Chemicals and the Future Demand for Crude Oil

A recent report from the International Energy Agency emphasizes that the petrochemicals market is set to expand in the near future, and that the degree and consequences of this expansion constitutes a “blind spot” in most analyses of the energy industry. Such analyses seldom account for the pressures that will be created as chemicals, rather than fuels, become more of a driving force in the demand for and consequently the pricing of hydrocarbons.

“Petrochemicals” is a broad term encompassing plastics, solar panels, many textiles, detergents, fertilizers, etc. Plastics and fertilizers, in that order, represent the two largest groups.

The economics of fertilizers is a bone of contention among those who study food prices. As an observable fact, the prices of fertilizers and of foods rise and fall together. One argument is about the direction of causation. Do higher fertilizer prices -- perhaps triggered by increases in oil and gas prices -- cause higher food prices?  Or do higher food prices, rather, represent an increased return on investment for the farmers who have purchased fertilizer, leading to an increased demand for the stuff, in turn putting pressure on fertlizer prices?

What can be said in general terms is that markets seek equilibrium, and that in the course of that search causation works in both directions, up and down a supply chain.

The Reference Technology Scenario

Roughly 14% of the world’s crude oil (roughly 13 million barrels a day) now goes to the manufacturers of such materials, as feedstock. Roughly 8% of the world’s natural gas (or 300 billion cubic meters a day) goes likewise.

According to what the IEA calls its “reference technology scenario,” a baseline projection presuming no disruptive technological breakthrough, the market for crude oil, fuel and feedstock, is likely to grow by nearly 10 mb/d over the next 12 years. Importantly, of that growth, chemical manufacture will account for one third.

Looking further out, to 2050, the IEA estimates that the growth by 2050 will amount to 14 mb/d, and that petrochemicals will account for half of that.

Petrochemicals will likewise use up an additional 56 billion cubic meters of natural gas by 2030. That figure will rise to 83 bcm by 2050.

Africa and the Middle East

Demand for oil as a component of high value chemicals (HVCs) that can be generated from hydrocarbons is expected to be especially great in the Middle East and Africa in years to come. Africa will triple its HVC production volume by 2050 and the Middle East will double its own.

Many Middle Eastern countries are moving into the oil refining and petrochemical businesses as a way of increasing their role in the overall petroleum value chain and of diversifying their economies.

The conversion of crude oil into feedstock involves the creation of “steam crackers,” plants that crack hydrocarbons to produce ethylene. According to a report Nexant prepared for an EU/OPEC conference in 2014, the Middle East’s ethane crackers were then producing the lowest cost ethylene, based on ethane at $0.75 per billion Btu. This compares with $4 per billion Btu in the US and more than twice that in Europe.

The IEA does not refer specifically to the Nexant report, but it does say in a conclusory manner that the region enjoys a cost advantage over steam crackers elsewhere in the world, and it estimates that the feedstock portion of the demand for crude oil in the countries of that region will increase by 3 mb/d between now and 2050. 

Meanwhile, in the United States, the IEA expects that feedstock consumption of hydrocarbons will grow until about 2030, and then will enter “a period of gradual decline in the wake of tightening ethane supply from shale formations.” 

Plastics

The key driver of demand for HVCs is: plastics. Plastics consumption is set to have a “robust rate of increase … particularly for packaging and construction.”

The IEA’s RTS model posits that between now and 2050 there will be a 70% increase in the consumption of a “group of key thermoplastics,” that is, plastics that become pliable above a specific temperature and solidify upon cooling.  (This is a critical trait for injection or compression molding or extrusion.) This key group includes polyethylene terephthalate (PET), high-density polyethylene (HDPE), polyvinyl chloride (PVC), low-density polyethylene (LDPE), polypropylene (PP) and polystyrene (PS). It may grow from approximately 350 million tons (Mt) in 2017, to 559 Mt in 2050, an increase of nearly 70%.

In some of the mature industrial economies of the world, notably in Europe and Japan, plastics consumption is plateauing. This is in part at least because of the success of recycling efforts in those contexts. “Virgin plastic production requires inputs of HVCs, but recycling using plastic scrap does not,” says the report. Plastic recycling rates have been increasing in Europe for twenty years now.

In its baseline projection,  average rates of collection for recycling of the main thermoplastics will continue to increase in Europe, nearly doubling by 2050. But the global average collection rate will remain at less than 60% of that seen in Europe today, and will have “a limited impact … despite the significant efforts deployed.” 

Broad Strokes

A couple of broad strokes by way of conclusion will elucidate the IEA’s findings, and the direction of further analyses they suggest in order that the blind spot be filled in.

First, demand for plastics has nearly doubled since 2000. It can reliably be expected to continue to grow.

Second, and finally, the growing importance of non-fuel uses of oil and gas may well drive increasing integration along the petrochemical supply chain in years to come. The integration can happen in either direction, by upstream companies moving downstream or by downstream companies going upstream. The IEA references recent moves by Hengli Group, a major fabric company in China which “is not only building a petrochemical-oriented 400 kb/d refinery in Dalian, Liaoning province, but has been looking to purchase stakes in Abu Dhabi oil fields.”

Similarly, HengYi Petrochemical began life as a synthetic textile company, before it expanded into synthetic fibre manufacturing. It has continued its pursuit of integration, and is now building a refinery in Brunei, to produce petrochemical feedstock for export to China.

We can expect many more such projects and expansions, IEA suggests.

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