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How Europe can avoid “sleepwalking” towards offshoring of petrochemicals

Europe, European economy, European petrochemicals, Middle East, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, US
By John Richardson on 27-Feb-2024

JIM RATCLIFFE, INEOS chairman and majority owner, earlier this month sent a letter to European Commission President, Ursula von der Leyen, in which he said that Europe was “sleepwalking towards offshoring its industry, jobs, investments, and emissions”.

The letter was sent as chemical industry leaders and trade union representatives met von der Leyen and Belgium’s Prime Minister, Alexander de Croo, at the BASF site in Antwerp to press home their concerns and launch the ‘Antwerp Declaration for a European Industrial Deal”.

As my colleague, Nigel Davis, wrote in this 21 February 2024 ICIS Insight article: “The EU has an industrial policy, and it is enshrined in its Green Deal and other objectives outlined by Brussels – often at very great length. But ambition from within the bloc to support industry has by no means been met with effective action either at the European or the member state level.

“In the midst of Europe’s economic slump and energy crisis, the lack of industrial ambition within the EU’s framework policies has helped shift companies’ strategic thinking. It has put brakes on investment and forced multinationals to look elsewhere. Companies may not necessarily want to shift further from the European market, but the reality is that they are.”

In his letter, Ratcliffe said that investment in Europe had been driven away by carbon taxes while the US had used a carrot and stick approach to improve its carbon footprint.

In the same letter, Ratcliffe warned that there would be little left of the European chemicals industry if the European government did not address the high energy costs, carbon taxes and lack of renewal that impacted the sector.

INEOS is investing heavily in its Project One cracker project in Antwerp but has faced environmental obstacles brought to court. Ratcliffe suggested that they demonstrate the flawed European approach.

Nigel Davis added in the February 2024 ICIS insight article: “The EU has pushed its green, low carbon agenda hard and sought to carry the energy intensive industries with it but confusion and stasis on the energy front, including the inability to push harder and faster for local and regional renewable energy capabilities is a major headache for producers.

“To meet climate neutrality by 2050, and even earlier targets, investment in renewables will have to increase markedly. Permitting of energy projects will have to accelerate.”

US certainty, at least for the time being, on the price of carbon

Returning to the theme of the US versus Europe, the US’s giant Inflation Reduction Act (IRA) includes a raft of green incentives, including support for green hydrogen and carbon capture and storage (CCS) projects.

“The IRA will probably accelerate some activity in the US, there’s no doubt. Hopefully, what that does is allow technologies to be de-risked, the cost of technologies to be reduced and the attractiveness of these investments to improve,” said Mike Wirth, CEO of Chevron, in this 6 February 2023 ICIS Insight article.

The key word here seems to “de-risking”: Enabling US companies to make investments in green technologies because of regulatory clarity regarding the price on carbon.

“The IRA increases the 45Q tax credits from up to $35/tonne for captured CO2 used in enhanced oil recovery (EOR) or in certain industrial applications, and up to $50/tonne for CO2 in secure geological storage, to $60/tonne and $85/tonne, respectively, according to US law firm Gibson Dunn,” said the same February 2023 Insight article.

This had led to big plans for green investments. BP, for example, was quoted in the same February 2023 article as saying that US CCS deployment could be more than 100m tonnes/year by 2035 and close to 400m tonnes/year by 2050.

There is a risk that if Donald Trump wins a second term in November, some if not most of the IRA’s green provisions will be rolled back. But as things stand today, the “stick” of what are seen as high EU taxes on carbon appears to compare very unfavourably with the US “carrot” represented by the IRA.

Sadly, as I shall discuss next, the US is far from being the only overseas challenge faced by Europe.

Saudi Arabia’s lower carbon and big new capacity additions

Saudi Arabia is investing heavily in CCS with the Kingdom said to have geology ideal for making CCS work. Saudi power stations that run on fuel oil are being converted to run on renewables to take advantage of vast quantities of sunlight. New cracker projects set to employ electric rather than gas-based furnaces.

If the EU follows through on its plans to extend its carbon border adjustment mechanism (CBAM) to organic chemicals and polymers by 2030, one can envisage a situation where bigger of volumes lower-carbon imports arrive in Europe from the Middle East. The imports could effectively beat the CBAM.

Lower-carbon Middle East imports may place a strain on European plants where the cost of decarbonisation is said to be high.

And as I’ve discussed before on the blog, Saudi Aramco’s ambitions in crude-oil-to-chemicals (COTC) are on a scale that I don’t think our industry has fully got its head around. This is both in Saudi Arabia and overseas, especially in China where Aramco look set to play a big role in enabling China to reach self-sufficiency.

Saudi Aramco has said that it wants to convert up to 4m bbl/day of liquids into chemicals by 2030.

Do the maths and this would add 28m tonnes/year to global ethylene capacity beyond what has already been announced and is therefore in the ICIS Supply & Demand Database. This would raise global ethylene capacity by 11% versus our current assumptions for 2024-2030.

