YEARENDER
By Siti Radziah Hamzah
KUALA LUMPUR: It was never a dull moment in the energy market this year as the industry remained heavily influenced by ever-volatile geopolitical conflicts, production cuts by the Organisation of the Petroleum Exporting Countries (OPEC) and demand-supply pull.
While some of the immediate pressures from the global energy crisis have eased, the global economy remains unsettled with stubborn inflation, high borrowing costs and elevated debt levels. And the risk of further disruption is ever present in the industry.
Oil futures hit a 2023 high on Sept 28 amid tight supply expectations as inventories at the largest storage hub in the US were falling toward near minimum operational levels.
West Texas Intermediate (WTI) jumped more than 3.0 per cent to settle at US$93.68 per barrel following a drop in stockpiles to just below 22 million barrels; the storage facility is considered a benchmark for US oil prices. Brent oil futures also rose, trading more than 2.5 per cent higher at US$96.55 per barrel.
On Nov 7, oil prices dived to their lowest on the back of mixed Chinese economic data and as rising OPEC exports eased fears about tight markets amid strengthening of the US the dollar.
Brent oil settled at US$81.61 a barrel, down 4.2 per cent, while U.S. WTI crude futures settled at US$77.37 a barrel, down 4.3 per cent.
Mideast conflicts and production cuts
More than a year after the Russian invasion, the continued fighting in Ukraine is now accompanied by the risk of protracted conflict in the Middle East amid renewed military and political conflicts between Israel and Palestine that started on Oct 7.
A sharp escalation in geopolitical risk in the Middle East, a region accounting for more than one-third of the world’s seaborne oil trade, has markets on the edge.
Hong Leong Investment Bank, in its sector outlook in early November, said it did not foresee immediate supply risk from the region so long as the conflict is contained to Israel and the Gaza Strip.
However, the Israel-Hamas conflict would add to the risk premium due to possible escalation into a regional conflict, entangling major oil-producing nations while the alleged involvement of Iran in the conflict might result in interventions by the US, such as tighter enforcement of sanctions on Iranian oil.
While Saudi Arabia and Russia extended their voluntary production cuts through year-end, the International Energy Agency (IEA) in its oil market report in October 2023 highlighted the prospect that ‘higher for longer’ interest rates could slow economic and demand growth.
No country is an energy island
While political events and geopolitical tensions were at the vanguard of the impact on the oil and gas industry, let’s not forget the global push toward cleaner and more sustainable energy sources.
This move towards acquiring sustainable energy sources would also strengthen the defence against future oil shocks.
SPI Asset Management managing partner Stephen Innes said companies in the oil and gas sector are increasingly exploring renewable energy options and investing in technologies to reduce their carbon footprint.
He noted that several oil and gas companies are expanding their investments by diversifying into renewable energy sources like solar, wind, and biofuels.
“The primary reasons behind this diversification are economic considerations and a desire to shift towards more sustainable practices. Malaysia is making notable progress in this direction,” Innes told Bernama.
In the oil and gas sector, technological advancements like artificial intelligence, data analytics, and automation are now optimising exploration, production, and operational efficiency.
In March this year, national oil firm Petronas announced its plans to spend RM300 billion on capital expenditure in the next five years, with 80 per cent of it focusing on its core business of hydrocarbons to bolster energy security while striking a balance in energy transition efforts. It will funnel 20 per cent of its five-year capex into decarbonisation and energy transition activities.
As for the oil and gas services and equipment (OGSE) players, the government intends to carry out a mid-term review of the National OGSE Industry Blueprint 2021 to 2030 next year that will include sustainability and energy transition for the industry.
Climate change risks
Climate change is having a considerable impact in Malaysia. Hence, the government is in the early stage of formulating the national climate change bill in the next two to three years. The development of the new bill will adopt a whole of nation approach that includes engagement with relevant stakeholders.
With the global energy crisis driving a sharp acceleration in installations of renewable power, Putrajaya has introduced roadmaps and policies in recent years to speed up its commitment to achieving net zero carbon emissions by 2050.
In August this year, the government launched the National Energy Transition Roadmap (NETR), outlining the efforts to attain a sustainable and inclusive energy system with the expected result of a 32 per cent reduction in emissions in the energy sector, besides bringing in a higher volume of green foreign direct investments into the country.
The policies outlined under NETR, involving energy efficiency, renewable energy, hydrogen, bioenergy, green mobility as well as Carbon Capture, Utilisation, and Storage, are expected to uplift gross domestic product by 10-15 per cent.
On top of this, 350,000 jobs will be created, whereby 70 per cent of the income gains will flow to the low- and medium-income households.
Energy market in 2024
In 2024, the overall health of the global economy will have a big impact on oil and gas demand.
According to the IEA, global oil demand growth is set to slow to 900,000 barrels per day in 2024 as the post-Covid rebound runs out of steam while the economic expansion slows and energy efficiency improvements weigh on oil use.
Innes said economic growth tends to drive energy consumption, so shifts in economic conditions could affect the industry.
At the same time, he noted that changes in regulations related to environmental standards, safety measures, and emissions reductions can impact how oil and gas companies operate while regulation would continue to force oil and gas to diversify from fossil to renewables.
“The driving force is the US Inflation Reduction Act (IRA), which not only promotes renewable energy and contributes to climate protection but it also encourages other economies to turn green, which will remain a huge industry focus in 2024,” Innes said. — BERNAMA
