Asia will be the driving force behind expansion, says PM
Malaysian Prime Minister urges AOGC delegates to innovate and reform to spark more growth
Fast-developing Asian nations will continue to be the driving force behind future global economic expansion and more energy will be essential to bolster this growth, the Malaysian Prime Minster, Dato’ Sri Mohd Najib Tun Razak, told delegates at the 18th edition of the Asia Oil & Gas Conference.
But the key to sustainable development is to make the most of the opportunities, during these challenging times, to innovate and reform, he added.
It has taken years for many economies to recover from the financial crisis of 2008, but growth remains fragile in much of the developed world. Still world energy consumption has been robust. It stood at 11.7m tonnes of oil equivalent (toe) in 2008, but hit 13.1m toe in 2013. Much of the increase stemmed from Asia as its percentage of overall energy consumption jumped from 36.4% to 41.5%.
Since 1990, Asia’s population climbed by 33%, compared to 20% in the rest of the world. “It is perhaps no wonder, then, that in 2014 Asia’s economic growth of 6.9% was not far off triple the world average of 2.6%,” noted Najib.
But energy consumption per capita is still only half the global average, so a considerable rise in demand is expected as the region continues to urbanise and the middle class balloons, predicted Najib.
China has been the engine of the bulk of economic growth in Asia this past decade but as its economy starts to cool – it is expected to expand at its lowest level in 25 years this year – its energy demand will not be as high as before.
The expected 7% expansion in gross domestic product for 2015 translates to annual oil demand growth of only 2.9% in China this year, compared to a record 16% in 2004, and will decelerate further to 1% from 2020 to 2030, to around 13m barrels a day (b/d).
But economic slowdown in China does not remove Asia from the centre stage. Since 2001, the 10 states that make up the Association of South East Asian Nations (ASEAN) have grown by 300%.
If the economies of the 10 ASEAN member nations were combined, the bloc’s economic weight would be equivalent to the seventh largest economy in the world. It is expected to grow further, to the equivalent of the fourth largest by 2050. Still, the drastic drop in oil prices, which have fallen from over $100 per barrel a year ago to around $65/b today, has dented revenues among the major producers in the region.
However, Malaysia had already started to introduce reforms to weather such external shocks by cutting the country’s dependence on oil and gas income, which makes up one-third of the government’s revenues.
The government started reducing fuel subsidies in 2010, lifting them completely on petrol and diesel in December 2014, freeing up more than 20bn ringgits ($5.6bn) in yearly spending. Najib added: “I also believe that adversities can provide opportunities. The low price of oil can and should be a spur to innovation.”
Nevertheless, the second half of 2014 saw the industry transform from being lucrative to being almost marginal, said Petronas’ chief executive, Datuk Wan Zulkiflee Wan Ariffin. He told delegates to AOGC 2015 that the drastic fall in oil prices has been “undeniably overwhelming for us” but the industry will deliver viable solutions to emerge stronger from the downturn.
As an illustration, the industry is now able to monetise abundant unconventional oil resources in the US at close to $50/b, he added. Even so, reports have estimated that industry layoffs will hit more than 100,000, with 90,000 job losses already reported in the last few months.
“It would have been nice to see operating costs declining just as fast, but unfortunately costs tend to be more lethargic moving downwards,” said Wan Zulkiflee.
He added that consolidation opportunities are clearly plentiful. “Those with heftier cash reserves and other means to fund acquisitions and who are guided by a clear strategic focus will be able to beat competitors to the negotiating table for winning deals. These manoeuvres will position them ahead of the pack when the oil prices recover.”
And there is room for optimism. “It is my personal hope that the discussions that happen here in the next two days will lead to initiatives that will create significant shifts in the industry and inject some positivity back into the gloomy outlooks we have all become so accustomed to lately.”
But he added, oil price downturns are nothing new. They happen every decade. But the question is: how long will this low price scenario persist?