Technology and Future Energy Security

Hello and welcome to Plat's Oil Markets podcast, a series byasNig Global Energy. Assia's energy security has always rested on a difficult bargain, deep reliance on Middle Eastern crude in exchange for scale, proximity and established relationships. The recent conflict tested that bargain in real time forcing refiners, traders and governments to railroad supplies, reassess risk and confront the true cost of dependence. As risk premiums fade and markets move from crisis response to post war recalibration, the bigger question is no longer just where the next cargo comes from It is whether AsSia can succeed in building a more resilient energy system or simply replace one vulnerability with another I'm Sambit Mahani Ashia Enerergyeditor and host for today. To discuss some of the key themes, I'm pleased to welcome Calvin Lee Head of Asia contontent at SMPic Global Energy and Nick Sharma, He of Global Upstream inssights. Welcome all. Calvin, let me ask you the first question of this podcast For decades, ISia's depredance on Middle Eastern crude has always been an accepted vulnerability. We witnessed huge changes to trade fls during the U.S Iran conflict, such as increased reliance on long haul Atlantic basin crudes and Russian barrels. Will this geopolitical shock genuinely accelerate ISia's diversification into African, American or other alternatives Or will the region remain structurally bound to gulf producers in the foreseeable future Thanks A bit, and thanks for having me on this podcast today. So the conflict's immediate impact on the Asia curement was dramatic and well documented, as youve probably seen in the news in the last few months. South Korea, for example, is the clearest case study So in April, Middle Eastern crude imports actually fell about thirty nine percent year on year, with Saudi Arabian volumes down, thirty six percent and Iraqi volumes down, about forty one percent. And in order to compensate that drop in volume South Korea to rapidly diversify. And in Japan, they also experimented with having the CPC pl from Kazakhstan for the first time. So it's a grade that had hardly ever featured in Japanese refinery feedstock bles And weve also seen super tankers resorted to ship the ship transfers in Malaysia to work around the Straits of Hahamuts disruptions, right? So together, South Korea and Japan, they jointly moved to revive the CPC bnd procurement targeting about thirty million barrels annually from Kazakhsan and South Korea's government is also providing diplomatic and economic support. South Korea also accelerated the Canadian heavy sou crude imports, so a six foold increase in the first four months of this year, which is also supported by a customs cooperation agreement Alberta that reduced tariffs to zero percent under the Korea Canada FTA. Now what we've seen is that the U.S. Iran MOU immediately triggered a reversal of diversification flows. So Asian refiners and particularly the Chinese independence They actually kind of suspended or stopped to secure any alternative crudes as they await the barrels from the Middle East to become available again. And what we've seen is that China's crude imports from the Middle East had already fallen fifty six percent year on year in M And the expectation of the normalization has caused buyers to actually pause any Atlantic basin purchases to and wait for cheaper golf barrels, right? As one trader put it bluntly, any reopening of the stade will send eighty to one hundred million barrels of oil straight onto the market. And given that Asia is now covered until August or September arrivals, this is going to force a lot of oil into deferred demand and make arbitrage is almost unworkable. Now when the brand buy spread widened sharply during the conflict, Atlantic Basin and U.S. crudes became veryery expensive relative to gulf grades. And as the spread normalized post peace deal, WTI Midland was described as increasingly uneconomical compared to Merbourne on a delivered basis to North Asia. So Asian refinerers were observe selling WTI Midland BLCs into Europe and switch you back Mourbouron, which is a reverse of the wartime pattern. So all in all, you know if you look at how the diversification and restructuring of trade flows and so on, the more I guess appropriate framing could be that Asia has learned to manage the disruption better It has not escaped the structural dependence, as you probably will see that most of Southeast Asian refiners, Indian refiners and North Asian refinerers they are still heavily reliant on Middle Eastern crude. The diversification achieved during the conflict is best understood as an emergency buffer that will be maintained at the margin, right Gulf, the Middle Eastern crude grade will remain as a baseload supplier, at least for the foreseeable future Sure, Thankks, Calvin, those extremely interesting opening remarks. I'll stay with you also for the next question. and as you have mentioned, with hopes of peace rising after a war which continued for months, geopolitical risk premiums have started to fade. How will the sudden shift include Ild dynamics and cheaper fade stop access options impact Asian refining margins and which refinery configurations stand to lose or gain the most in a post crisis environment. I'll also ask you here. the other key issue is how quickly you think Asian refiners can ramp up utilization rates to capture the post demand recovery? or will aound be choked off by the high inflationary costs left behind by the conflict Yeah, thanks for that question. No. So the peace deal's impact on Asian refining margins has been swift and severe. So around june fifteenth and on that day alone, when there were signals that the US Iran MOU was going to be signed or was confirmed, The Singapore crack spreads actually collaped. By june twenty second, the FOV Singapore gas oil cash differential had fallen for five consecutive sessions to just ninety eight cents per barrel While the jet fuel cash