Oil industry eyes petrochemicals profits amid uncertain fossil fuel demand

Welcome back. For today’s newsletter, I look at an area of growing importance for global oil companies anxious about slowing demand for hydrocarbon fuels.

Petrochemicals, which go into plastics, polyester and many other cheap and lightweight commodities that underpin modern life, could buoy the profits of oil companies even after demand for transport fuels has peaked. I look at how the fight for market share in the petrochemicals business is heating up — as well as the threat it might face from green alternatives.

Thanks for reading.

Petrochemicals

Petrochemicals promise a future to oil companies

Petrochemicals hold the hope of the oil industry. With the US and Europe likely to have passed peak fossil fuel demand, owing partly to the rise of electric vehicles, oil and gas majors are preparing for a world in which transport fuels are no longer a big driver of growth.

Petrochemicals are woven through modern life, from packaging and detergents to medicines and fertilisers. The International Energy Agency predicts that oil demand will grow to 105.45mn barrels per day in 2030, from 102.24mn bpd last year. Within that growth, 2.8mn bpd — more than 85 per cent of the overall increase in demand — will come from petrochemicals, it says.

The fight for market share in petrochemicals is already fierce, and will matter enormously for some of the energy sector’s biggest listed companies. In the short term, US shale oil producers have been a prime beneficiary. But even as this seems to be an area of promise for the global oil majors, such as ExxonMobil and Shell, they need to consider how much of this demand they will actually be able to service — and how much of a threat they face from green alternatives.

The fight for the Chinese market

The explosion of demand for petrochemicals is overwhelmingly a Chinese story, reflecting that country’s vast industrial output. About 6.7mn bpd, or 6.5 per cent of all global oil use, currently goes to supply China with petrochemicals, according to Ciarán Healy, an oil market analyst at the IEA, making this the single largest contributor to world oil demand growth in recent years.

Widely used synthetics such as polyester and nylon are derived from petroleum, and fast-fashion ecommerce retailers such as Shein and Temu have been strong drivers of demand.

Petrochemicals may also be crucial for the green energy transition. Electric vehicles use more thermoplastics, foams, fibres and rubber pads than internal combustion engine vehicles, David Yankovitz, the US chemical practice leader at Deloitte, told me. To make EVs more lightweight, carmakers are substituting plastic resins for metal parts. All told, Yankovitz said, roughly three-quarters of all emissions-reduction technologies require chemicals, most of which are oil-derived.

China has met much of that demand through domestic processing of imported crude. Between 2019 and the end of 2024, China will have built as much capacity to produce olefins, which are used in plastic, as currently exists in Europe, South Korea, and Japan, the IEA has forecast. But the US shale oil boom has also formed a mutually reinforcing “symbiosis” with growing Chinese demand for petrochemicals, Healy told me. Between 2019 and 2023, the US was the only major producer to boost its polymer exports into China, according to ICIS data.

Over the same period, Healy said, Gulf producers lost market share in major classes of petrochemicals, notably natural gas liquids such as ethane and propane.

But Gulf producers are vying fiercely for Chinese market share. China is the biggest market for Saudi crude oil, and will be critical to state oil company Saudi Aramco’s ambitions to convert more than one-third of its current oil output into petrochemicals by 2035.

Aramco has elbowed into Chinese refineries, acquiring a 10 per cent stake last year in Shenzhen-listed Rongsheng Petrochemical for $3.6bn, and entering talks to buy a stake in Hengli Petrochemical, a top Chinese producer of chemicals for plastics. Last year, Aramco-owned S-Oil broke ground on a $7bn petrochemical factory in South Korea.

Adam Hanieh, a professor of the political economy of the Middle East at the University of Exeter, argues that this is part of the rise of the “East-East hydrocarbon circuit”. There is a tendency to dismiss Middle Eastern countries’ investments in downstream diversification, he said, and “to treat the Gulf as simply oil spigots”. But he pointed to a recent spate of investments in refining capacity as evidence of Gulf states’ long-term strategy.

US oil majors have also been part of the action. Exxon is building its own petrochemical complex in southern China’s Guangdong province, as well as expanding its own chemical production at existing facilities on the US Gulf Coast.

The drive for greener options

Amid tough competition for the fastest-growing segment of global oil demand, some are betting that there is scope for further disruption — replacing petrochemicals with greener alternatives.

At a refinery south-east of Paris, which was originally configured to take in crude oil, TotalEnergies is building a recycling facility. UK petrochemicals group Ineos, run by billionaire Sir Jim Ratcliffe, is developing a new ethylene cracker in the port of Antwerp that it claims would be the greenest in Europe, representing “the largest investment in the European chemical sector for a generation”.

Meanwhile, in the US a crowd of start-ups have emerged that are seeking to convert biomass such as corn into chemicals. One such start-up, Houston-based Solugen, last month received a $213.6mn loan guarantee from the US Department of Energy’s Loan Programs Office to finance a new plant in Minnesota that will take in sugar from Chicago-based Archer Daniels Midland.

Challenges for these companies include transportation, scale and the power of oil incumbents they are seeking to displace, which is one reason they have been eager to team up with politically influential US agribusinesses such as ADM.

Whether such bio-based products are greener than their oil-derived predecessors is also a matter of debate, partly because of the challenges of sourcing biomass sustainably. But chemicals that power modern life — including green energy — will have to come from somewhere. “We may decarbonise, but there’s no scenario in which we dematerialise,” Yankovitz said.

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