The petrochemicals or chemicals (depending what you prefer) transition to Net Zero is both connected and different from the energy transition for reasons I’ll detail in a series of blog posts, starting today with a few headline thoughts on how global margin and cost curve positions my change over the next few years – and I mean “few”. The pace of change makes challenges medium and not just long term. Later posts, with the support of my colleagues and contacts, will drill down to complications over legislation and the pros and cons of different technology choices.
By John Richardson
THE PHRASE “shale gas advantage” is still widely used when referring to the competitive position of US petrochemicals. This is, of course, still makes sense as the chart below indicates.
The chart shows US Gulf integrated variable cost linear low-density polyethylene (LLDPE) margins versus those in northwest Europe and northeast Asia between January 2014 and February 2022. It is the same story in high-density PE (HDPE) and low-density PE (LDPE).
But for how much longer will this strong US competitive position continue, unless the industry also adds competitive advantages in carbon emissions management and plastic waste-handling?
Note I say “plastic waste-handling” as I believe recycling by itself is not the answer. The core and largely unresolved problem is the some 3bn people who lack access to adequate rubbish-collection systems. I cannot see how we will be able to signifcantly reduce plastic waste in the oceans until or unless this problem is resolved.
We must fund adequate rubbish collection system for the3bn, who are mainly in the developing world. We must also ensure that systems are properly used through education programmes.
As public awareness of the core problem builds – followed by legislation and a shift of focus by the brand owners – I see polymer producers being forced to take “cradle to grave” responsibilities.
Instead of the responsibilities of producers ending pretty much as plastic pellets leave plants, they will be extended to, say, a producer being credited for stopping someone in Indonesia disposing of a plastic bag in a river.
It will be fascinating to see how blockchain technologies enable this transition. Blockchains could be used to track each plastic pellet all the way to an Indonesian river, landfill site or recycling plant.
Back to the central theme after this important aside. I believe that over the next five years, global margins and cost curves will start to look very different indeed.
What applies to the US obviously also applies to the Middle East and Canada gas-based petrochemicals industries, along with gas cracker complexes in other countries such as Malaysia and Thailand.
“No more conventional crackers” to be built in North America
Public statements point towards the US and Canadian industries understanding the urgency of the challenges.
“Conventional, conventional crackers – we won’t see another one built [in North America]. It will be more expensive and involved,” said Luis Sierra, CEO of NOVA Chemicals, in an interview with ICIS at last November’s American Chemistry Council (ACC) annual meeting in Colorado Springs.
Any new North American ethane-based crackers might include carbon capture and storage (CCS), electric furnaces that run on renewable energy and ethane-dehydrogenation technologies etc.
Which technologies will win? Not all of them, so the technology choices made by US and other companies will play a big role in deciding success or failure. A problem in the US and elsewhere is the uncertainty of how regulatory frameworks will evolve. This in turn creates uncertainties over which technologies to pick.
In the US, Dow Chemical and ExxonMobil are pushing for the country to set a price on carbon emissions. They believe that this would accelerate investments in CCS infrastructure, along with other decarbonisation measures.
“A price on carbon will give the industry confidence to make the investments that are needed to get to a low carbon future,” said Karen McKee, president of ExxonMobil Chemical, at the same ACC meeting.
ExxonMobil, Dow and nine other companies want to build a Houston hub for CCS infrastructure that could capture and store up to 50m tonnes/year of CO2 by 2030 and about 100m tonnes/year by 2040.
Dow CEO Jim Fitterling laid out the policy prerequisites for building a new cracker in the US – a price on carbon, CCS infrastructure and government incentives to build carbon mitigation assets.
“The pathway to carbon neutrality is not easy and it’s not free… Public policy can accelerate this, and we are fully engaged [with government] to de-risk investments,” said Fitterling during the ACC meeting.
US LLDPE exports to the EU fall into my high-risk category
US LLDPE exports to the EU in 2021 totalled 928, 683 tonnes, 20% of total exports of 4.7m tonnes ,but the EU introduced a €800/tonne charge on unrecycled packaging waste in January 2021.
