The future of petrochemicals: a tale of two transitions
By Alan Gelder, Vice President Refining, Chemicals and Oil Markets, and Guy Bailey, Head of Intermediates and Applications, Wood Mackenzie Chemicals
The global shift towards a more sustainable future is disrupting the status quo – reshaping power and transport networks and changing our consumption habits. The energy and materials transitions are set to be among the biggest influences on petrochemicals demand over the next 20 years. In this article, we look at the transformative road ahead.
A tale of two transitions
The energy transition, the switch away from fossil fuels and towards renewable and clean sources of energy, is well underway. The materials transition, which will transform the way we produce and use materials, is an emerging force with a similar starting point.
Both stem from urgent environmental challenges, supported by the societal pressure of consumer outcry and political response of taxation and regulation. In each case, the industry is responding with technological innovation and the upheaval is leading to a total reorganisation of the value chain.
Seen through the lens of sustainability, it is easy to conflate these two transitions, but each is moving at a different pace, and will have separate (and sometimes conflicting) impacts – particularly for petrochemicals.
“Seen through the lens of sustainability, it is easy to conflate these two transitions, but each is moving at a different pace, and will have separate impacts.”
Energy transition: the petrochemicals star is rising
The next 20 years could see the chemicals industry rise to greater prominence as decarbonization reshapes the oil market.
In the transport sector alone, we expect the energy transition to displace 7.5 million barrels of liquids per day. Overall oil demand is likely to plateau then fall by 2040. Oil intensity, which saw a sharp fall in 2020 due to Covid-19 restrictions, will continue to trend downwards as oil gradually decouples from the global economy.
The increasing share of electric vehicles, together with tightening fuel-efficiency standards for internal combustion engines will erode fuel demand from light vehicles. Growth will slow in road freight and aviation consumption, while industrial and power-generation sectors will continue to shift away from oil to cleaner energy sources.
As a result, we expect the demand for petrochemicals feedstocks to grow four times faster than global oil demand between 2019 and 2030 and effectively become the dominant driver of oil demand post 2030.
“We expect the demand for petrochemicals feedstocks to grow four times faster than global oil demand between 2019 and 2030 and effectively become the dominant driver of oil demand post 2030.”
Refineries are moving with the times
Refineries are already reacting to petrochemicals’ rising importance.
Even before the pandemic, refiners were facing a looming capacity surplus. Covid-19 has wiped out around two to three years of global oil demand growth, exacerbating the situation. By 2023, global supply potential outpaces demand by almost 3.5 million barrels a day – the capacity of around 20 average-sized refineries.
Petrochemicals has become a key differentiator in the outlook for refining assets. Operators are repositioning themselves to increase the proportion of their chemicals output, investing in ‘crude-oil-to-chemicals (COTC) facilities. Many of the current facilities in operation still have a strong focus on fuel, but future generations promise to flip the production mix on its head, with potentially as much as 80% of output being chemicals. Fuel will be relegated to a by-product.
Shifting priorities for materials producers
But at the same time as the energy transition appears to be enhancing the prospects for petrochemicals, could the materials transition be pushing in the other direction? Efforts to build a more circular economy are building momentum, putting pressure on producers of virgin plastics and other polymers.
While perhaps not as severe a threat as climate change, mismanaged plastic waste has become a highly visible issue in recent years. Public awareness is heightened thanks in part to the tremendously popular Blue Planet documentary series and China’s ‘National Sword’ policy, which placed more stringent restrictions on the import of waste material, forcing the problem back onto the waste generating countries. It’s a growing and increasingly global concern.
“Flexible packaging has gained higher growth momentum with CAGR volume growth of close to 4% since 2019.”
Regulation is also playing its part. Policies such as Europe’s Single-Use Plastics Directive and a ban on disposable plastic applications in China are pressuring brands to redesign their packaging applications, pay attention to their waste stream and increase their use of recycled material.
Technological innovation will be game-changing
Industry is turning to technology to reduce plastic and materials waste.
Chemical recycling is attracting the most significant interest. An array of technologies can break down hard-to-recycle polymers into new forms of plastic or high-quality feedstock, using depolymerisation; pyrolysis; or super-heating to produce syngas.
Plastic-to-plastic (P2P) and plastic-to-feedstock (P2F) recycling opens the door to make more polymer types economically recyclable. It’s not impossible that chemical recycling could double the level of plastic packaging that is recycled (which currently sits at around 20%).
But this innovation comes with a hefty price tag. To deliver sufficient chemical recycling capacity would need more than USD 50 billion globally.
The other avenue the industry is exploring is bioplastics. Still considered a niche application, representing only around 1% of plastics production, biodegradable polymers such as polylactic acid (PLA) come from biomass, rather than fossil fuels, offering the potential of a lower carbon future.
“To deliver sufficient chemical recycling capacity would need more than USD 50 billion globally.”
“The next 20 years are set to be an age of transition for the energy and materials worlds, and these themes will become increasingly prevalent in business, society and politics.”
Could materials drive petrochemicals production down?
Global demand for plastic applications is growing, set to reach nearly 600 million tonnes by 2040 – nearly double the current levels. So how realistic is a scenario where the materials transition drives down petrochemical demand?
Much hinges on the industry’s ambition. A bolder materials transition would mean an increased proportion of recycling, including scaling up chemical recycling. It would also include ‘redesigning’ plastics consumption, for example, convincing consumers to abandon plastic shopping bags – or swapping out single-use plastic water bottles for reusable metal ones.
Under this more ambitious scenario, virgin plastic demand could fall below 2018 levels and up to 40% of ethylene demand – around 330 million tonnes – could be displaced.
This forecast is not our central forecast. But we believe it offers credible insight into what the future could look like if policy and technological developments align. Producers will have to seriously consider scenarios like this as the materials transition starts to bite over the next 20 years.
How will companies approach this change? Much like the situation for refineries adapting to changes in oil demand, we believe the solution lies in greater integration across the value chain, between chemical recycling facilities and the petrochemical and refining complexes.
The next 20 years are set to be an age of transition for the energy and materials worlds, and these themes will become increasingly prevalent in business, society and politics. For the petrochemicals industry, the winning formula will come in finding the balance between financial and environmental sustainability.
To learn more about this topic, watch GPCA’s webinar on the energy transition conducted in association with Wood Mackenzie. Speakers at the webinar included:
- Guy Bailey, Head of Applications and Intermediates, Wood Mackenzie
- Alan Gelder, VP Refining, Chemicals and Oil Markets – Downstream Global SME, Wood Mackenzie
- Matt Chadwick, VP Petrochemicals, Wood Mackenzie