Home Blogs Asian Chemical Connections The scale of plans to turn oil into petrochemicals may radically reshape this industry

The scale of plans to turn oil into petrochemicals may radically reshape this industry

China, Company Strategy, Economics, Environment, Europe, European petrochemicals, Fibre Intermediates, Middle East, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, Singapore, South Korea, Sustainability, Taiwan, Thailand, US
By John Richardson on 26-Nov-2023

By John Richardson

RUMOURS AS to the scale of what’s being planned to turn oil into petrochemicals are truly scary for the smaller, non-integrated existing players.

I cannot tell you the size of the new olefins and derivatives investments that I’ve heard about as I am a long, long way from confirming the details.

Suffice to say that if what I’ve heard is true (and I think it could well be because it’s come from reliable sources), what is today the third quartile of global steam crackers on the global cost curve might shift to being the fourth quartile – or right off the edge into economic “no man’s land”.

Consolidation may have to follow, which I’ve discussed before. It’s just that given what I’ve recently heard, the size of consolidation might be bigger than what I had anticipated.

Sorry to be so vague, but I am an old school journalist. Unless I see something confirmed in black and white, I won’t print it. But I am happy to discuss, on a confidential basis, with ICIS clients some of the details of what I have heard, without, of course, disclosing my sources.

At a high level, what appears to be happening is that Saudi Aramco wants to hedge against the forecast declines in oil demand resulting from the electrification of transport, biofuels and increasing fuel efficiency.

“Growth in the world’s demand for oil is set to slow almost to a halt in the coming years, with the high prices and security of supply concerns highlighted by the global energy crisis hastening the shift towards cleaner energy technologies,” wrote the International Energy Agency (IEA) in a June 2023 report.

Based on current government policies and market trends, the IEA said that global oil demand would rise by 6% between 2022 and 2028 to reach 105.7m bbl/day. But despite this cumulative increase, annual demand growth was expected to shrivel from 2.4m bbl/day this year to just 0.4m bbl/day in 2028, putting a demand peak in sight.

“In particular, the use of oil for transport fuels is set to go into decline after 2026 as the expansion of electric vehicles, the growth of biofuels and improving fuel economy reduce consumption,” the IEA continued.

The risks that apply to Saudi Arabia and Aramco obviously apply to other countries and their oil-producing companies. It will be thus interesting to see  whether other oil producers go down the same route of maximising petrochemicals feedstocks from refineries.

As I discussed in my detailed blog post on technologies to increase petrochemical feedstock output from refineries, there are the well-established processes that slightly increase yields versus the breakthrough processes that can be truly described as crude-oil-to-chemicals (COTC).

Aramco says on its website that aims to hit 70-80% conversion of a refinery’s output into feedstocks. Aramco COTC technologies already developed are understood to yield lower rates than this, but higher rates of conversion compared with the older “tweaks” to existing refinery technologies and configurations.

One crude-oil-to-chemicals (COTC) project alone – the Saudi Aramco/SABIC 400,000 bbl/day Ras Al-Khair project in Saudi Arabia – gives a pointer towards the scale of what could happen next: a potential 9m tonnes/year of chemicals and base oils production from one complex.

Along with the sheer scale of what’s being rumoured, there is the issue of how these developments could change the perceived value of each tonne of petrochemicals.

Will this value be reshaped by the alternative of leaving oil in the ground? In other words, will pricing not be set by the traditional mechanisms of petrochemical supply, demand and production costs?

We also need to consider the possibility that a greater focus by refiners on petrochemicals output will create a new class of Supermajors.

These new Supermajors may also include the advantaged ethane-based players. Substantial increases in ethane-based ethylene capacity are also being planned.

The Supermajors would be made of up highly efficient, technically adept and very experienced companies.

The demand and China self-sufficiency issues

Rumours of this big wave of new capacity are occurring in parallel with the changes that have taken place in China.

The latest ICIS data for 2023 on the country’s polyethylene (PE) and polypropylene (PP) demand point to growth of 1-3% over last year, which I will detail in a later blog post.

Because of debt and demographic factors, I don’t see any circumstances under which, during the medium term at least, the country’s petrochemicals demand growth can return to the older much higher levels.

And remember that today’s record levels of oversupply appear to be largely the result of earlier expectations of long-term China petrochemical growth of 6-8% per year. This was the basis on which many new projects were sanctioned.

Then we have the effects on demand in the West of ageing populations and growing sustainability pressures (“less is more”).

For the developing world outside China, the old logic of booming demand resulting from millions more people moving between income thresholds – and thus being able to say, afford their first motor scooter or TV – needs to be challenged.

Nobody knows the full extent of the effects of climate change on growth in the developing world.

But we do know that poorer countries are already suffering from food insecurity partly caused by the increased incidence of floods and droughts; and that countries with less resources are more vulnerable to episodic interruptions to growth resulting from climate change.

The thing about demand in general is that it has become far harder to measure. I believe that the old models using multiples over GDP and per capita consumption to measure increases in petrochemicals consumption no longer work.

“Nvidia [one of the world leaders in artificial intelligence] has announced plans to build a digital twin of Earth, called ‘Earth-2’, a computer model that the company hopes will be able to predict climate change at a more regional level, several decades in advance,” wrote The Economist in a 23 September article.

