Asian oil demand set for recovery

David Knott
London
[email protected]

Asia's financial problems continue to hit energy projects, the latest being a hydroelectric power project in Nepal from which Enron Corp. withdrew (OGJ, Apr. 20, 1998, Newsletter).

The company's Enron Renewable Energy unit had applied to dam the Karna* river in West Nepal to drive a planned 10,800-MW capacity electric power plant that would export to India and China.

Agency reports say Enron withdrew from the project, citing uncertainty in selling a large amount of electric power to a market outside Nepal. The Nepalese government hopes Enron will reconsider.

While Asia's fortunes are at a low, the outlook is brighter. India and China, for example, are among the largest yet least developed of Asia's industrializing nations. In these countries plus Indonesia, 400 million people are expected to be born between now and 2010.

Growing populations and continued industrialization in most Asian countries are expected to keep demand for electric power growing to 2010, and anticipated low crude oil prices for at least the next 5 years will help ensure oil demand growth.

Outlook

Leo Drollas, chief economist at London's Centre for Global Energy Studies (CGES), says real income per capita and real oil prices are the drivers of oil demand over time.

"Despite Asia's economic problems now," said Drollas, "there is still lots of oil demand to come, and this has huge investment implications for oil industry. It is nonsense to talk about slowing oil demand in Asia."

Drollas said Asia's oil demand grew by an average 7.4%/year during 1986-96, and that, if growth had continued at that rate, the region's 10 main economies would have overtaken the U.S. as an oil market by 2003.

"It was inevitable that the rate of these countries' growth would decline," said Drollas. "They were industrializing heavily, but they could not keep building refineries and shipyards.

"This is not to say that these economies hit a brick wall. Growth rates would have slowed in the next 10 years anyway-the financial crisis just concertina'd this forward."

Investment ahead

Drollas says oil prices are expected to remain comparatively low for the next 5 years, making fuel oil an attractive option for new power plants in Asia.

CGES forecasts that, as Asia recovers from financial turmoil, its oil consumption will grow at a rate of 3.1-5.1%/year-equivalent to 300,000-530,000 b/d a year-from now to 2010.

"The most likely case is somewhere between the two," said Drollas. "I'd say there will be an average growth in oil demand of about 500,000 b/d each year in the period to 2010."

Resumed growth in demand will be of most obvious benefit to Middle Eastern producers. Drollas reckons that, if Japanese demand is included, Middle Eastern crude oil will meet 60% of anticipated incremental demand to 2010, and 39% of growth without Japan.

Increased demand will necessitate investment within Asia, said Drollas. For example, a total investment of $5 billion/year by refiners will be required to meet anticipated fuel requirements to 2010.

In the same period, a further $600 million/year investment in new tankers will be required for transport of anticipated additional crude oil and products volumes.