Oil industry risks overreliance on 'shaky' plastic demand growth: study

London — The global oil industry is overestimating the future growth of petrochemical demand as rising pressure to curb the use of plastics risks hundreds of billions of dollars of stranded petrochemical assets, according to a new study by Carbon Tracker.

Most oil market forecasters, such as the International Energy Agency, see plastic and petrochemical demand as the largest single driver of oil demand growth over the coming decades, helping to stall peak oil demand until the late 2030s.

But the COVID-19 crisis alone is likely to reduce global plastic demand by around 4% this year and push policymakers to accelerate policies to reduce plastic use and boost recycling, according to the report.

As part of its coronavirus recovery package, the EU has agreed on a new tax on plastic packaging waste. Set to go into force at the beginning of 2021, the measure proposes a Eur800/mt ($948.06/mt) tax on unrecycled waste plastics.

China has similar aspirations and has started to ban certain types of plastics. In the US, a bill was introduced during the summer that would direct federal agencies to support plastic recycling.

As a result, the report estimates virgin plastic demand growth could collapse from 4% a year to under 1%, with demand peaking in 2027, under a "System Change Scenario" (SDS).

If achievable, the scenario would present huge risks to investors, according to the report, as the global petrochemical industry currently plans to expand supply for virgin plastic use by 25% at a cost of at least $400 billion in the next five years.

"Remove the plastic pillar holding up the future of the oil industry, and the whole narrative of rising oil demand collapses," Kingsmill Bond, Carbon Tracker's energy strategist and report lead author, said.

Recycling challenge

Under the SDS scenario, global plastics demand would be reduced to around 230 million mt/year by 2040, down from 430 million mt/year under a base case scenario, according to the report. Current global demand for thermo-plastics is estimated at around 350 million mt/year.

A reduction in plastics demand is seen as the biggest single contributor to that scenario playing out, with lower demand accounting for 30% of the total plastics utility by 2040. Mechanical recycling and chemical recycling combined are seen at 22%, with substitutes such as paper and compostables making up 16% of the total.

The scenario would require dramiticaly boosting the current "shamefully low" levels of plastics recycling, the report concludes, noting that only about 5% of used plastic is actually recycled to substitute virgin plastic rather than converted into new non-recycled plastics such as carpets.

The impact from weaker-than-expected petrochemical demand would be felt most acutely in demand for natural gas liquids (NGLs), such as ethane and propane, the main feedstocks for petrochemical plants. US shale production is currently the world's biggest source of incremental NGL supply, with BP estimating some 3 million b/d of US NGL growth by 2040.

Petrochemical resilience?

S&P Global Platts Analytics currently sees global oil demand about 3 million b/d lower than its pre-COVID-19 forecasts out to 2040, with jet fuel and marine fuels suffering the biggest losses.

Rather than accelerating peak oil demand, however, Platts Analytics believes it could be extended by about a year to 2041 due mostly to the expected resilience of long-term petrochemical demand.

Indeed, petrochemical demand has been supported this year by the need for personal protective equipment, disposable packaging and chemicals, offsetting lower demand for more durable plastics. Weaker oil prices will also continue to weigh on virgin plastic material prices and costs relative to their recycled counterparts, according to Platts Analytics.

"While Platts Analytics continues to expect the greater prevalence of plastics recycling and recycled plastics use, we do not expect these efforts to substantially threaten our long-term outlook for oil demand in this sector," Platts Analytics said in a recent note.

BP last year, however, raised its assumptions for the demand impact from increasing environmental pressures on the use of single-use plastics and packaging.

Tighter expected regulations on plastic use will reduce global oil demand by about 3 million b/d in 2040, BP forecast, around 1 million b/d higher than BP's central forecast in 2018.

Assuming a worldwide ban on single-use and packing plastics from 2040, overall global liquids demand growth would be just 4 million b/d by 2040, BP said, some 6 million b/d lower than the central scenario.

Under Platts Analytics base case scenario, petrochemical feedstocks account for about 40% of global oil demand growth from 2020-2040, rising from 13.5 million b/d to 22.3 million b/d.