The pandemic hit the chemical-driven profit margins of integrated oil companies and petrochemical manufacturers to the point that many firms slashed capital expenditures and deferred petrochemical projects for better times.
The safe bet on petrochemicals suddenly became not so safe as demand from industries slumped with COVID-19, and the crash in oil prices added to the pressure on margins. In the United States, petrochemicals supply had exceeded demand even before the pandemic, and the coronavirus further skewed the balance into an oversupply.
Major U.S. petrochemical manufacturers continue to believe that strong demand recovery in the latter part of 2021 and from 2022 onwards will continue to underpin a strong petrochemical business going forward, despite the pandemic-induced slump this year.
OPEC also believes that it will be none other than the petrochemicals sector that will be the single largest growth driver of global oil demand through 2045—even if total world oil demand plateaus before then.
While the petrochemicals industry and OPEC appear optimistic about the future of the sector, the growing awareness about plastic waste and the drive toward a circular economy could undermine the long-term prospects of what, until recently, was considered a safe bet through oil price cycles and the energy transition. Related: Three Energy Stocks To Watch On Election Day
COVID-19 Defers U.S. Petrochemical Projects
Pressured by low margins amid low demand, petrochemical manufacturers slashed capex, and some deferred investment decisions or paused ongoing construction of some projects in the United States.
Net incomes for Q1 2020 at Dow and LyondellBasell, for example, crashed compared to the same period of 2019, while many chemicals manufacturers and oil majors from Dow Inc and Shell to ExxonMobil slashed capex for 2020 by between 11 percent and 43 percent, Wood Mackenzie has estimated.
Chevron Phillips Chemical Company (CPChem)—a joint venture of Chevron and Phillips 66—has deferred the final investment decision for its US$8-billion U.S. Gulf Coast project with Qatar Petroleum, Phillips 66 said at the end of July. Initially, Chevron Phillips Chemical and Qatar Petroleum had expected a final investment decision no later than 2021.
Due to the pandemic, FG LA LLC, part of Formosa Plastics Group, has deferred major construction at its US$9.4-billion Sunshine petrochemicals project in Louisiana, FG LA LLC director of community and government relations, Janile Parks, told ICIS this week.
The biggest oil-producing company in the world, Saudi Aramco, which is also betting big on petrochemicals, is reportedly reviewing its plans to add a US$6.6-billion petrochemical unit at the biggest refinery in the United States. Due to the oil price crash, Aramco is slowing down its petrochemicals project at the Motiva refinery in Port Arthur, Texas, and is also re-considering a natural gas project with Sempra Energy, also in Texas, sources with knowledge of the matter told The Wall Street Journal last month.
Petrochemicals Industry Believes in Long-Term Growth
Despite the crisis and the recent deferrals of projects, the largest U.S. petrochemicals manufacturers remain optimistic about the future of their business.
Dow’s Jim Fitterling told The Wall Street Journal last week that the delay of new projects would likely result in higher margins next year when demand for plastics and petrochemicals from major industries, including auto manufacturing and construction, rebounds.
Mark Lashier, president and CEO at Chevron Phillips Chemical, is also upbeat about the chemical business post-COVID.
“Capacity is going to come on in lumps and outstrip demand temporarily, but the beauty of a market that’s growing 4% to 5% a year is that [demand] will catch up,” Lashier told the WSJ. Related: This Deal Could Create The Next Big Shale Giant
OPEC sees oil demand from the petrochemical sector growing by 3.7 million barrels per day (bpd) between 2019 and 2045 and sees it as being the single-largest demand driver of oil demand growth. In the United States, large capacity additions and cheap domestic feedstock will incentivize petrochemicals demand growth between 2019 and 2025, OPEC said in its World Oil Outlook 2020 earlier this month.
According to the American Chemistry Council, companies have announced nearly 350 chemical projects from shale gas in the United States since 2010, with total cumulative made and planned investments of US$200 billion. More than 96 percent of all manufactured goods are directly touched by the business of chemistry, ACC says, noting that chemicals support industries such as medical equipment and supplies, food packaging, computers and electronics, automotive, and construction.
Plastic Waste Problem Weighs on Industry
The increased environmental consciousness of consumers and investors and the government drive to reduce plastic waste could disrupt the long-term prospects of the petrochemicals industry.
“Environmental considerations and regulations, such as bans on single use plastics, will play an increasingly important role in shaping long-term prospects by adding another disruptive element to future demand growth,” OPEC admitted in its World Oil Outlook.
“Therefore, the second wave of US petrochemical projects and projects scheduled for completion for the second half of the medium-term are less certain and are more likely to see delays,” the cartel added.
Plastic consumption will continue to grow due to rising GDP and population, and modern life’s dependence on plastics, according to Wood Mackenzie’s Petrochemicals Research team.
“The tide of waste threatening our ecosystems isn’t going to subside without determined action,” WoodMac’s head of Intermediates and Applications, Guy Bailey, says.
Currently, 10-12 percent of plastic is recycled. For the three main polymers accounting for 85 percent of plastic packaging—polyethylene, polypropylene, and polyethylene terephthalate—about 17 percent of feedstock is recycled plastic, Bailey said.
Chemicals manufacturers test recycled plastics production. Chevron Phillips Chemical, for example, said earlier this month it had successfully completed the first U.S. commercial-scale production of circular polyethylene from recycled mixed-waste plastics.
Recycled plastics and a circular economy are still way off track for sustainable global economic growth. Still, the reputational damage for companies and environmental damage from plastic waste could speed up innovation in plastics production.
By Tsvetana Paraskova for Oilprice.com
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