A carbon border adjustment mechanism could also be introduced by the EU in order to create a level playing field for local industries paying higher costs of carbon. The mechanism might apply to petrochemicals.
The EU has become a centre for innovation in refining (some people refer to “energy” these days rather than refining) and petrochemicals.
As gasoline and diesel demand decline due to electrification, refineries are being converted to make bio ethanol. Provided the land for food versus petrochemicals feedstock issues can be settled, bio ethanol to make ethylene may become a competitive and significant source of feedstocks in Europe.
Not all EU refining capacity is of course going to be shut down as some capacity will still be needed to make kerosene or jet fuel, with gasoline and diesel demand hardly likely to disappear entirely.
The unneeded gasoline and diesel fractions of the barrel look set to be increasingly turned into petrochemicals feedstock in, for instance, deep catalytic cracking units in the EU and elsewhere.
Significant investment by EU polymer producers in chemicals and mechanical recycling are also taking place despite lack of long-term clarity on the regulatory details. What matters more than this lack of clarity is the certainty that the EU will not change its overall direction away from sustainability.
We could thus see the EU petrochemicals industry moving further to the left of cost curves at the expense of the US, and Canada, the Middle East and other major exporters to Europe.
US and Canadian producers might, as I said, make big progress around managing carbon in their petrochemical complexes.
But how much progress will be made upstream in North America in reducing “fugitive” or accidental methane emissions during natural-gas processing? What about the carbon impact of transporting North American resins to Europe on container ships that use bunker fuel?
Sure, container ships might shift to biofuels or less carbon intensive LNG etc. But as petrochemicals companies are not freight operators, their ability to force the transition will be limited.
I think we can therefore categorise the 20% or so of US LLDPE exports that go the EU as high risk. It is the same story in other PE grades.
China has capability to completely reshape trade flows
In raw percentage terms, without the essential context, China didn’t seem like a big deal for the US LLDPE industry in 2021, as it only accounted for 7% of total exports or 318,012 tonnes.
But anyone studying the trade data properly knows that this misses the point. China accounted for around 60% of global net imports of LLDPE in 2021 among the countries and regions that imported more than they exported – way, way ahead of anywhere else.
As I’ve long argued, if China were to greatly increase its self-sufficiency over the next five to 10 years, this would displace lots of resins from South Korea, Saudi Arabia, Thailand and Singapore that now go to China.
These displaced resins would be battling with the US for market share in the EU – and in other big import markets such as Turkey, Africa and South and Central America.
“I believe China has the potential to move to complete petrochemicals and polymers self-sufficiency as part of its energy and petrochemicals transition,” said an industry source.
He believes this could be partly through giant new oil-to-petrochemicals units that take unwanted gasoline and diesel fractions to make petrochemicals feedstock as China electrifies most of its transportation.
I see Common Prosperity as very much connected with China’s energy and chemicals or petrochemicals transitions, as the policy pivot involves reducing carbon emissions and air and plastic pollution.
China’s complete self-sufficiency all the major petrochemicals therefore seems possible.
If complete self-sufficiency doesn’t happen, I can’t see any reasons why China wouldn’t go down the path of the EU in imposing a carbon border adjustment mechanism and plastic waste charges.
Conclusion: The cost curves of the future
I am absolutely not saying that the US PE producers won’t overcome these challenges.
What I’ve detailed above is also there to be debated This is always the point of my blogs. But what I see as beyond dispute is that sustainability is here to stay. The pressures can only build and build.
The chart at the beginning of this section shows the latest global LLDPE cost curve from our recently launched Plant Cost Evaluator.
Our cost curves can be broken down into all the regions in LLDPE, the other two grades of PE, polypropylene (PP), ethylene, propylene, methanol, styrene monomer (SM), paraxylene (PX), polyvinyl chloride (PVC) and mono-ethylene glycol (MEG).
Our weekly updated cost curves will evolve as industry economics evolve because of sustainability. Watch this space.