differential had collapsed to seventy four cents per barrel. and that's down about a dollar twenty five cents a barrel week on week. And during the conflict, refiners shifted toward lighter, sweeter fruds, which yielded more light d ds. But as the sour crudes start to return, refiners processing medium heavy sour ce grades will see their yields profiles shift back toward higher residual fractions, which is negative for margins in a falling crank environment. So if you look at the twenty twenty six, the so called wartime reffining margins, they were extraordinary by any historical standard. But the key question is how much of this will survive post the peace deal? And simple refineries, those without deep conversion units will face the worst post crisis outlook? Because as product cracks normalize toward pre war levels, simple refineries will lose their windfall as they cannot efficiently process the returning South crude grades. And as such, higher cracking configurations are best positioned for the post war environment Now speaking about the refineries food food recovery, any recovery would be gradual and it would start to normalize in Q three after the reopening of the Straits of Hamu, meaning that the inventory rebuild cycle will sustain middle distant cracks above war levels for a few months to come. The utilization recovery will be gradual and it's not sharp and probably will reach a high maybe towards the end of the year. and it is consistent with the physical reality on the ground, right? And talking about inflation. so this is probably the most unappreciated risk, which is that the conflict has left a significant inflationary risk on the market The U.S. Federal Reserve held rates recently at its meeting, but it also signals that the pential rate hike could take place by year end, citing persistent energy driven inflation. So tighter monetary policy could weigh on oil demand by slowing economic activity And then there is also the aspect of demand destruction, which we have already seen in some countries because higher fuel prices, reduced fuel availability and also the government efforts to curb consumption has caused a drop in demand in some of those countries Sure. Thanks, Calvin Yes. I completely agree with you. That macroeconomic impact will definitely have a big role on energy markets over the next few months. We'll have to wait and see how it pans out. Nick, let's turn our focus on the upstream sector a bit. How did the supply of vulnerabilities exposed by the US Iran war fundamentally alter the risk assessment for AsSia's domestic oil and gas exploration And what are the primary strategic learning points for regional energy sector looking to secure long term upstream resilience? If you can share your views on how geopolitical shocks like the one we saorry cly can reshape the region's upstream strategies Yeah, Hi summit. So it's a really important point and it's kind of buildilling a little bit on what Calvin K mentioning a little bit in terms of the exposure of the crisis. And this crisis in very Maz was very different to the Russia Ukraine because they really brought the vulnerabilities to this region, right? Because nearly a majority of the countries and have a high percentage both from their exposure straits of homes, but also from a kind of absolute welling perspective. So one of the things that if we go back a little bit in time, a lot of the countries here that have actually a negative oil balance in the sense that their domestic production is far below the requirements from a demand perspective They did obviously the early part of the last decade and a bit before that, there was a period where national oil companies were very much kind of given the freedom to go out and pursue a lot of international mergers and acquisition to kind of buffer end security. It was really only after the twenty fourteen time frame where when the dust sett a little bit The host governments and the respective national oil companies kind of pivoted towards building a lot more supply security through the Middle East. Part of it was some of the M andA deals they did in that preceding cycle were not that value generating, but also for the fact that a lot of that movement of large independence of companies moving back to the lower forty eight through the unconventional boom. So we had this kind of perfect straw where a lot of the domestic exploration activity became a responsibility of national oil companies and there was a perceived security of supply from the Middle East in terms of kind of bringing all those volumes back home But what's changed, I would say is that this has kind of woken up a lot of host governments, right? One clearly is diversification. I'll get to that in a little bit because I think as much as people would like to talk about the buzzw of diversification, the reality is the alternatives are more expensive and we already see just After the AMa US Caralmen pointed out, people are kind of trying to go back to normal because you know memories are quite short. But what I will say is that two things I think are going to happen pretty quickly. One are the governments are going to realize that we need to do more domestically and we need to really incentivize more activity. That's s accelerating licensing rounds, doing as much as they can to roll out the red carpet for activity in frontier basins, which is a bit more of a long term play, but is an energy security play. And then the other aspect is kind of state led on a bit more international acquisitive through the national oil companies. And that I think is something I've personally seen through a lot of conversation with companies and h governments that what do we do? and what opportunities are available on the international front for us to kind of build some security hedge against you know future shocks like this I' stay with you also for the next question. Those are extremely nicely you summed up the upstream scenarios, but some of the key developments that we have