Energy transition outlook for 2025 murky as crude oil demand grows

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Mark Thomas:

You have this beautiful paradox where you have their petrochemicals absolutely seen as a key enabler of the energy transition, while also remaining the main future growth engine for crude oil demand. So it's no surprise when you hear some of the major, the biggest integrated energy companies looking at petrochemicals as a core component of their long-term growth plans.

Rob Westervelt:

Hello and welcome to the Chemical Week podcast. I'm your host, Rob Westervelt, editor of Chemical Week, and today we're going to dive deep into the outlook for petrochemicals and the pivotal role they'll be playing in energy transition. I'm delighted to be joined by Chemical Week Markets editor Mark Thomas, who leads our coverage in this area. And when you look at how this is playing out ranging from impacts on market dynamics, feedstock shifts, the need for investment and scaling of advanced recycling and low carbon technologies, there's a lot to cover and I'm happy to have Mark with me to help sort through this. Mark, welcome.

Mark Thomas:

Welcome Rob. I'm very happy to be here and what is really such an important time for the petrochemical industry. You mentioned transition and the petrochemical industry itself just being such a crucial moment in its life, in its current downturn environment, but with so much opportunity lying ahead.

Rob Westervelt:

And with energy transition, obviously a critical theme for the industry and what that means for the outlook for oil and hydrocarbons at some point in the next few years. Now petrochemicals is going to become the main driver of oil demand growth in the coming decades. What's your sense of how that impacts the market? How are dynamics going to shift?

Mark Thomas:

In terms of dynamics, I think really it's first of all just the actual perspective of petrochemicals itself as a segment. The energy transition as it is now and the process that we're on, this long process that we're on to transition to a lower carbon and eventually net-zero environment means that petrochemicals and the feedstocks, oil and natural gas liquids and so on really are front and center in terms of the attention that they've been given to them by the heads of all the major companies in this segment. So I think the crunch data that has come out of recent reports from S&P Global Commodity Insights and from the International Energy Agency really do highlight that petrochemicals will be the key driver of crude oil demand growth in the coming decades.

For so long, crude oil demand growth has essentially been driven by transportation, whether that be road, aviation and shipping and so on. I think transportation, I think last year still accounted for about 58% of crude oil demand last year. I think petrochemicals sits at around 15% at the moment, but you're going to see in terms of the decline that's forecast for transportation in terms of the demand for oil as that moves to a more use of electric vehicles and so on and lower carbon fuels, petrochemicals is going to grow and be this main growth engine for crude oil well beyond 2030, 2040 and some would say beyond that.

Petrochemical feedstocks are going to rise so dramatically in terms of their global requirement. There's not a sort of a one region, it's always interesting to look at regional variations, but there's not one region which shows any sign of not following this same trend of increased demand for oil. I think even though there may longer term be a sort of a slight start of a drop in the level of oil intensity that's required for feedstocks, for petrochemicals, there's no sort of peak in absolute demand for feedstocks anywhere in sight. That's according to the IAA, according to commodity insights. So really it's full steam ahead for petrochemicals and their feedstocks at this time. It's a really, really interesting time. It's really quite a sea change.

Rob Westervelt:

Yeah, indeed. And I think it's an important thing to note and to stress when you talk about how energy transition plays out and peak fuels demand is in sight possibly near, but there's no the short-term, near-term, long-term forecast. There's no peak polymer in site. There's no peak petrochemical in site. And companies come back to stress that even we're sitting here in early February, some of the fourth quarter results are in. And even Dow they still expect GDP plus type growth with their polyethylene business. Polyethylene is obviously the biggest component of petrochemical's demand and of ethylene polyethylene is the biggest driver there.

Broadly across chemicals, there's no peak petrochemicals in sight even though there are things happening on the feedstock side. Even with the rise of circularity, like you said, it's not in sight. It's going to continue to grow, it's going to continue to be a greater share of the barrel. Talk about the role that petrochemicals will play in energy transition beyond consuming more of the barrel, so to speak. What is going to sustain petrochemicals' demand going forward at GDP type or GDP plus type rate?

Mark Thomas:

Yeah, that's a great question. In terms of what's going to sustain demand, it's really interesting. I've been lucky enough to attend a number of events over the past, really going back in the past year or so that have been very much focused on this role of petrochemicals and how it plays out within the wider energy transition. And you have this beautiful paradox where you have their petrochemicals absolutely seen as a key enabler of the energy transition while also remaining the main future growth engine for crude oil demand.

