Investors at risk as transport fuels set to decline amid 100 countries calling for plastic production cuts

LONDON, 5 December – Oil majors are making risky bets that growth in petrochemical demand will offset the imminent decline in oil demand as the global rollout of electric vehicles gathers pace, finds a report from the financial think tank Carbon Tracker released today.

It warns investors and financiers that petrochemical demand would have to consistently grow at 3.9% a year out to 2035 to make up for declining demand for oil in transport fuels under a moderate-paced transition in line with announced government policies,[1] a growth rate that is at the top end of the range of the industry’s expectations. Companies that appeal to petrochemicals to justify maintaining or expanding oil production risk overinvestment in assets that become financially stranded in an oversupplied market.

Governments are responding to consumer concerns by rolling out tougher regulations on the manufacturing, use and waste management of chemicals and plastics. Last week saw negotiations in South Korea for a UN Global Plastic Pollution Treaty, where nearly 100 nations, including the UK and EU, called for a legally binding pledge to reduce plastic production, although agreement was blocked by oil-producing nations.

Saidrasul Ashrafkhanov, Oil & Gas Associate Analyst and report author, said: “Companies are gambling that petrochemicals will save the oil industry from decline, but if they overestimate future demand, they risk locking in long-term production that’s unlikely to be profitable, as revenues fail to meet expectations. Shareholders will be the ones to take the hit.”

Companies expect demand for plastics, fertiliser and other petrochemicals to grow strongly, at 2-4% a year to 2030 and beyond, driven by higher GDP and a rising global population. But GDP growth has been slowing since before the financial crisis and increasingly severe climate change impacts will act as a further drag.

Oil companies assume petrochemicals will prop up oil production, but feedstocks are largely sourced from Natural Gas Liquids (NGLs) – a by-product of gas extraction. Shell and TotalEnergies are among companies that plan to increase gas production, so a greater supply of NGLs is likely to limit demand for oil in petrochemical production anyway.

The report also notes that only a small proportion of crude oil can currently be used for petrochemicals; increasing this to the levels targeted by companies would require expensive upgrades to refineries with technologies that are not yet commercially proven at scale.

Ashrafkhanov said: “Investing in refineries is also risky. If growth in demand for petrochemicals falls short of expectations, this will squeeze profits and force plants with the lowest margins to cut capacity or shut down. Companies that assume refineries can be repurposed to serve the petrochemicals market could be left with assets that become stranded if this turns out to be unfeasible technically or unviable commercially.”

Declining demand for fossil fuels and growth in cleaner alternative fuels threatens to render refining assets unprofitable and obsolete, forcing the early retirement of these assets. See our report published this week on Asset Retirement Obligations: https://carbontracker.org/reports/off-the-record/

General Electric’s unsuccessful bet on thermal power in the mid-2010s should serve as a warning, the report says. The company invested in the expectation that power generation would grow by 3% a year. It was forced to write down $23 billion after global demand for gas turbines collapsed in 2017 and saw a 74% drop in its market value.

Road transport accounts for over half of all oil demand. Bloomberg expects this to peak at 49 million barrels a day in 2027 before falling rapidly to 35 million by 2040.[2] Bp’s latest Outlook sees the peak earlier, in 2025, and a steady decline thereafter.

Oil and gas companies are now pivoting towards petrochemicals in three main ways: 1) maintaining or increasing oil production to serve this market, 2) investing in refineries to supply petrochemical feedstocks, and 3) expanding down the value chain and increasing investments in chemical production itself.

For example, ExxonMobil claims: “Global chemical demand is expected to grow faster than the global economy, driven by demand for products like cell phones and medical supplies, as well as products necessary to preserve food and improve hygiene.”

Mike Coffin, Head of Oil, Gas and Mining, said: “Transport fuel demand for oil and gas is around four times larger than it is for petrochemical feedstocks. As fuels demand plateaus and starts to decline this decade, petrochemical demand growth will increasingly struggle to offset fuels decline, given this scale difference. Investors must challenge the assumptions underlying corporate forecasts of oil demand, and the commercial viability of new capital developments across the petrochemical value chain.”

The International Energy Agency expects the growth of petrochemicals to largely track growth in the global supply of NGLs, leaving little room for increased supply from oil. It projects that by 2030 there will be an 8 million barrel a day oil surplus, which would drive down prices.

As well as challenging oil and gas companies’ assumption that petrochemical demand will grow strongly and prop up oil production, Petrochemical Imbalance challenges two other common assumptions underpinning investment plans.

Companies assume it is commercially viable to increase yields of chemical feedstocks from oil. Typically only 8-12% of a barrel of oil yields light fractions which are suitable as petrochemical feedstock and these are normally sold at a loss. Exxon, Shell and others now aim to reconfigure refineries to increase this yield and Saudi Aramco aims to raise it to over 50% and potentially to even 70-80%.

However, the report says the technology to break down heavier fractions of crude oil for petrochemical use is unproven at scale and likely to involve significant costs. Even if this is technically feasible companies need to demonstrate that it is economically viable and cost competitive with the NGLs associated with gas production.

Companies assume that refineries can easily be repurposed to supply petrochemicals. However, chemicals come in many forms – industrial gases, liquids like detergents, and solids like plastic pellets – which makes shipping much more complex than an oil terminal dealing with standardised liquid products.

Companies must also take into account the geographical requirements of the supply chain. Refiners with easy access to growth markets in China and the US may see some demand for their products but will struggle in low-growth markets like Europe, where delivery of naphtha has dropped by up to 30% since 2019 and chemical plants are failing to break even.

Overall, the report says, companies give little detail of how they expect demand for petrochemicals to drive demand for oil and gas and influence prices. Investment plans for refining and chemicals are also often undifferentiated. Investors and financiers should challenge companies’ assumptions and valuation models and policymakers should demand greater transparency.

“Since it is already difficult to estimate the transition risks and environmental impact in the legacy segments of oil and gas, where information is in greater supply, the lack of transparency about petrochemicals should be of major concern to investors and financiers,” it says.

 

When embargo lifts the report can be downloaded here: https://carbontracker.org/reports/petrochemical-imbalance/

 

For further information and to arrange interviews please contact:

Stefano Ambrogi    sambrogi@carbontracker.org     +44 7557 916940

David Mason      david.mason@greenhousepr.co.uk    +44 7799 072320

Joel Benjamin    Jbenjamin@carbontracker.org          +44 7429 637423

 

About Carbon Tracker

The Carbon Tracker Initiative is a not-for-profit financial think tank that seeks to promote a climate-secure global energy market by aligning capital markets with climate reality. Our research to date on the carbon bubble, unburnable carbon and stranded assets has begun a new debate on how to align the financial system with the energy transition to a low carbon future. www.carbontracker.org

[1] IEA Announced Pledges Scenario

[2] BloombergNEF, Electric Cars Have Dented Fuel Demand. By 2040, They’ll Slash It. 15-8-23