Decarbonising road transport: the consequences for petrochemical producers

Author Francis Osborne, Head of Forecasting, Argus Consulting Services

As efforts to decarbonise road fuel demand intensify it is worth noting that lower oil demand means less refining, which will have significant consequences for the global petrochemical industry.

In our last blog post, we discussed how electric vehicles (EV) are set to radically change the nature of road transport and with it the demand for traditional fossil fuel products. With 100mn EVs on the road by 2030 it is clear that the potential for demand growth in traditional gasoline and diesel fuels is fast disappearing.

A recent report from the UN Intergovernmental Panel on Climate Change (IPCC) ups the stakes significantly. It states “there is no uncertainty that global warming is caused by human activity and the burning of fossil fuels”, while warning that an increase in global temperatures of 1.5°C as early as 2040 is now almost inevitable.

There is no going back. The shift away from fossil fuels can only accelerate.

Peak oil demand is getting closer

Here we want to address what the implications might be for petrochemical producers as the world turns away from the use of petroleum products. These are produced from refineries so it stands to reason that if the market requires less, then the demand on refining is also reduced. But refining is an important source of feedstock to the petrochemical industry.

At the moment the consensus view is that while global demand for petroleum-based road fuels is close to peaking and will start to fall after 2030, demand for key petrochemical products ethylene and propylene will still be growing. By 2040, road fuel demand is forecast to be 15pc lower than in 2019. But ethylene and propylene demand could be 75-80pc higher.

Global demand for road fuel and key petrochemical products

Consulting chart 01 

Feedstock availability becomes a concern

Inevitably, falling oil demand means that refineries will either run at lower utilisation or close completely. This means there will be less naphtha produced. Naphtha is a key feedstock for ethylene production – in 2019 close to 50mn t was used, accounting for 40pc of total feedstock consumed. So just as demand for feedstock is rising, refinery supply of naphtha will be falling.

Other important sources of feedstock to ethylene production are ethane and LPG, which come from gas processing. And since the role of gas in the global energy mix is set to rise – gas after all contributes less to global warming – there should be more gas liquids to supply as feedstock to the petrochemical industry and make up for the loss of naphtha supply.

Not necessarily. Gas is still a significant source of greenhouse gas (GHG) emissions and will not escape the global push to decarbonise. Its role as a fuel for power generation is set to weaken over time and growth in global gas demand is set to halve after 2030 compared to a decade earlier. This will mean weaker growth in LPG and ethane supply as well.

Refining also supplies around one third of global propylene demand. Reduced supply of refinery-sourced propylene can be offset by construction of propane dehydrogenation (PDH) plants, which produce propylene directly from propane feedstock. PDH capacity is already set to become an increasingly important source of propylene but more capacity will reduce the availability of propane feedstock for ethylene production.

Constraints to the availability of naphtha, ethane and LPG suggest that the risk of a shortage of feedstock developing is a real one. Our analysis shows that a feedstock gap could open up as early as 2030 and by 2040 could become significant.

Meeting global demand for ethylene

Consulting chart 02 

Relatively small supply gaps usually can be bridged organically, with appropriate price signals stimulating incremental investment to bring more supply of any of the feedstocks to market. But here the size of the supply gap potentially increases to a size where this will not be possible. In which case other things will have to give.

Demand growth may be weaker as higher feedstock prices feed through to the price of end products. Demand may be lower because of increased recycling. The production of petrochemical products direct from crude feedstock may become mainstream.

Whatever happens it is clear that as transport markets decarbonise the market environment for petrochemical producers will also change. At the moment companies are more focused on what refinery closures mean for local feedstock supply. In the longer term, they will need to come to grips with much wider losses in feedstock supply.

Argus’ consulting team is well placed to research and advise on decarbonisation and its impact on the petrochemicals space. Argus’ experts will help you determine what trends to track and how to stay competitive in today’s ever-changing global markets.
Click here to contact us to find out more details or how this trend will affect your company

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