over the next decade. Of that currently being constructed, over 70 per cent is in Australia, including three first-of-a-kind LNG facilities based on coal seam gas. With annual export capacity projected to rise from around 30 bcm in 2011 to over 100 bcm in 2035, Australia may soon rival Qatar as the world’s top LNG exporter. But it will do so in a global gas market that may evolve significantly, and particularly in the realm of pricing. Greater trade volumes, increased short-term trading and greater operational flexibility are likely to lead to increasing gas price connectivity between regional markets and to a degree of gas price convergence. Opportunities to arbitrage regional price differentials are likely to spur expanded trade between North America (having already approved the construction of three LNG liquefaction plants) and the Asia Pacific region, which have traditionally been isolated from one another.

Future energy market trends are of course subject to shades of uncertainty and Australia is not isolated from this. In the near term, economic growth is probably the most significant question mark, but over the longer term it is the policy pathways chosen by governments that will have the greatest effect on the global energy map. Governments must take big decisions on climate change mitigation, energy subsidies, nuclear power and resource pricing, and production and export strategies. Nevertheless, Asia’s thirst for energy is one certainty that we can count on over the longer term, which puts Australia in the enviable position as the supplier next door.

Dr Fatih Birol is the Chief Economist and Director of Global Energy Economics at the International Energy Agency (IEA), and founder and chair of the IEA Energy Business Council. He is responsible for the World Energy Outlook publication, recognised as the most authoritative source of strategic analysis of global energy markets.

This article appeared in the most recent edition of the East Asia Forum Quarterly,‘Energy, Resources and Food’.

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