In propylene, the same mathematical exercise suggests that an additional 16m tonnes/year of capacity could be added by Aramco by 2030, raising global capacity by a further 15%.

COTC plants will of course be superefficient on cost-per-tonne basis, placing further strain on older and smaller European assets.

Here is the thing as well: New COTC complexes will make a lot of highly competitive fuels that could be exported to Europe, placing pressure on upstream European refinery assets that would add to the economic challenges of downstream petrochemical plants.

Here is further thing: COTC projects are being pursued to support oil production because of the threats to crude demand from electrification of transport, fuel efficiency and biofuels.

The value of making a tonne of petrochemicals could in future be linked to the alternative for Saudi Arabia of leaving oil permanently in the ground, which is obviously zero. This could place yet more pressure on the European petrochemicals sector.

The vast existing oversupply Europe needs to contend with

The above chart (and it’s a very similar story in propylene, butadiene, benzene, toluene and mixed xylenes) is a reminder of the vast oversupply that already exists, even without the addition of unannounced COTC projects.

What the chart shows is our estimates for global ethylene operating rates from now until 2030. The average of 79% would compare with the very healthy 1990-2023 average of 88%.

How would we get back to 88%? Annual average capacity would need to grow at just 800,000 tonnes/year in each of the years between 2024 and 2030. This is versus our base case assumption of 7m tonnes/year of capacity growth during each of the years. Capacity growth would thus have to be 90% lower.

As the table below shows, even without any unannounced COTC plants there’s a great deal of confirmed advantaged ethylene capacity due onstream by 2030. So, if we are to get back to 88% operating rates, plants elsewhere would have to shut including perhaps in Europe.

Supermajors versus Deglobalisation

The above slide adds further depth and breadth to the challenges facing Europe’s petrochemicals industry which have highlighted above.

I believe that by 2030, we will see one of two scenarios in petrochemicals: Supermajors or Deglobalisation.

Under Supermajors, the petrochemicals industry is dominated by the oil and gas majors. The capacities they build (as mentioned earlier, there will be a lot more new plants than we know about today) make bringing global markets back into balance even harder than is the case now.

Recycling targets are delayed or are abandoned because of competition from low-priced polymers. The best way to reduce carbon is seen as importing petrochemicals and polymers from carbon-efficient overseas plants.

Under Deglobalisation, markets become much more regional as governments intervene to prevent major petrochemical shutdowns. This is to protect employment and ensure local supply of refinery products.

“Local for local” petrochemical supply chains also receive strong regulatory backing because they are seen as the best way to hit recycling targets and reduce carbon.

These are of course extreme scenarios, meaning that the outcome is likely to be somewhere in between the two extremes.

But wherever we land, I see the following four results as inevitable:

  1. We will continue to face record-high levels of oversupply because most of the industry got the scale of China’s demand growth and capacity additions wrong. Pressure will be on Europe, Singapore, South Korea, Taiwan and Japan to close capacity down.
  2. There will be no more big volume imports by China in polyethylene, polypropylene, paraxylene and ethylene glycols by 2030.
  3. Because of China’s ageing population, its unsustainable debts and the geopolitical split with the West – and because of the global impact of ageing populations, sustainability and the climate crisis – we have entered a period of significantly lower petrochemicals demand growth.
  4. The post-Berlin Wall “peace dividend” that had reduced defence spending is over. Less money will be available to spend on welfare and infrastructure as defence spending returns to Cold War levels.

Conclusion: Decision time for Europe

To borrow Jim Ratcliffe’s phrase, until or unless all the above is fully factored into the thinking of European petrochemical companies and the region’s legislators, Europe will continue “sleepwalking towards offshoring its industry, jobs, investments, and emissions”.

Neither Supermajors nor Deglobalisation are inevitable. Outcomes will instead be set by many individual choices that are coordinated in the rights ways. In other words, it is within the gift of Europe to wake up from the Ratcliffe’s “sleepwalk”.

What should European petrochemical companies regardless of the big picture outcome?

Rigorous scenario planning is essential. Start with the Supermajors and Deglobalisation assumptions and every six months study the actual events to adjust your tactics, based on how close we are to either result.

Companies need to “make their own demand” by more forcefully arguing the case for the societal and environmental value of what they produce (while, of course, also ensuring that what they produce has strong social and environmental values!).

A deeper dive into the opportunities in different end-use markets and geographies is the key. Let’s take wire-and-cable grade low-density PE (LDPE) as an example.

A lot more electricity transmission in Europe will have to be built to distribute renewable energy, which of course is an environmental gain – and elsewhere in the world. Could European wire-and-cable LDPE producers be a leader in providing these resins to the developing world?

This is a very different approach than during the 1993-2021 Supercycle when booming demand was guaranteed. All producers had to do as ensure there was enough supply, preferably with low feedstock costs and efficient logistics.