On the journey to net zero, the chemical industry will need to innovate across all value-chain segments. This means companies reducing their own emissions (Scope One) by developing new processes; reducing their Scope Two emissions by leveraging more sustainable energy sources; and, for Scope Three emissions, reviewing the upstream value chain segments, by sourcing more sustainable raw materials.

This is not the time to adopt a defensive posture. The changing global context provides petrochemical and chemical companies in the GCC with significant opportunities to assert global leadership and help promote local economic development.

The first opportunity is for the industry to position itself as a key partner in the sustainability-driven transformations of its customers (that is, providing low-carbon packaging materials, lightweight composites, and green ammonia).  Chemical companies that are able to comply early with more rigorous ESG standards will build an advantage.

The second opportunity is to innovate and develop new “future-proof” capabilities. That means building the GCC’s dual feedstock advantage as the plastics sector becomes circular, digitized, and decarbonized. It also means taking proactive steps to become the core of the hydrogen economy, including by building out the ammonia business.

And the third opportunity is to develop local content programs that will strengthen economic growth and employment in the region and pivot the existing mature local content programs to promote ESG in the business and supply chain.

Drive ESG-centric innovation across the value chain

We recently published a study that looked at how the chemical industry globally could innovate across ESG goals in a holistic manner. Among the recommendations:

• Innovating beyond regulatory requirements to respond to customer demands. Many industrial customers are already asking suppliers to come up with sustainable solutions to meet their own ESG targets and those of their end consumers. For example, BASF has introduced a Product Carbon Footprint mapping and digital tool that allows targeted discussions with customers on desired sustainability properties of products.[1]
• Adopting a hybrid corporate-business unit operating model for innovation that can respond quickly to changes in a highly dynamic environment. Companies need to both continue developing incremental innovations which deliver fast returns and to think ahead to longer-term challenges. As many as two-thirds of companies interviewed for the study allocate about 30% of their research time to the pursuit of new ideas for future growth.
• Building an innovation ecosystem with external partners to gain access to complementary capabilities and increase the value pool. Longitudinal partnerships with feedstock providers, suppliers, and customers will fit into such an ecosystem. And building stronger research and development ties externally will also be important. While chemical firms historically conducted most of their research in-house, this is changing in response to the complexity of ESG challenges. More open and versatile ecosystems are springing up, with two-thirds of companies now externalizing part of their R&D.

[1] Product Carbon Footprint, BASF website https://www.basf.com/global/en/who-we-are/sustainability/we-drive-sustainable-solutions/quantifying-sustainability/product-carbon-footprint.html

Build a dual feedstock advantage to close the supply gap for circular plastics

Plastics have assumed a growing role in the global debate on sustainability. Demand for recycled plastic is soaring: more than 500 organizations representing 20% of the global plastic packaging market have committed to reducing virgin plastic use.[1] Faced with this growth in demand, supply is failing to rise to the challenge—for now. Recycling rates are relatively low, between 10% and 20%, in part because of various constraints across the waste management value chain.[2] As a result, major consumer brands have had to roll back their commitment to using recycled plastic for their products.

The demand and supply mismatch for circular plastics provides a unique opportunity for GCC players to go a step further, by developing a dual feedstock advantage. In other words, leveraging the continued access to advantageous feedstock for virgin plastic production and, at the same time, increasing access to quality plastic waste for recycled plastic production. For now, GCC players struggle with access to quality plastic waste— they have a structurally low share of plastics waste generation (in 2021, this accounted for just 9% of the global plastic waste generated compared with 19% in China and Europe and 25% in the United States).[3] They must also contend with restrictions in the trade of global plastic waste from recent global regulations, including the Basel Convention Plastic Waste Amendments.

[1] See Global Plastics Outlook: Policy Scenarios to 2060, OECD, June 2022. https://www.oecd.org/environment/plastics/

[2] Ibid.

[3] Global Plastics Outlook: Policy Scenarios to 2060, OECD, June 2022.

To build the dual feedstock advantage and gain a leading position in circular plastics production, GCC chemical companies will need to take action across six dimensions: [1]

First, they will need to create global closed-loop supply chains and material marketplaces, in order to have competitive access to secondary markets, such as those for mixed plastic and inorganic material.

Second, according to our estimates, chemical companies working in partnership with governments will need to invest heavily to build world-scale recycling infrastructure over the next two decades, using the latest technologies and exploring opportunities to drive synergies with existing infrastructure.

Third, they will need to acquire recycling assets and supply-chain capabilities, especially in large consumer markets.

Fourth, they will need to adopt a customer-driver sustainability vision—with sustainability pricing—that will enable them to develop tailored high-value products.

Fifth, they will need to develop smart, digital capabilities and mission-oriented research and development capacity for circular technologies, artificial intelligence, and industrial biotech, including for feedstock recycling.

And finally, they will need to be proactive in helping shape global and regional standards for plastics to stay ahead in the new chemical economy.

[1] For details, see Yahya Anouti, Devesh Katiyar, André Duerrbeck, and Ankit Gupta, “Using recycled plastics to build a more sustainable future,” Strategy&. https://www.strategyand.pwc.com/m1/en/strategic-foresight/sector-strategies/energy-chemical-utility-management/recycledplastics.html

Reinforce local content programs (the “S”) and pivot them to include the “E”

The third opportunity for GCC petrochemicals is a critically important one for future growth in the region: it is about helping to develop local content programs. Such programs provide a foundation for ESG because they contain objectives that meet the “S” in ESG such as employment and economic development. They seek to boost local value creation, strengthen resilience, and stimulate sustainable growth.

For now, national oil companies have mainly developed such programs, including Saudi Aramco’s In-Kingdom Total Value Add, ADNOC’s In-Country Value, Qatar Energy’s Tawteen, and SABIC’s Nusaned. Local content is now at the heart of many GCC government agendas.[1]

Chemical companies can create new local content programs or expand existing ones to drive an ESG agenda. For example, well-established local content measurement mechanisms used for auditing and certifying local content performance (for example, the number of local jobs created) could be expanded to include a wider set of ESG metrics, such as greenhouse gas emissions or circular economy metrics. Companies could embed ESG elements in the local content driven procurement guidelines and provide access to finance for ESG-linked projects. And they could also leverage supplier development programs to work with SME suppliers to help them develop their ESG capabilities

For all such opportunities, the upside for GCC chemical companies is substantial.  More competitive companies better equipped to deal with the changing global context around environmental issues, better able to rise to the recycled plastics challenge, and giving greater service to the local community through localization programs will make the sector more resilient and more future-proof for the longer term.

[1] See In-Kingdom Total Value Add, Saudi Aramco, https://www.aramco.com/en/sustainability/responsible-business/supporting-communities/in-kingdom-total-value-add-iktva; ADNOC’s ICV program, https://www.adnoc.ae/en/incountry-value/adnocs-icv-program; ICV Overview, Tawteen, https://www.tawteen.com.qa/In-Country-Value/ICV-Overview; “Nusaned – Enabling access to connections, support and finance,” SABIC, https://www.sabic.com/en/nusaned.