Petrochemicals Are Big Oil’s Next Big Profit Hedge

The ongoing electrification drive and the EV revolution have elicited dire forecasts about the imminent demise of the nearly two-century old oil & gas industry. Last year, Bloomberg predicted that global demand for road fuel will peak in 2027 at an all-time high of 49 million barrels per day before entering terminal decline. Bloomberg says that rapid adoption of electric vehicles, shared mobility and ever-improving fuel efficiency are the biggest bear catalysts for oil, with EVs expected to displace a staggering 20 million barrels per day in oil demand by 2040, or 10x the current estimate.

And, the Chinese EV sector is expected to play a big part in disrupting the global fossil fuel industry. China’s oil market is closely watched by energy experts not only due to its sheer size but also because of the ongoing EV revolution in the Middle Kingdom. According to Lu Ruquan, president of state-owned China National Petroleum Corp.’s Economics & Technology Research Institute, EVs will displace more than 20 million metric tons of crude demand this year, good for 10% of the country’s gasoline and diesel consumption.

At a time when internal combustion engine (ICE) vehicle sales continue to decline, retail sales of new-energy cars (NEV) in China, including electric vehicles and plug-in hybrids, rose 28.6% to 856,000 units in June from a year earlier, thanks to continued high demand for NEVs with by government subsidies, tax breaks and steep discounts helping bring buyers back into showrooms after a sluggish start to the year.

Not surprisingly, Big Oil companies are betting the farm on another pivotal energy sector: petrochemicals. Petrochemicals, which go into plastics, polyester and many other cheap and lightweight commodities that underpin modern life, could help oil companies stay afloat long after demand for transport fuels has peaked. As we have reported before, among the major energy agencies, the International Energy Agency (IEA) tends to be the most pessimistic about the long-term oil demand outlook.

Over the medium-and long-term, only the IEA sees global oil demand peaking before 2030, even in its most optimistic forecast (high growth). However, the IEA says an oil demand peak doesn’t necessarily mean a rapid plunge in fossil fuel consumption is imminent, adding that it will probably be followed by “an undulating plateau lasting for many years.” The Paris-based energy watchdog has predicted that oil demand will grow to 105.45mn barrels per day in 2030, from 102.24mn bpd last year, with 2.8mn bpd–more than 85% of the overall increase in demand–coming from petrochemicals.

A 2023 review of the major oil and gas and chemicals companies found that over the next three years, Exxon Mobil Corp. (NYSE:XOM) plans to invest over $20 billion in expanding plastic production; CPChem will spend $14.5 billion and Dow Inc. (NYSE:DOW) plans to invest USD 10 billion.

A lot of those petrodollars are flowing into the Chinese market. According to Ciarán Healy, oil market analyst at the IEA, ~6.7mn bpd, or 6.5 per cent of all global oil use, currently goes to supply China with petrochemicals. The International Energy Agency has reported that 90% of China’s increased oil demand from 2021 to 2024 comes from chemical feedstocks like LPG, ethane, and naphtha. IEA notes that between 2019 and 2024, additional Chinese production capacity for ethylene and propylene will exceed the combined current capacities of Europe, Japan, and South Korea. Between 2018 and 2023, China’s output of synthetic fibers alone rose by 21 million metric tons–enough to spin more than 100 billion T-shirts a year. A new breed of private refiners such as Hengli Petrochemical and Rongsheng Petrochemical has emerged in China whereby they are spending billions of dollars building plants specializing in chemicals, rather than gasoline and diesel.

Ironically, petrochemicals are crucial for the green energy transition, with EVs typically using more thermoplastics, foams, fibers and rubber pads than ICE vehicles. Indeed, US chemical practice leader at Deloitte David Yankovitz has told the Financial Times that EV makers are substituting plastic resins for metal parts to make lighter cars. Yankovitz says that roughly three-quarters of all emissions-reduction technologies require chemicals, most of which are oil-derived. China has met much of that demand through domestic processing of imported crude. But the US shale oil boom has also formed a mutually reinforcing “symbiosis” with growing Chinese demand for petrochemicals. According to ICIS data, between 2019 and 2023, the U.S. was the only major producer to boost its polymer exports into China,

Exxon is currently building a petrochemical complex in southern China’s Guangdong province, as well as expanding its own chemical production at existing facilities on the US Gulf Coast. According to Exxon, the chemical complex will produce performance polymers used in packaging, automotive, agricultural, and consumer products for hygiene and personal care.

“Demand for performance polymers will continue to increase in China, and we’re well positioned to meet the needs of that growing market,” “We look forward to progressing this exciting project as we work to build a competitive growth platform in Dayawan,” said Karen McKee, president of ExxonMobil Chemical Company, at the unveiling of the project in 2021.

Meanwhile, last year, Saudi Aramco acquired a 10% stake in Shenzhen-listed Rongsheng Petrochemical for $3.6bn, and has entered talks to buy a stake in Hengli Petrochemical, a top Chinese producer of chemicals for plastics. Last year, Aramco-owned S-Oil broke ground on a $7bn petrochemical factory in South Korea.

By Alex Kimani for

Source link

About The Author

Scroll to Top