INDUSTRY INSIGHT

The energy transition and growing circular economy challenges Middle East petrochemical developments

By Alan Gelder, Vice President, EMEARC Refining and Chemicals, and Gordon Haire, Head of Aromatics, Wood Mackenzie Chemicals

The global energy transition is the switch away from fossil fuels to renewables as the source of primary energy, primarily electricity. Electrification of the vehicle fleet is the key enabler of this transition for the transportation sector.

While legislation sets a clear direction of travel, mass adoption of these technologies will occur when they become cost competitive with internal combustion engines, which are powered by fossil fuels.

For electric vehicles, battery costs need to continue to fall. We estimate a battery cost of USD 100/kWh is required for cost competitiveness to be fully achieved. Based on our understanding of technological developments and a deep knowledge of the costs of supply of key battery metals, such as lithium and cobalt, Wood Mackenzie estimates this to be achieved within the next decade.

Over the next 10 years, the environmental impact of personal mobility will be partially offset by tighter vehicle fuel efficiency standards, such as those being adopted in Europe and China. The US is currently the only major auto market not following this path, as it considering freezing the progressive tightening of the current fuel efficiency regulations at the 2021 levels. However, the 2021 levels still require new vehicles to be more efficient than the majority currently in use.

Fuel efficiency improvements and electrification also affect the commercial transportation sectors, but to a lesser extent.

“Over the next 10 years, the environmental impact of personal mobility will be partially offset by tighter vehicle fuel efficiency standards, such as those being adopted in Europe and China.”
“Petrochemical demand growth remains strong, largely driven by rising economic activity in the developing world and the associated growth in the middle class.”

These moves have two implications for the oil market. Firstly, oil demand will continue to grow over the medium-term, peaking in the mid-2030s. Given the ongoing production decline in the upstream sector, significant new supply growth needs to be developed to satisfy global oil demand, so our medium-term crude oil price outlook is for levels higher than today.

Secondly, gasoline demand growth is slowing and will fall after peaking around 2030. The growing demand for distillates requires sustained refinery investment. And, as the energy transition accelerates, there is potential for the refining system to supply feedstocks for petrochemicals.

Petrochemical demand growth remains strong, largely driven by rising economic activity in the developing world and the associated growth in the middle class and their switch to more energy/petrochemical intensive lifestyles. Globally, petrochemical demand growth is higher than global GDP growth. However, in the OECD, the ageing population and fall in working age population will be a drag on that future demand growth.

A bigger threat to demand growth could be higher recycling rates and a ban on single-use plastics. The total size of the commodity polymer market is around 300 million tons per year, but less than 10% of polymers are recycled. The exception is PET, for which over 50% is collected and recycled. Most of the other polymers have almost no recycle position.

PET has such a strong recycling position, as the majority of PET bottles are clear and do not use layered polymer structures.  Also, the recycled PET has a developed market outlet into polyester fibre for clothing.

There is clearly growing pressure from governments and brand owners to increase recycling rates.  This will impact polymers differently; we think the polymers that are going to come under the most pressure are those with single-trip applications and no recycle agenda. So simplistically this could even promote PET applications at one end of the agenda and discourage the use of polystyrene at the other.

However, we believe these recycling targets will take time to implement, as collection is complex (given the range of different polymers) and significant investment in recycling capacity is required in the markets where the waste is generated, as China has stopped importing such waste.

While we recognize that recycling mandates have the potential to subdue demand, given the practicalities, we expect a measured pace of implementation. This is one of the key reasons why our petrochemical growth rates weaken from “global GDP plus” to “global GDP parity” over the next decade or so.

There is the sustained need for petrochemical investment to satisfy demand growth. The traditional approaches of choosing between low-cost feedstocks (often located far from end-use markets) or naphtha-based feed (located close to the petrochemical demand centres) are being supplemented by crude-to-chemical facilities.

“A bigger threat to demand growth could be higher recycling rates and a ban on single-use plastics.”

These new integrated refinery/petrochemical facilities that are being readied for commercial operation in China are transforming both the refining and chemical landscape. The yield of chemicals from these second-generation facilities is typically about half of crude processed, rather than 10 – 15% for first generation, traditional sites.

The sites are expected to occupy the first quartile in global competitiveness, so will be highly utilised once fully operational. Their impact on the chemicals market is more dramatic than refining, due to the different scale of the global gasoline and aromatics markets, but the start-up of these facilities will certainly affect both, weakening refining and chemical margins in Asia and beyond.

These facilities and those due to follow will improve China’s self-sufficiency for ethylene and its derivatives, which will challenge the future growth of Middle East petrochemical exports.

For Middle East petrochemical companies, global competitiveness becomes even more important as the global energy transition unfolds.