INSIGHT: Indorama flags peak oil demand in possible plant closures

HOUSTON (ICIS)–While Indorama Ventures reviews six sites for possible closure, it will consider signs that oil demand will continue growing in emerging Asia while peaking in Europe and North America – a trend that would alter the regional costs of a principal polyester feedstock, making it more attractive to import it from Asia than make it in the West.

Benzene, toluene and mixed xylenes (MX) are produced in refineries, and they are among the fundamental building blocks for the chemical industry. If oil demand peaks in the West, that would discourage refiners from expanding capacity or making the expensive investments needed to maintain existing production levels.

That would tighten supplies for these building blocks, affecting costs for chemicals as varies as phenol, styrene and paraxylene (PX).

By contrast, oil demand has yet to peak among emerging economies in Asia. There, refiners will continue to increase capacity to meet growing demand for diesel and gasoline. Supplies of aromatics should continue growing in those regions.

Indorama is taking the prospect of peak oil seriously because a key polyester feedstock, purified terephthalic acid (PTA), is made from PX, and PX is extracted from MX.

If Western PTA prices become too expensive, then it would make more sense for Indorama to shut down its high-cost plants in the West and purchase the feedstock from producers in Asia that can sell material at a lower price.

Indorama did not specify which plants it could close.

PEAK OIL IN WEST SPELLS END OF NEW REFINERIES
Indorama expects oil demand in the West will soon peak, perhaps in 2025 or 2026, said Aloke Lohia, Group CEO of Indorama. He made his comments in an interview with ICIS.

His comments are backed by statistics from the Energy Information (EIA). Outside of the post-COVID rebound in 2021, gasoline demand in the US has been running below pre-pandemic levels. In 2023, it reached a summertime peak of nearly 9.60 million bbl/day. That is more in line with summer levels in 2015.

Given the outlook for oil demand in the West, Indorama is betting that refiners will unlikely make the pricey investments necessary to increase capacity. “No one is looking to build a new refinery,” Lohia said.

Refiners could even shirk from making the investments needed to maintain existing capacity.

“We believe there will be de-growth in refineries in the West and hence high cost for crude oil derivatives that has hurt our competitiveness, especially in Europe,” Lohia said in prepared remarks.

Actions by refiners are bearing this out.

LyondellBasell plans to shut down its Houston refinery because it cannot justify the capital expenditures needed to keep the 100+ year old complex running.

Although ExxonMobil recently expanded its refinery in Beaumont, Texas, the last time a refiner made a comparable investment was in 2012, when Motiva expanded its refinery in Port Arthur, Texas.

Several refiners have converted existing units to process vegetable oils and similar feedstock to produce renewable diesel and sustainable aviation fuel (SAF).

LyondellBasell could convert its Houston refinery into a sustainability hub.

OIL DEMAND TO CONTINUE GROWING IN EMERGING ASIA
Unlike the West, Indorama expects oil demand to continue growing in emerging Asia. Governments in this part of the world have less aggressive schedules for reducing carbon emissions, with net-zero goals further out in the future, Lohia said.

Reducing carbon emissions boils down to renewable electricity. Instead of producing power by burning coal and natural gas, countries would do so with renewable sources such as solar panels, wind turbines and hydropower. Renewable electricity could also be used to generate heat.

Emerging economies have limited power production, and they want to use that electricity to rapidly industrialize, according to Indorama. De-carbonization and industrialization will compete for limited power generation.

That will place a limit on the expansion of charging stations needed for electric vehicles (EVs). Until emerging markets build out electrical infrastructure, they will still need petroleum-based fuels.

Consequently, emerging markets are giving themselves more time to reduce carbon emissions.

In China in particular, some companies could rush to complete new expansion projects before decarbonization deadlines take effect, Lohia said. China already has too much capacity, so this building spree will worsen the supply glut.

As it stands, crude oil processing in China reached 14.8 million bbl/day in 2023, an all-time high, according to the EIA.

Growing refining capacity should increase supplies of aromatics such as PX, the feedstock used to make purified terephthalic acid (PTA).

That should depress PTA production costs.

INDORAMA’S PLAN
Given the global outlook for chemical feedstock produced at refineries, Indorama is considering a plan that would reduce consumption of these feedstocks at its Western operations. Instead of producing feedstock at high-cost plants, Indorama would import the material from Asia.

Production lost from any closures would be offset by increasing utilization rates at Indorama’s low-cost plants.

The move would significantly increase Indorama’s overall operating rates and lead to double-digit returns on capital employed (ROCE) for the two businesses most exposed to MX, Combined PET (CPET) and Fibers.

US SHALE MAY SPARE DOMESTIC PLANTS
The calculus is less straightforward for Indorama’s US operations. Critically, these operations include methyl tertiary butyl ether (MTBE), an octane-boosting gasoline blendstock that is made with methanol and isobutylene.

In the US, both of these chemicals are made from shale-based feedstock, giving Indorama a substantial cost advantage. When gasoline prices rise, Indorama’s MTBE operations can earn the company very attractive margins.

Those fat MTBE margins would offset the higher costs involved with producing PTA from PX extracted from MX. MX is another octane-boosting blendstock, so its price tends to rise and fall with that for gasoline.

In effect, MTBE provides Indorama with a hedge against higher MX costs for its US PET operations.

MX is not the only feedstock used to make PET. The other is monoethylene glycol (MEG), a chemical made from ethylene.

US ethylene producers predominantly on ethane as a feedstock, giving them a cost advantage.

For Indorama’s PET operations in the US, shale gas gives the company a cost advantage on the MEG side and a hedge on the PTA side.

Thumbnail shows bottle made of PET. Image by monticello/imageBROKER/Shutterstock

Insight article by Al Greenwood