seen over the last couple of months, I just wanted to highlight that a bit. Asian countries have indeed stepped up efforts to find oil and gas at home We saw countries like Bangladesh and Pakistan announcing new upstream initiatives and policies after the conflict started and supply became an issue. Do you think structural regulatory and commercial challenges will continue to limit international oil companies' interest in investing in the region's upstream sector, making it difficult for allast Asian countries who try give a big push to the for opstream production I think there answerers parts of that, but it's actually a little bit more nuanced. So when we think a little bit around value creation for a lot of companies, exploration has been that kind of question mark where has it really delivered a lot of value the last fifteen years? And our resource conversion metrics show that less than fifty percent of the volume' discovered go into production. Now part of that is quality of resources P is also kind of above ground operating environment. Now, the region obviously is very diverse and has a different set of risk reward, particularly from a subsurface perspective, but also how from an above ground perspective. And where this region has kind of been a little bit challenged is on a couple of facets that kind of touch on what you mentioned around fiscal, legal and regulatory. I would largely say, the regions have recognized that they have to be more competitive, particularly for more higher risk opportunities. But then just because youS one host jurisdiction' done it doesn't mean others haven't made those same changes. So relative to relative, your changes are kind of negligible because every hass improved But where the areas that some countries in the region do still struggle with and that does create a little bit of a less conducive environment is the regulatory certainty and execution. I think that's one area, particularly around execution, bottlengths and policy implementation. They are quite uncertain from country to country We also have often very less contract flexibility and vict sharing so some countries have kind of they pulled back from let's say production sharing contracts, which give a little bit more downside protection for weaker opportunities. And then the other one that is really important and the ones that I think really do put a little bit of strain on attractiveness is when we look at kind of stability and sanctity of contract, right? When there's policy shifts or weak fiscal stability provisions or windfall taxes that are put on, or also domestic market obligations or weaker gas domestic markets, all of those aspects kind of inhibit investors to think, okay, you know what Some of these risks are a bit more difficult to manage. But on the flip side, I will say that this is a demand center, right? you have to navigate through these markets because they're always going to be open for the growing demand. And a good example of a country that kind of gets it right consistently is Malaysia, right? It doesn't have the biggest acreage running room, but what it does bring to bear is really a fit for purpose investor centric mindset. And so by that I mean is that every single bid round is very much tered with a specific set of investors in mind, not for a buyaser or orientated towards one set of plers. They also have a very set of tailored fiscal terms for the risk appetyppe. So for example, they have specific enhanced deep water terms for obviously deep waterater. They've also built in enhanced shallow water terms. they've got late life asset terms, they've got discovered resource opportunity terms for very small fields and this new set of terms like funnels. They also bring in pre bidding round kind of joint study agreement mechanisms like the technical evaluation agreement. And so what this enables them to do is to really kind of attract a wide set of investors. They have obviously or a mem of the global integrated oil companies to have a lot of the regional independence, they' peer national oil companies in the region, like for petroniz they also have perermina PTTP in a meaningful way. They have smaller independence and they have some kind of local startup. So that's the kind of competitive landscape the industry is needed to make sure that they continuously churn acreage and then maintain production level Sure. you rightly pointed out the Malaysia example. Thanks for that. Yes, that's definitely something for other countries to look at. I'll also stay with you on itate for the next question. and let's focus a little bit on technology. And what's your view on AI and the new exploration technologies that are coming up to overcome some of the commercial and financial barriers for the sector And here I want to ask that we've seen some Indian companies announcing early exoration successes especially in the deep water. Do you see a huge deep water potent sheial there? So it can just sum up on both the issues a little bit Yeah, so look, besides some of the negative aspects that I was kind of leaning on, I think one thing we need to recognize is last year was think a fifteen year high on acreage awards from a square colorater perspective globally, right? So that is a really important metric to show that people are returning back to exploration. Now let me caution that a little bit Firstly, why is that happening? Well, companies are recognizing that can't emNA your way out of the problem of reserves replacement. You need to actually go back to exploration. But secondary technology here is where it beces is a big lever, right? You know We've seen a tremendous amount of advancement or capital allocation towards AI related seismic imaging digital subsurface and interpretation modeling work. And so what companies and some of the really large companies have really built some really advanced supercomputing capacity that allows them to take these really, really large volume data sets across big acreage positions and run it