So it's no surprise when you hear some of the major, the biggest integrated energy companies, companies like Aramco, companies like ExxonMobil, looking at petrochemicals as a core component of their long-term growth plans. Abu Dhabi National Oil Company, ADNOC itself targeting being a top five global chemicals player. It hasn't put a schedule on that, but as we've seen there, some of its major recent acquisitions of companies like Covestro and Fertiglobe and others it's well on the way to doing this.

Strategically petrochemicals and their role in terms of how they are going to act as the core materials required to make so many of the materials that are needed to deliver energy transition technologies, everything from wind turbines to the lightweighting of cars and so on. There's only going to be, I think, an increased focus on this transition in terms of the importance of petrochemicals. I think one of the executives at Aramco described it more as a materials transition than an energy transition. I kind of get what he means. He's absolutely completely focused on the fact that without these materials which have to come from fossil fuel-based petrochemicals, there will be no energy transition.

So I think it's the scenario of how petrochemicals are going to grow and the importance to the energy transition. Their absolutely interlinked. I don't know how you see that, Rob. I mean there's been so much of a focus on energy transition as a whole, but for many people it's hard to say just how quickly this transition is going to happen. I don't know whether you have any views on really the pace of change that's going to take place.

Rob Westervelt:

Yeah, I think you've touched on part of it in your comments around ADNOC and Aramco, and clearly Aramco looking to or acquiring SABIC, well closely aligning with SABIC, what ADNOC is doing with Covestro and its existing assets. Borealis, Bruges clearly the downstream offtake of petrochemicals is going to be more important to the upstream players. And even I'll take Exxon and look what they're doing. It's still in the very early stages, but they've filed some paperwork around tax incentives, we'll call it for a Corpus Christi, for a new cracker, so north of their existing cracker, the JV cracker with SABIC. I think that's interesting.

ExxonMobil is interesting for two things. One thing, Exxon's been all about key deep integration. So if you look at the US sites, the Baytown, even Singapore, Europe, all those sites very tightly integrated with refining. This site will not be integrated with refining, but as Exxon says, it will be integrated with its Permian operations that just shows you how energy transition is playing out, petrochemical you're going to need on purpose, direct petrochemicals demand.

And if you look at the moves that ExxonMobil is doing with what they've already done with the JV cracker, with the SABIC and what they're doing with this possible planned cracker in Corpus Christi, it's being disconnected from fuel and Exxon makes the argument that they are maintaining integration with their upstream operations specifically in Permian year. But it just shows you how energy transition is playing out in the petrochemical sector or in the broader energy sector and how that's playing out in petrochemicals as well. It's an interesting time.

And Exxon, these plants cost a lot of money. They take a long time to build 9 billion price tag on this. If things go smoothly, you're talking about a 5, 6, 7 year period and this asset's going to operate for 40, 50 years. So that just gives you a sense of, and it ties well with what you said about how this is playing out and petrochemicals is going to continue to grow. And when you look at what the moves of what the Exxons, the Aramcos, the Adnocs are planned, how that's playing out, it just gives you a sense of the role that they think petrochemicals will play going forward. So it's all very interesting.

Now I want to talk about speed stocks. One of the things that struck me is if you look at the S&P Global Commodity Insights forecast going forward, with all this said, Naphtha actually starts to grow its share of output again in petrochemicals. The percentage of ultrachemicals tied to Naphtha starts to increase again after declining really since the big build of Middle East capacity in the naughts. How do you see that playing out? We've talked about shifts within the barrel of oil and where it's going clearly that more of the barrel has to go to petrochemicals. So that would indicate that an increase in Naphtha, but what's happening there? Why is Naphtha going to increase going forward and what happens to gas?

Mark Thomas:

Yeah, that's such a good question. That sort of a role that Naphtha has played traditionally and how that has been squeezed by the emergence of low-cost feedstocks, the shale boom in the US and the plentiful supplies of ethane that are currently, despite tariffs that may or may not be applied, the ethane making its way to China and many of these other really major world-class integrated sites that are producing polyolefins and other downstream derivatives on a mass scale. That gas ethane trend, although it's going to continue well into the next decade, is not going to last. Essentially, it's going to mean that Naphtha has to return to some would almost say it's rightful place, but certainly it's traditional place as the key feedstock for the petchem sector.

