Peak Oil Demand Opportunities For Petchems Are Being Over-Hyped

1200px-Auto_scrapyard_1By John Richardson

THERE is a lot of excitement about new petrochemicals feedstock opportunities resulting from the approaching end of the road for the internal combustion engine, the rise of the electricity battery car and the related arrival of Peak Oil Demand.

Here is some of the logic which supports the notion that the demise of the conventional automobile will result in lots of cheap raw materials to make petrochemicals

Imagine a scenario in Europe where a landlocked refinery – i.e. one that cannot cost effectively export its gasoline and diesel – is faced with closure.

A problem is that gasoline and diesel demand isn’t going to suddenly come to an entire halt overnight. The use of fossil-fuel powered cars is only being phased out – for example, France and the UK only plan to ban the sale of new gasoline and diesel autos by 2040.

So this landlocked refinery will need to stay open to guarantee local fuel supply, even if it is losing money because of the gradual decline in demand for gasoline and diesel.

In steps a local petrochemicals company that offers to buy additional naphtha from the refinery to expand its steam cracker. The same company might also work with the refinery to convert a catalytic reformer to run entirely for petrochemicals rather than for gasoline blend stock and petchems. The petchems player will obviously be in a strong position to successfully negotiate for low feedstock costs.

The investment needed to make this new refinery-petrochemicals investment work will be funded by preferential loans and tax breaks etc. from the local government. The local government will be anxious to keep the refinery open because of, as I said, fuel security reasons and because of the need to maintain all the direct and indirect jobs that depend on the refinery.

This could work in other ways. For example Saudi Arabia, as it faces both Peak Oil Demand and rising competition from US shale oil, has to find a home for its crude. It cannot afford to leave its most valuable national asset in the ground.

This will result in Saudi Arabia buying more existing refineries whilst continuing to build new refineries in countries such as China in order to guarantee a home for its crude.

Refinery-product markets could as a result be pushed into oversupply, which will be exacerbated by the constant fall in gasoline and diesel demand resulting from rise of the plug-in electric vehicle. But from a Saudi perspective, this oversupply won’t matter because, as I said, it must find a home for its crude.

A refinery sector pushed into oversupply by Saudi Arabia might as a result have lots of cheap naphtha available for petrochemicals producers.

Then there is the crude-to-chemicals option. Saudi Aramco and SABIC have developed a technology to directly crack oil in steam crackers. This could be another means by which Saudi Arabia can find a guaranteed big-volume home for its hydrocarbons.

ExxonMobil has long had such a technology. It makes use of the technology at its 1m tonnes/year steam cracker in Singapore, which it brought on-stream in 2014.

Stephen Prior, the former president of ExxonMobil Chemical, said at the time that the cracker was started up:

When you crack crude, you have the whole barrel, so you actually produce a richer mix of valuable by-products that you can further upgrade. We are already looking at what additional derivatives you might want to produce – C4 molecules for butyls and C5 molecules for adhesives.

If you think about it, you have eliminated the refining step to produce the naphtha, so there is an inherent energy efficiency and emissions efficiency, [and a] sustainability story around that.

As gasoline and diesel demand declines, the alternative value of refining oil in transportation fuels will make less and less economic sense. Oil will as a result become a very cheap direct feedstock for steam cracking.

But what about demand?

The problem is that this kind of thinking is old-school as it is based on the notion that all you have to worry about is feedstock advantage as demand will continue to take care of itself.

The rise of the electric-battery driven car will be accompanied by the rise of ride-hailing and autonomous driving. This could reduce urban vehicle numbers by as much as 90%.

Why own a car at all when it sits in your garage unused for 96% of the time if you can instead hail a ride when you want, thus saving on all that wasted and rapidly depreciating capital cost?

Why would governments want to allow anything but autonomous vehicles on the world’s roads given the huge human health costs of road accidents? The World Health Organisation estimates that globally, around 1.25 million people die each year as a result of road traffic crashes. Road traffic injuries are the leading cause of death amongst people aged between 15 and 29 years, with the cost of accidents accounting for 3% of most countries GDP.

The end-result will be a steep fall in the demand for petrochemicals and polymers as auto sales collapse. Electricity battery cars are also simpler to build  than conventional autos as they require less components. Petrochemicals demand will thus also suffer from reduced sales of components.

And given that an electric battery engine generates far less heat than an internal combustion, will high value engineering polymers be required in as great a volume as today? Will the temperature resistance of say co-polymer polypropylene be good enough for some engine components, thereby reducing the demand for nylon resin-based engineering polymers? Quite probably, yes.

The much broader and more significant risk for petrochemicals demand is from changing demographics. As populations age in the West, it faces long-term lower GDP growth. That’s unless governments and other policymakers first of all recognise the problem (they haven’t done yet) and devise policies that compensate for the retirement of the Babyboomers.

And last but far from least is the rise of environmentalism. It is becoming more and more commonly understood that our throwaway society is causing major damage to the earth’s eco-system. For example:

  • The world has produced 8.3bn tonnes of plastic over the past 60 years.
  • Almost all of it, 91% in fact, has since been thrown away, never to be used again.
  • But it hasn’t simply disappeared, as plastic takes around 400 years to degrade.
  • Instead, a new study finds, 79% is filling up landfills or littering the environment and “at some point, much of it ends up in the oceans, the final sink”.

Consumers will increasingly want to buy less plastics, even in developing countries such as China, as new legislation supports lower use of virgin polymers and greater recycling.

I thus see a major risk that that major petrochemicals oversupply will result from the slow death of the internal combustion. Sure, there will be some opportunities to add new incremental capacity in some supply chains based on cheap feedstock. But these opportunities will be far more limited than many people are suggesting.

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