Imagine if this ambition were to be realised. We could accurately calculate the demand for flood and drought prevention materials, made from petrochemicals, country by country and time period by time period.

We need to increasingly harness AI. AI gives our industry a tremendous opportunity to be more precise about when, where and what to produce. The levels of complexity have moved beyond the capacity of our unassisted brains to make reasonable forecasts

More prosaically and more immediately, remember the chart from my 15 November blog post.

I am hearing, again unconfirmed, that China wants to be much closer to petrochemicals self-sufficiency by 2030 – the end of its 15th five-year-plan (2026 until 2030).

There are said to be new projects to this end that haven’t been announced yet, and speculative ones that may be confirmed. Confirmed projects by Aramco, some COTC, look set to play a significant role in raising China’s self-sufficiency.

As the chart tells us, if China were to go all the way to reaching a balanced position in the above products, the disruptions to the global petrochemicals industry would be huge.

Under our base cases, which assume China will still be a long way from self-sufficiency by 2030, we estimate that no less than 81% of total global net imports of paraxylene (PX) and 66% of ethylene glycols (EG) would be derived from China.

In the case of polyolefins, there are big net import markets aside from China. Might China therefore decide to strategically compete in these other markets or instead just move to more or less balanced positions with occasional tactical exports to deal with temporary oversupply?

If balanced positions were to be the government policy, then China would still have to occasionally import to cover outages and unexpected surges in demand.

On a cost-per-tonne basis, it would seem logical that these imports would be largely met by the new Supermajors.

This could help force major consolidation in Singapore, South Korea, Thailand, Taiwan and Japan which are heavily dependent on exports to China.

When it comes to PX and EG, there are no significant net import markets other than China. So, balanced positions seem the only option

If this were to happen, all but the most advantaged PX and EG players outside China would be under a great deal of pressure.

The battle for carbon advantage and COP28

Aramco’s COTC plants and the ethane-based new projects are aiming to minimise the amount of carbon produced per tonne of petrochemicals and polymers through carbon capture and storage (CCS) and electric furnaces to heat up steam crackers. The furnaces would run on renewable energy.

If the EU’s carbon border adjustment mechanism (CBAM) were to apply to organic chemicals and polymers by 2030, which is under consideration by the EU, then the Middle East may have an export advantage to Europe over higher carbon plants in countries such as South Korea. 

South Korea exports significant quantities of PE and PP to Europe. Europe is the world’s second-biggest PE net import market behind China and the third biggest in PP, so absent China, the importance of Europe would increase.

Higher costs of carbon abatement than in Saudi Arabia in particular, along with the age and scale of assets, could force a significant proportion of the European olefins and polyolefins industry to shut down.

Then there is the US where cracker operators may also have a carbon export advantage to Europe. This is perhaps provided any second Trump presidency doesn’t roll back much of the Inflation Reduction Act that is incentivising CCS.

But given that these rumoured huge investments in refinery-based petrochemicals are still  based on crude oil, to what extent would they really mitigate the climate crisis?

Might a data war begin between those backing lower-carbon polymers and those against?

These are important questions to consider as we head towards COP28 which takes place in Dubai between 30 November and 12 December.

Ahead of COP28, the IEA published a report on 23 November which said: “Oil and gas producers face pivotal choices about their role in the global energy system amid a worsening climate crisis fuelled in large part by their core products.”

The oil and gas sector – which provided more than half of global energy supply and employs nearly 12m workers worldwide – had been a marginal force at best in transitioning to a clean energy system, said the IEA.

“Oil and gas companies currently account for just 1% of clean energy investment globally – and 60% of that comes from just four companies,” the IEA added.

“The oil and gas industry is facing a moment of truth at COP28 in Dubai. With the world suffering the impacts of a worsening climate crisis, continuing with business as usual is neither socially nor environmentally responsible,” the report continued.

Perhaps the carbon abatement efforts taking place in the Middle East, the US and Canada, will go some way towards addressing the IEA’s concerns.

But, as I said, we may end up in a data war between different full lifecycle methodologies with very uncertain outcomes.

Conclusion: another scenario is a major wave of protectionism

Assuming that the arguments over lifecycle analysis are won by those opposing the “business as usual” oil industry, including those trying to convert more oil into petrochemicals, this could be one reason for more trade barriers.

Another reason may be the realisation by politicians that for every one job lost because a refinery and petrochemical complex shuts down, half a dozen or so would be lost downstream.

In such circumstances, we may not see the emergence of a new breed of Supermajors.

We could instead see a much more regionalised petrochemicals world where local plants increasingly supply local markets however inefficient they appear on standard global cost curves.

The above slide, illustrated by the latest ICIS ethylene cost curves for Europe, South Asia and Southeast Asia and Northeast Asia, summarises these two scenarios: A petrochemicals world dominated by Supermajors, especially those running COTC plants, or one where greater regional cooperation (more on this in later posts) and increased protectionism allow older, smaller and less carbon efficient plants to survive.

And, of course, the outcome could be between these two extreme scenarios.

Confused? You should be as this is the right response. Any other reaction would show that you haven’t fully grasped the complexities of the new petrochemicals world in which we live.