The Fuse

Strong Growth in Petchem Demand Alters Long-Term Dynamics in Global Oil Market

by Matt Piotrowski | May 15, 2017

Top executives for a major U.S. refiner said recently that the company’s future will be in petrochemicals rather than transportation fuels. Independent refiner Phillips 66 argues that while demand for gasoline in the U.S. will grind lower, the need for petrochemicals to make plastics will continue to rise at a rapid clip and become an even greater priority for downstream actors and producers. “The Middle East and U.S. Gulf Coast are going to be the two best places in the world to make petrochemicals, long-term,” said Chief Executive Greg Garland. “In 10 years, if we’re driving the same, we’re going to see less need for transportation fuel. Given that as a backdrop, you don’t want to invest in adding capacity in a declining market.”

The need for petrochemicals to make plastics will continue to rise at a rapid clip and become an even greater priority for downstream actors and producers.

The statements were eye-opening given that transportation fuels make up almost 75 percent of total U.S. oil demand, and gasoline consumption, after years of declines, hit a record last year. At the same time, however, petchem growth appears guaranteed for the coming decades with demand rising faster than GDP in non-OECD countries and limited substitutes in this area. In this context, petchems will underpin oil demand for some time, competing with the growing needs in the transportation sector.

Both transport and petchems have strong positions in oil that can’t be easily displaced.

Plastic growth

Crude oil is used globally as a feedstock for making plastics from refined products, but it is not the only input—plastics are also produced from natural gas feedstocks. But natural gas can provide only so much relief for meeting petchem demand. The IEA points out: “While the share of natural gas rises slightly in the petrochemical sector and there is a small uptake in the use of bio-derived feedstocks, this does little to erode a 50% increase in oil use in this sector between 2015 and 2040.”

According to the International Energy Agency’s (IEA) long-term outlook, petrochemical demand should rise by 5 million barrels per day (mbd) through 2040 to 15.7 mbd, a 1.5 percent jump per year. That increase is below the annual 1.9 percent expected rise in aviation jet demand, but it’s still much sharper than the projected 0.6 percent yearly increase expected in road transportation, as growth in emerging markets are only partially offset by OECD declines. From 2000-15, petchem increased its share in total oil demand by one percentage point, rising from 11 percent to 12 percent. From 2015-40, its market share will increase to 15 percent. That compares to road transportation growing modestly from 56 percent to 58 percent of total oil demand, slower than the 2000-15 increase from 51 percent to 56 percent.

petchem1

In developed countries, demand for petrochemicals is expected to remain relatively stagnant, but in emerging markets, it should rise by one-and-a-half to two times GDP growth. In the current situation, demand has been underpinned by the relatively low oil price, while on the supply side, the rapid growth of natural gas liquids (NGLs) has taken pressure off the crude market.

In the U.S. and other OECD countries, the petchem markets are mostly mature and also threatened by increased recycling, but demand is unlikely to decline since it’s hard to find substitutes when making plastics.

In the U.S. and other OECD countries, the petchem markets are mostly mature and also threatened by increased recycling, but demand is unlikely to decline since it’s hard to find substitutes when making plastics. In China, where demand will grow by about 30 percent in the next couple of decades, petchem plants use domestic propylene, but also turn to the U.S. for higher-quality feedstock that’s derived from shale output. As India’s thirst is growing, it is pulling in propane and butane from Middle East suppliers, such as Saudi Arabia, Kuwait, and the UAE. The joint venture between Dow and Saudi Aramco, the growth of SABIC (Saudi Arabia Basic Industries Corporation), and OPEC countries inking downstream deals with Asian partners reflect the rising importance of petchem growth.

But the Middle East producers will have to keep a lot of their supply at home, with OPEC countries set to see their demand for petchems more than double through 2040. This expectation has pushed traditional crude producers to expand their supply base, making the Middle East a petchem hub, led by output of ethylene and propylene. Thanks to cheap feedstock from gas and more investments from companies in the region, petchem supply should grow. But players there are being threatened by exports of U.S. NGLs and petchem products to Asia. “China and Southeast Asia will drive a lot of the demand growth with more of the population moving into the middle class,” Jim Cooper, Senior Petchem Advisor for American Fuel and Petrochemical Manufacturers (AFPM), told The Fuse.

Shale revitalizes U.S. petchem industry

The U.S. petchem industry has been particularly helped by the massive surge in domestic oil and gas supplies that has brought about a sharp uptick in NGLs, particularly ethane. “Shale development is causing all the commotion,” said AFPM’s Cooper. “It’s changed the nature of petchem feedstock and reduced costs. It used to be about half of ethylene derived from oil. We still use naphtha from refineries as a feedstock, but it’s now about 80 percent ethane coming from NGLs to make ethylene.”

The explosion in ethane supply does have a potentially weakening effect in the transportation market. The extra ethane has freed up naphtha supply in a number of markets that would traditionally be used as a petchem feedstock.

Besides Phillips 66, a host of other companies are investing in petchem facilities in the U.S. to meet domestic and international demand, including ExxonMobil, Dow, Royal Dutch Shell, Sasol, Saudi Aramco, and others. With the growth in shale has come the increased availability of cheap ethane. U.S. ethane production is forecast to average 1.46 mbd in 2017, up 210,000 b/d from last year. As a result, exports are exploding, rising to 240,000 b/d this year from 90,000 b/d in 2016. U.S. producers are also now the world’s largest exporters of liquefied petroleum gases (LPG), which serve a variety of uses, including gasoline blending and petrochemical feedstock. In total, the U.S. ships some 1.4 mbd of ethane and LPG, up from virtually zero a decade ago. Based upon fresh International Trade Commission data, exports of ethane and LPG hit a record in March. China, Japan, and South Korea are key target markets, but sellers reach others, such as Mexico and the Netherlands, reflecting the versatility and wide range of U.S. petroleum exporters.

petchem

The explosion in ethane and LPG supply does have a potentially weakening effect in the transportation market. The extra ethane and LPG have freed up naphtha supply in a number of markets that would traditionally be used as a petchem feedstock. Naphtha, a fungible commodity, can be used in petchem or transport. U.S. refiners produce over 200,000 b/d of naphtha for petchem use. Outside of the U.S., plants whose crackers rely on naphtha are adjusting to use more ethane and LPG, which in turn would free up more naphtha to blend in transportation fuels.

By the look of current market trends, demand for petrochemicals will grow, with a high concentration of the increases occurring east of the Suez Canal. While the growth of NGLs will no doubt help meet this demand boost, it’s unclear yet how the transportation sector will be affected. But it stands to reason that larger-than-expected increases in aviation and road demand, which also has few viable substitutes at the time being, have the potential to underpin oil markets for the coming decades.

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