Oil industry targets profits from petrochemicals despite uncertain fossil fuel demand

Welcome back. For today’s newsletter, I’m looking at an area of ​​increasing importance to global oil companies concerned about declining demand for hydrocarbon fuels.

Petrochemicals, which are made into plastics, polyester and many other cheap, lightweight raw materials that underpin modern life, could boost oil companies’ profits even after demand for transportation fuels peaks. I look at how the battle for market share is heating up in the petrochemical sector — and the threat posed by green alternatives.

Thank you for reading.

Petrochemicals

Petrochemicals promise a future for oil companies

Petrochemicals are holding up the oil industry’s hopes. With the U.S. and Europe likely reaching peak demand for fossil fuels, thanks in part to the rise of electric vehicles, oil and gas giants are preparing for a world in which transportation fuels are no longer a major growth driver.

Petrochemicals are woven into the fabric of modern life, from packaging and detergents to medicines and fertilizers. The International Energy Agency predicts that oil demand will grow to 105.45 million barrels per day (bpd) in 2030, from 102.24 million bpd last year. Of that growth, 2.8 million bpd — more than 85 percent of the total demand increase — will come from petrochemicals, it says.

The battle for market share in petrochemicals is already fierce and will be hugely important for some of the largest publicly traded companies in the energy sector. In the short term, U.S. shale oil producers are among the biggest beneficiaries. But even if this seems like a promising area for global oil giants like ExxonMobil and Shell, they need to consider how much of this demand they can actually serve — and how big a threat they face from green alternatives.

The battle for the Chinese market

The explosion in demand for petrochemicals is largely a Chinese story, reflecting that country’s massive industrial output. Some 6.7 million bpd, or 6.5 percent of all global oil consumption, currently goes toward supplying petrochemicals to China, according to Ciarán Healy, an oil market analyst at the IEA, making it the single largest contributor to global oil demand growth in recent years.

Commonly used synthetic fabrics such as polyester and nylon are derived from petroleum. Fast-fashion e-commerce retailers such as Shein and Temu are a major driver of demand.

Petrochemicals could also be crucial to the green energy transition. Electric vehicles use more thermoplastics, foams, fibers and rubber pads than internal combustion vehicles, David Yankovitz, U.S. chemicals practice leader at Deloitte, told me. To make electric vehicles lighter, automakers are replacing metal parts with synthetic resins. All told, Yankovitz said, about three-quarters of all emissions-reduction technologies require chemicals, most of which come from oil.

China has met much of that demand through domestic processing of imported crude. Between 2019 and the end of 2024, China will have built as much capacity to produce olefins, used in plastics, as currently exists in Europe, South Korea and Japan, the IEA predicts. But the U.S. shale oil boom has also formed a mutually reinforcing “symbiosis” with China’s growing demand for petrochemicals, Healy told me. Between 2019 and 2023, the U.S. was the only major producer to increase its polymer exports to China, according to ICIS data.

Healy said Gulf producers lost market share in key petrochemical categories over the same period, particularly natural gas liquids such as ethane and propane.

But Gulf producers are fiercely competing for market share in China. China is the largest market for Saudi crude and will be crucial to state oil company Saudi Aramco’s ambitions to convert more than a third of its current oil production into petrochemicals by 2035.

Aramco has been pushing into Chinese refineries, acquiring a 10 percent stake in Shenzhen-listed Rongsheng Petrochemical for $3.6 billion last year, and is in talks to buy a stake in Hengli Petrochemical, a top Chinese producer of chemicals for plastics. Last year, Aramco-owned S-Oil began construction of a $7 billion petrochemical plant in South Korea.

Adam Hanieh, professor of Middle Eastern political economy at the University of Exeter, argues that this is part of the rise of the “East-East hydrocarbon circuit.” There is a tendency to dismiss Middle Eastern countries’ investments in downstream diversification as insignificant, he said, and “treat the Gulf as simply oil taps.” But he pointed to a recent surge in investment in refining capacity as evidence of the Gulf states’ long-term strategy.

American oil giants have also joined in the action. Exxon is building its own petrochemical complex in the southern Chinese province of Guangdong and expanding its own chemical production at existing facilities on the U.S. Gulf Coast.

The push for greener options

With fierce competition for the fastest-growing segment of global oil demand, some are betting there is room for further disruption as petrochemicals are replaced by greener alternatives.

At a refinery southeast of Paris originally designed to process crude oil, TotalEnergies is building a recycling facility. British petrochemical group Ineos, run by billionaire Sir Jim Ratcliffe, is developing a new ethylene cracker in the port of Antwerp that it claims would be the greenest in Europe, representing “the biggest investment in the European chemicals sector in a generation.”

Meanwhile, a group of startups have emerged in the U.S. that aim to convert biomass such as corn into chemicals. One such startup, Houston-based Solugen, last month received a $213.6 million loan guarantee from the U.S. Department of Energy’s Loan Programs Office to finance a new plant in Minnesota that will take sugar from Chicago-based Archer Daniels Midland.

Challenges for these companies include transportation, scale and the power of the incumbent oil companies they seek to displace, which is one reason they are eager to partner with politically influential U.S. agricultural companies like ADM.

Whether such biobased products are greener than their oil-based predecessors is also a matter of debate, in part because of the challenges of sustainably sourcing biomass. But chemicals that power modern life — including green energy — will have to come from somewhere. “We can decarbonize, but there is no scenario where we dematerialize,” Yankovitz said.

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