INDUSTRY INSIGHTThought Leadership

The Shifting Roles of Petrochemical Producers During Energy Transition

By Carlo Barrasa, Vice President, Energy Insights, Chemical Market Analytics

“Energy transition” is a phrase that has become widespread in the media and within discussions among industry professionals. But what is it really? Simply put, it is the shift from traditional sources of energy (coal, crude oil, and natural gas) to renewable sources of energy (solar, wind, geothermal, and hydro) with the aim of reducing overall carbon emissions. The biggest sources of these emissions come from transportation and power generation. As these two sectors decarbonize, it will have profound impacts on the production of crude oil and natural gas, which in turn will affect the chemical industry. Please note that the underlying data is courtesy of Rystad Energy, but the interpretation of the data and the implication assessment are provided by Chemical Market Analytics by OPIS.

Figure 1

Crude oil

Over the last 30 years, the biggest contributor to oil demand growth has been the increasing mobility of developing countries’ populations via vehicles with an internal combustion engine (ICE). However, the next 30 years will almost certainly evolve differently than the prior 30 given the increasing adoption rate of electric vehicles (EV). Today, EVs have closed the gaps of both purchase price and practical range, leading to increasing sales and enhanced penetration into the global vehicle fleet throughout the last decade.

Thus, predicting the penetration rate of EV is core to the evaluation of the future demand for oil, since a significant portion of global oil demand is still used to satisfy fuel demands of ICE vehicles (see Figure 1). Rystad Energy provides the various pathways of energy transition defined by the degree of temperature increase out to 2100. Their house view is the case of a 1.9-degree Celsius increase, resulting in oil demand falling from over 100 MMB/d in 2026 to 61 MMB/d by 2050. To achieve the decline in oil demand as specified in the 1.9-degree case, an aggressive penetration of EV into the global vehicle fleet must be assumed. As depicted in Figure 2, the share of EVs relative to the overall vehicle fleet grows from slightly above 1% today to just under 20% by 2030 and to roughly two-thirds of all vehicles on the road by 2050.

Figure 2

Figure 3

Therefore, while the outlook for the price of crude oil must consider the growing adoption of EVs, several other crucial factors remain at play. This includes the marginal cost of oil production, the geopolitical realities of exporters’ revenue requirements, and the persistent dependence of importers. As shown in Figure 3, prices are likely to decline from the recent highs as EV adoption accelerates and long-cycle supply investments begin to take hold. This decline continues in the early part of the 2030’s as supply is unable to respond quickly enough to shifting demand patterns. As supply cuts outpace the demand declines, prices will reverse the declining trend in the late 2030’s and stabilize at the marginal cost of producing shale oil from non-OPEC (specifically from the US).

Predicting the future of the oil markets is always a dubious proposition as there are multiple unforeseen events, geopolitical or otherwise, that could render any outlook obsolete. However, given the current pace of the energy transition, notably that EVs will cover a greater amount of the vehicle fleet than any other time in history, the pace of this electrification will dictate the path for the oil market, and future policy responses to the current geopolitical environment will play a critical role.


Natural gas

The European gas market in 2022 stands as one of the most extreme examples of commodity price spikes. The spike was so radical that it prompted forced demand reductions and policy backtracking on traditional forms of energy. Figure 4 shows that the continent mitigated the loss of pipeline flows from Russia by importing record amounts of liquefied natural gas (LNG) supply to meet energy requirements. As such, natural gas will continue to play a critical role in the fuel mix throughout the energy transition.

Figure 4

Figure 5

In Rystad Energy’s 1.9-degree case, an aggressive penetration of renewables within the power sector is assumed, but natural gas persists for power generation through 2050. As depicted in Figure 5, global gas supply continues to increase past the point where crude oil supply peaks. One of the primary reasons for gas being so entrenched is that it is generally viewed as a transition fuel since its CO2 emissions from direct burning are significantly lower than either crude oil or coal. Another reason would be the structural stickiness of LNG capacity. Much of the LNG supply is secured by multiyear term contracts, which tend to be renewed by importing entities as long as gas-fired power demand stays consistent. Also, new LNG projects continue to make progress and attain financial backing, which further alludes to the long-term viability of the fuel. Lastly, for many countries, natural gas is instrumental in solving most of the energy trilemma. Clearly, gas is not a sustainable fuel, but it more than makes up for that with high marks on reliability and affordability for many countries, especially those with abundant reserves of natural gas.

The price outlook for the global benchmarks of natural gas follows a similar trend as the outlook for oil (see Figure 6). However, given the abundant reserves of the United States as well as the number of LNG projects that the country looks to add over the next ten years, Henry Hub prices begin the forecast at a lower level, but gradually increase throughout the forecast period as export demand steadily increases.

While the future of the natural gas market is just as difficult to predict as the future of the oil market, the global market is still very much dependent on natural gas and that dependence should continue to grow over the next decade. The European gas market spike in 2022 is testament to that dependence and exemplifies that natural gas is the cleanest dirty shirt of the traditional fuel mix.

Figure 6

Impacts on chemical industry

Regardless of the scenario one chooses, the petrochemical industry will take longer to decarbonize because of its outsized reliance on hydrocarbon feed plus its rate of demand growth. By its very nature, the industry cannot remove the “petro” from the petrochemicals it produces every day. Society needs the resulting synthetic materials to continue to enhance the standard of living and facilitate the overall energy transition (lightweighting, food preservation, etc). While the industry can undertake initiatives in the short run to reduce energy intensity, most of those will be at the margin to reduce process emissions. Longer-term, the most realistic option for decarbonization is to continue research and development of low-emission and low-energy intense chemical recycling

In the meantime, the petrochemical industry will face its own energy and feedstock challenges. The availability of feedstock will become an increasing area of concern because lower oil demand will ultimately reduce hydrocarbon development, adversely impacting the supply of natural gas liquids. The price of downstream petrochemicals will need to increase to either carry the cost of upstream development or motivate a refiner to run incremental barrels of crude to provide the necessary feedstock for chemical production.

As it stands today, if the 1.9-degree scenario comes to fruition, petrochemicals will account for over 30% of oil demand in 2050. Without further advances in recycling to lower fresh feed consumption, the industry may find itself with very little choice but to pay even higher prices for hydrocarbon feedstock, a sobering prospect in the current environment.