It's really interesting to see that there have been several reports. You mentioned one by S&P Global. They have all identified this emerging feedstock supply gap essentially, and that need as the traditional refining sector streamlines itself and that impacts the amount of by-products that have traditionally been more available. So that therefore I think as you said, means that there's going to need to be more on-purpose feedstocks. Conventional refineries, okay. They'll seek to boost their feedstock yields by perhaps changing their cut points during operations to draw more Naphtha from lighter distillates and so on.

Some refiners might be able to repurpose conversion units like hydrocrackers to maximize their naphtha production. I think this is going to increasingly happen, especially over the course of the next decade, to increase the amount of naphtha that is produced by refineries and it's going to be produced specifically for petrochemicals. And that's on a basic scale, going to change the pricing dynamics. It's going to change the very, very challenged naphtha cracks that have been in place now for several years, especially in Europe and Asia, often negative. It's going to change the pricing dynamics quite substantially relative to crude oil because as naphtha is no longer going to be a byproduct but produced on purpose, it's going to increase those prices.

But even despite all that, we talk about naphtha, we talk about LPG, ethane and so on, I think a lot of that sort of shortage in feedstocks is going to come and be taken care of by the crude oil to chemicals technologies that have been talked about a lot and have started to appear again at some of those major complexes in China. But that crude oil to chemicals or in some people are now calling them direct oil to chemicals configurations. That's I think where you're going to see many substantial changes in how naphtha and other feedstocks are produced. And yes, there's nothing going to be relevant to transportation or anything else traditionally that's been there. It's going to be entirely focused on supplying downstream derivatives in the petchem sector.

Rob Westervelt:

Yeah, and I think that's a really important thing to look at over the next few years as this plays out because there is still, it's certainly in the US if you look at what Exxon will possibly build, there's CP chem is well along in construction. The US does have some gas available. The Middle East does have some gas available, but they can't continue to build at the pace they had 10 years ago. So there's even beyond the dynamics of petrochemicals taking up more of the barrel so to speak, naphtha and direct oil to chemicals, chemicals continues to grow at GDP type rates. You're going to see the shift. So it's definitely something to look out for.

We mentioned net zero, energy transition and what's going on there, and obviously that's playing out in the petrochemical sector. There is a commitment to reducing the carbon footprint and cutting carbon from operations, pushing around circularity. So a lot of these things are playing out that will influence the dynamics for demand, feedstocks and strategies and investment going forward. So let's start with the advanced recycling for and the increase demands for circularity. How do you see that playing out in the dynamics for petrochemicals demand and feedstocks?

Mark Thomas:

That's really something that's quite hard to pin down because it's such a movable feast when you talk about the role that advanced recycling, that chemical recycling, also, of course mechanical recycling and what impact that's going to have. It depends which scenario you pick. Many of the companies out there, including S&P Global or the IA, they have their various scenarios, whether it be their net zero emissions scenario by 2050 or whether they have their stated policies scenario, which is essentially where the industry carries on its current line.

There's the degree that stakeholders across the industry embrace these efforts to reduce, reuse, recycle petrochemicals in their derivative products. It's a major factor and it directly shapes the future of petrochemical feedstock demand. These different scenarios, whichever one plays out, does impact how much requirement is going to be for on purpose production of naphtha and so on.

If I think the feedstock intensity of the industry continued on the trajectory has taken over the past decade or so, I think you're going to see oil demand from the feedstock sector for petrochemicals reach about 23 million barrels a day by 2035. But if you look at the S&P's got a green rules scenario, which envisions a much more rapid energy transition. In that case, the feedstock sector's oil demand drops to about 18 million barrels a day by the same year, 2035.

So you've got this range in terms of oil demand growth from the petchem's feedstock sector ranging between growth of about 2 million barrels a day, up to growth of about 7 million barrels a day. You've got this 5 million barrel range depending on which scenario plays out. Now there is I think, increasing realism amongst many of the stakeholders within the industry and also government and regulatory level that the adjust transition is going to be hard to deliver On the current schedule. I think there's increasing skepticism that these targets are going to be met.

So I think you've got this push that where everyone I think wants to achieve what has been set out. But I think whether it be through chemical recycling, mechanical recycling, the increased use of biofeedstocks, low carbon alternatives, feedstocks such as hydrogen, ammonia and methanol and so on, it's the pace at which they're going to be able to be commercially transferred and replace the existing products, which I think is open to question. I don't know how you see that, Rob.