through a number of layers around improving their kind of modeling and interpretation analysis. That allows them to move from a period that would you have taken six months, twelve months, eighteen months to really shorten that time frrame to a couple of months to quickly look at v large volumes of data and ascertain whether this is a go or no go kind of opportunity. So that I think is very useful. Governments also have to play a really important role because they have to understand that the old rules of a minimum work programe of a seismic and a we commitment is not what investors are seeking. So you know, really looking at an assessment and approach that everyveryone has to focus towards. So that's where the technology layer really comes in. And the last point I would probably make on that is when we look at some of the large majors, they look at country entry. Historically you would come in in five to seven years from an exploration appraisal program with another seven years to develop large fields. Companies are saying if we can't time from entry to fres production in five to seven years, that's a kind of metric we need to be striving for. Now I'm shifting a little bit to the India story. Firstly, when you get a bit of gas flowing and you see gas show then gas flowing through some early flaring through the well trape, that's a positive science. There's a working hydrocarbon system, right The story of deep waterater and ultra deep water is a story of endurance, right? It takes a lot of time, it takes a lot of wealth, it takes a lot of capital, it takes a lot of partnerships and companies to really kind of do that really well. So the short answer is clearly it's a positive story, but it's going to take a lot of time and a lot of wealth to really kind of prove up the resource base. Ideally that needs to be done with more partners and international partners coming in. so hopefully this early success kind of gets a lot of other companies interested. And I refer to the Orangey subbasin in Nibibia as a really good example where it took you know over fifteen, twenty years of people poking holes on different areas until they're finally kind of unlocked through Venus and Graph, the first big volum is in twenty twenty three. And now we see that kind of wave of competitive landscape coming in. And even now, over the last three years, you know people are drilling north and they realizing the paros and permeability is not that attractive So they're going more south of the acreage to go towards the South Africa side of the southwest coastal basin to see whether there is kind of the right rocks there. So it takes a lot of effort, takes a lot of capital and you know, de waterater and ultra deep water are in the region of one hundred fifty to two hundred million dollars. That burden can't be shared by one company has to be shared by the industry. So positive, but a lot more work Thank you, Nick. That brings us to the last question of this podcast. Calvin, let me come back to you for the last question of this podcast. Looking back at the entire conflict, what is the single biggest lesson global all markets can take away regarding how modern energy security is calculated? As this war fundamentally redated the roadmap on how traders, governments and state oil companies will hge against geopolitical supply disruptions in the future. The single biggest lesson here is that logistics is the ne geopolitics. The world did not run out of oil during this whole conflict. Saudi Arabia, the UAE, Russia, the U.S, and others had barrels available What failed catastrophically was the physical infrastructure of delivery. So a single thirty three kilometer wide choke point rendered approximately twenty percent of global oil supply inaccessible for over one hundred days So the lesson is not about reserves or production capacity during this conflict, right? It is about the brittleeness of the physical delivery chain and how profile energy security calculations had underweighted. And the conflict had also exposed another fundamental flaw in how markets price geopolitical risk in that the paper markets and physical markets operate on entirely different time scales and information sets. This divergence was not a market anomaly. It is a structural feature of how oil markets process geopolitical shocks. So algorithms trained on headline sentiment could move billions of dollars in paper positions, but physical tankers just sat stranded. So the traders that had followed paper signals obviously had their positions totally wrong because the physical reality then reasserted itself, right? So the lesson here is that there is models that treat paper price signals as proxies for physical availability. that's dangerously incomplete. The physical confirmation matrix, so the ship count, the AIS behavior, the war risk insurance premiums, freight costs to buy crude trrading, refinery nominations and Asian buying, that must be elevated to primary indicators and not secondary ones Gweet, those were extremely valuable insights. Thanks Calvin and Nick for joining me in this conversation. The supply shock is reshaping Assia's crude sourcing and refining economics. The crisis has also changed the investment keys for domestic oil and gas exploration, how regulatory reforms and new technologies such as AI can help to unlock opportunities Ultimately, this is a conversation about how energy security is being calculated. The conflict has shown that security is not just measured only by reserves, contracts or spare capacity. It is measured by flexibility across supply chains, refining systems, policy frameworks and hedging strategies Post crisis landscape raises a defiding question. Has the war merely disrupted the old playbook or has it forced the global oil market to rewrite a new one? We at AetBic Global Energy will be closely monitoring the events and keep bringing you all the insights. This podcast is produced by digital editor Chanzhi Mukurji based Google Gao Thank you for listening