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The biggest takeover deal in Europe so far this year was driven by a simple trend: at some point this decade, petrochemicals will become the main driver of oil demand growth.
The Abu Dhabi National Oil Company (Adnoc), one of the world’s largest producers of crude oil, is in the process of buying the German company Covestro for €15bn because it believes the demand for hydrocarbon-based plastics and foams will grow steadily throughout the energy transition.
“We looked at the next 25 or so years, out to 2050” explained Khaled Salmeen, an executive director at Adnoc, in an interview with the FT last month. “What are the areas that we see as growth areas? Gas will continue to be a key energy source through the energy transition, as well as chemicals, renewables and low-carbon fuels. Hence, our strategy is based around these four key pillars.”
The deal underlines the long-term importance of petrochemicals, despite some of the worst trading conditions the market has ever seen. A combination of oversupply and a collapse in demand, in the wake of the Covid pandemic, has hit prices and shut down older plants.
“There’s been a demand shock post-Covid and we have had massive destocking over 2023,” says Sebastian Satz, a chemicals analyst at Citi. “This was probably one of the worst periods that most management teams would have ever seen. There is oversupply in pretty much every product chain out there — and it doesn’t appear as if it is going to go away any time soon.”
Petrochemicals are omnipresent in the modern world. They are used in clothes, packaging, toys, furniture, white goods, paint and coatings, pipes and wire insulation, windows, and more.
So, for many oil and gas producers, a petrochemicals division allows them to own more of the value chain around each barrel they pump, and is also a hedge against the falling use of oil for road transport.
This year, around one-fifth of the world’s oil will be used in the industrial and chemical sectors, according to International Energy Agency (IEA) research, while 40 per cent will be used by road vehicles.
But that balance will quickly change as the number of electric vehicles rises. By 2050, a quarter of the world’s oil will be used for industry and chemicals, and 35 per cent for combustion-engined road vehicles, in the IEA’s most conservative scenario. In its more radical net zero scenario, industry and chemicals will use more than six times more oil than road transport by the same date.
This level of chemical production has two main environmental impacts.
According to a study by Lund University, the petrochemicals sector directly produced 1.8 gigatonnes of carbon dioxide-equivalent in 2020, which is about 4 per cent of global emissions, and was associated — when emissions from suppliers were factored in — with a total of 5.6 Gt CO₂-e, roughly 10 per cent of global emissions.
In addition, the disposal of plastic waste in landfill and the sea has become a widespread concern.
International oil companies, such as Shell, are already among the world’s largest petrochemical players. But Middle Eastern companies — which, until now, have focused mainly on producing oil and gas — are building up their petrochemical businesses.
Last year, Saudi Aramco, the world’s largest oil company, with a capacity to pump 12mn barrels a day of crude, bought 10 per cent of China’s Rongsheng Petrochemical, a polyester specialist, for $3.4bn.
Since then, it has sought a similar stake in another Chinese company, Hengli Petrochemical. And, last week, it broke ground on a refinery and petrochemical plant in Fujian province.
Amin Nasser, Saudi Aramco chief executive, said during its earnings call in August that it was “exploring several investment opportunities in China”. He also noted that China’s drive for more renewable energy would increase petrochemical demand — for example, in the manufacturing of solar panels.
China is the world’s largest consumer of petrochemicals and the cause of the current low prices across most products. In the past few years, it has invested heavily in building petrochemical plants, to be more self-sufficient. Petrochemicals are now the main driver of the country’s oil demand. “Alone, the petrochemicals sector in China now uses more oil than the whole of Japan, which is the world’s fifth-largest oil consumer,” notes the IEA’s World Energy Outlook.
This huge Chinese capacity has created a glut, which has hit European plastics producers particularly hard. According to Plastics Europe, an industry body, production in Europe fell 8.3 per cent last year.
Satz at Citi estimates that petrochemical plants, globally, are running at 80 per cent capacity. “As a rule of thumb, markets start to get tight and producers have pricing power when utilisation exceeds the low 90s,” he says. “You would probably say the market is balanced somewhere from low to mid-80s to low 90s.” He adds that, in his base case, the market will remain oversupplied into 2027.
“We are in the middle, low cycle for chemicals products today,” Patrick Pouyanné, chief executive of French oil company TotalEnergies, said last month. “The global margins are not very big because we face more Chinese capacities.”
The oversupply, and resulting cheap prices, are also making it harder for recycled plastics and bioplastics to compete.
Bioplastics, which are made from plant material, such as corn or sugarcane, are growing rapidly, but from a tiny base. Plastics Europe estimates that about 3mn tonnes of bioplastics were produced globally in 2023, compared with 36.5mn tonnes of recycled plastics, and 374.2mn tonnes of fossil-based plastics.
Because they are made from plants, which sequester carbon dioxide, bioplastics have a smaller carbon footprint than conventional plastics. This, combined with the fact that they may also biodegrade more readily, means they are particularly sought after by the food industry for packaging.
But one chemicals research analyst, who asked not to be named, says they are harder and more expensive to produce at scale, and petrochemical companies are largely trying to meet their climate commitments by reducing their energy use, rather than switching to bioplastics production.
“It is generally difficult to compete with petrochemicals because of the scale of the assets,” the analyst says. “A [petrochemical] cracker [production facility] produces a million tonnes of product. As far as I am aware, it is technically not possible to get close to anything like that through a fermentation, bio-based process.” They add that only in some niche products, such as cosmetics, will the higher cost of bioplastics be acceptable.