Rob Westervelt:

Yeah, I think it's a good point. I think you said realism is starting to set in, I think even the last two years. You look at events like CERAWeek, WPC, EPC, you name it, people certainly within the industry, even without other stakeholders, are acknowledging that two, these targets, Paris Accord targets were slipping away and that the current state of technology investments at really fundamental demand for these products wasn't shifting in a way that would enable all of us, not just the industry, but the entire economy to meet these targets. And I think there's been more discussion around that the last two years. I think that's accelerated coming out of COP and now with the transition in the US, president Trump, by all accounts will pull the US from the Paris Accord. In Europe I think there's more of a discussion around the difficulty in reaching these targets.

So I think that's something to keep an eye out for, certainly at WPC, CERAWeek at the industry events, how this plays out. But it's something certainly to keep an eye out for. That said, I think the ambition... Well, I know the ambition is still there. If there is a need to achieve low carbon or net zero footprints where possible, and if you look at some of the technologies, let's keep it to petrochemicals here that they're taking. What's your sense of the state of play around electrification, hydrogen, CCS obviously that has used beyond petrochemicals, even nuclear. How does this play out in reducing chemical zone production footprint? How do you see that playing out? What's the state of technology and what's your view on the route of adoption?

Mark Thomas:

Yeah, I think in terms of technologies, I don't think it's rocket science as they say. You have companies focusing on achieving, whether it be low carbon or net zero. Yeah, most of them will say the technology already exists. There's a wide variety of technologies, many of which have been developed originally through the production of hydrocarbons flowing into a refining and a petrochemical complex, and so on. These options, whether it be circularity, the reuse of waste materials, biomass, greener feedstocks, renewable gas and power.

Which technologies are going to play a key role? I would say all of the above. There is no one solution to the challenge of making a company's production activities lower carbon or one day net zero. We are all pretty sure that goal will be reached. But in terms of things, for example, looking at something which often gets a lot of attention when it's mentioned nuclear technology, nuclear reactors as a means of reducing a site's emissions to net zero.

I know one or two very high profile figures within the chemical sector, Jim Fittling at Dow, for example, he has said before that he sees small modular nuclear reactors as something that if they can make it work, I think at Seadrift where they're going to initially try it out, they're going to transfer that to many of their sites around the world. He sees that as an absolute way to reduce emissions to net zero pretty quickly. Although I think at Seadrift, that's probably not going to happen initially until around about the end of this decade.

You have other technologies, you have electrification like you say, there have been efforts by the industry to try and carry out demo projects for the electrically heated cracker furnaces and so on. These all have potential, but they all take time. I think it's a case of all of these technologies will be pursued by different clusters of companies, and I think as usual, there will be a combined solution found, whether it be through completely green solutions or I think, again, you mentioned that sort of dose of reality, which I think everyone now realizes must be recognized when trying to achieve the targets.

Carbon capture and storage is absolutely going to be vital to any future substantial progress towards net zero. Now again, you mentioned ExxonMobil. ADNOC again have also done it. CCS is going to be crucial to taking emissions down quickly, and the expenditure is dramatic in all cases. So I think these all have promise, but if you're asking me now, which of these is going to happen quickly, I couldn't really tell you. Most of these remain quite a long way off. Yes, there are options now to get green power through the power purchase agreements that have been signed by many companies elsewhere, BASF, Lionel Bacel, Borealis, many others have signed these PPAs, which are increasingly going to convert a lot of their scope to emissions to much lower levels. But it's going to take a long time. I don't think anyone can say otherwise.

Rob Westervelt:

Yeah, I fully agree. It'll take a long time, and I think you said it earlier in response to this question, all of the above. It's just what does the mix look like? It's unclear. But you look around electrification of processes, hydrogen, carbon capture, nuclear, it's all of the above. And those are obviously, the cost involved for each are significant, but vary quite a bit by orders of magnitude. Carbon capture and storage that could be, I think Exxon's project alone could approach a hundred billion dollars. So it's something to look out for.

And I think, like I say, we'll end this conversation because we're going to continue this conversation over the course of WPC CERAWeek and in the pages of Chemical Week. So Mark, I thank you for your thoughts here and encourage our readers to continue the conversation at WPC next month in Houston. You could check out the latest agenda for WPC at WPC.spglobal.com, and as always, you can catch up on the latest chemical news and insight at chemweek.com on Platts Connect. And I'll specifically point you to Mark's feature in our January Outlook issue that did a deep dive into this issue. So do check that out. So Mark, thank you very much for your comments here.

Mark Thomas:

Thank you, Rob.

Rob Westervelt:

Great, and thanks to our readers. And until next time, this is Rob Westervelt signing off for the Chemical Week Podcast.