INSIGHT: Chemicals demand for crude to fall as energy transition takes hold

Author: Nigel Davis

2020/09/14

LONDON (ICIS)--This is BP’s latest view of how demand for oil as a feedstock for plastics and man-made fibres will develop over time.

BP Energy Outlook 2020

The UK oil major on Monday released its latest Energy Outlook which has raised the question among commentators of ‘peak oil’ and how oil demand might not recover to pre-coronavirus pandemic levels.

The outlook presents some of the detail in thinking behind BP’s transformation into a much more customer-focused international energy company.

It is the detail that is informing current strategy, which includes a 40% reduction in oil and gas production.

The scenario-based analysis looks at how the battle against climate change might play out and impact BP’s primary businesses.

The oil markets are changing as energy demand shifts away from oil-based hydrocarbons and coal towards natural gas and renewables. Increasing efficiency and the electrification of road transportation and the shift to renewables herald great change.

BP presents three scenarios, as usual, but its latest analysis shows unprecedented growth in renewables over the next 30 years, supported by electrification of the energy system and considerable diversification of the energy mix.

This, in turn, will bring increased competition and greater customer choice.

This chart shows how the energy transition might look under BP’s Rapid scenario that “assumes the introduction of policy measures, led by a significant increase in carbon prices, that result in carbon emissions from energy use falling by around 70% by 2050 from 2018 levels.”

BP Energy Outlook 2020

The underlying trends outlined in the BP scenarios are driven by the rising cost of carbon and climate change-related legislation.

Customer habits are changing too and, if they shift radically, will intensify the energy transition.

But does the coronavirus pandemic represent a tipping point for the energy markets?

In two of the three BP scenarios (given the titles: Business as Usual, Rapid and net Zero), oil demand does not reach pre-coronavirus levels over the period to 2050.

Changing consumer habits – including more home-working – will impact oil demand and the wider energy mix.

Of greater importance is the negative impact of the coronavirus pandemic on developing and emerging economies that will be felt over many years. Oil will continue to be the major component of the energy mix, requiring significant investment of the next 10-15 years, but demand growth is under pressure.

A poll conducted following a BP webcast on Monday produced the following result.


-
CHEMICALS DEMAND DOWN
The outlook raises questions on how the feedstock mix for chemicals will be influenced through the energy transition and, also, how the circular economy will impact plastics and fibres demand.

The consumption of refined products as feedstocks for petrochemicals is an important source of incremental demand for fossil fuels but is impacted by environmental pressure.

Even under BP’s Business as Usual scenario, the consumption growth rate (into petrochemicals, bitumen and fertilizers) drops to 1.1%, less than half the rates seeN in the past 20 years (2.7%/year).

In its Net Zero scenario, the use of what BP calls “non-combusted fuels” by 2050 is 25% below current levels.

BP, which at the end of July announced the sale of its petrochemicals business to INEOS, clearly sees the influence of oil on chemicals, and of chemicals on oil demand, waning.

“The actions to reduce, reuse and recycle plastics means that the level of oil used in the production of plastics by 2050 is around 3m bbl/day lower in BAU [scenario] and 6m bbl/day in Rapid relative to an extrapolation of past trends linked to the growth in economic activity and prosperity,” the Energy Outlook said.

“These trends are even more pronounced in Net Zero, with oil demand by 2050 2m bbl/day below current levels and 10m bbl/day below an extrapolation of past trends.”

Front page picture: A pumpjack at sunset in California; archive image
Source: Etienne Laurent/EPA-EFE/Shutterstock

Insight by Nigel Davis