The oil industry is eyeing petrochemicals gains amid uncertain demand for fossil fuels

Welcome back. In today’s newsletter, I look at an area of ​​increasing importance to global oil companies that are concerned about slowing demand for hydrocarbon fuels.

Petrochemicals, which are part of plastics, polyester and many other cheap and light commodities that are the basis of modern life, could boost oil companies’ profits even after demand for fuel has peaked. I look at how the battle for market share in the petrochemical business is intensifying – and also the threat that green alternatives could face.

Thank you for reading.

Petrochemicals

Petrochemicals promise the future of oil companies

Petrochemicals hold the hope of the oil industry. With the U.S. and Europe likely past their peak in demand for fossil fuels, in part due to the rise of electric vehicles, major oil and gas companies are preparing for a world in which transportation fuels are no longer a major driver of growth.

Petrochemicals are woven into modern life, from packaging and detergents to medicines and fertilizers. The International Energy Agency predicts that oil demand will rise to 105.45 million barrels per day in 2030 from 102.24 million barrels per day last year. Of this growth, 2.8 million barrels per day – more than 85 percent of the total increase in demand – will come from petrochemicals.

The battle for market share in petrochemicals is already fierce and will be extremely important for some of the largest listed companies in the energy sector. In the short term, the main beneficiary was US shale oil producers. But while this seems promising for the world’s oil majors, such as ExxonMobil and Shell, they need to consider how much of this demand they will actually be able to service – and how much of a threat they face from green alternatives.

The fight for the Chinese market

The explosion in petrochemical demand is largely a Chinese story, reflecting that country’s massive industrial output. According to Ciarán Healy, an oil market analyst at the IEA, about 6.7 million barrels a day, or 6.5 percent of all global oil consumption, currently goes to supply China with petrochemicals, making it the largest contributor to global growth in recent years demand for oil. .

Widely used synthetic materials such as polyester and nylon are derived from petroleum, and fast e-commerce retailers such as Shein and Temu have been strong drivers of demand.

Petrochemicals can also be critical to the green energy transition. Electric vehicles use more thermoplastics, foams, fibers and rubber pads than internal combustion engine vehicles, David Yankovitz, head of Deloitte’s U.S. chemicals practice, told me. To make electric cars lighter, automakers are replacing metal parts with plastic resins. Yankovitz said about three-quarters of all emissions-reduction technologies require chemicals, most of which come from petroleum.

China met much of this demand through domestic refining of imported oil. Between 2019 and the end of 2024, the IEA predicts that China will have the capacity to produce olefins used in plastics as Europe, South Korea and Japan currently have. But the U.S. shale oil boom has also created a mutually reinforcing “symbiosis” with growing Chinese demand for petrochemicals, Healy told me. Between 2019 and 2023, the US was the only major producer to increase polymer exports to China, according to ICIS data.

During the same period, Healy said, Gulf producers lost market share in major petrochemical product classes, particularly natural gas liquids such as ethane and propane.

However, producers from the Persian Gulf are fighting hard for a share of the Chinese market. China is the largest market for Saudi oil and will be critical to state oil company Saudi Aramco’s ambitions to convert more than one-third of its current oil production into petrochemicals by 2035.

Aramco has plunged into Chinese refineries, acquiring a 10 percent stake in Shenzhen-listed Rongsheng Petrochemical for $3.6 billion last year and opening talks to buy a stake in Hengli Petrochemical, a leading Chinese plastics chemicals maker. Last year, Aramco-owned S-Oil broke ground on a $7 billion petrochemical plant in South Korea.

Adam Hanieh, professor of political economy of the Middle East at the University of Exeter, says this is part of the rise of the “East-East hydrocarbon circuit”. According to him, there is a tendency to reject investment by Middle Eastern countries in downstream diversification and “to treat the Persian Gulf simply as oil pivots.” But he pointed to the recent flurry of investment in refining capacity as evidence of the Gulf states’ long-term strategy.

American oil companies were also part of the event. Exxon is building its own petrochemical complex in the southern Chinese province of Guangdong while expanding its own chemical production at existing plants on the US Gulf Coast.

The pursuit of more ecological options

Amid fierce competition for the fastest-growing segment of global oil demand, some are betting there is room for further disruption — replacing petrochemicals with greener alternatives.

TotalEnergies is building a recycling facility at a refinery southeast of Paris that was originally configured for oil production. British petrochemicals group Ineos, run by billionaire Sir Jim Ratcliffe, is developing a new ethylene cracker at the Port of Antwerp that it claims would be the greenest in Europe and represents “the biggest investment in the European chemical sector in a generation”.

Meanwhile, a host of start-ups have sprung up in the US trying to convert biomass like corn into chemicals. One such startup, Houston-based Solugen, received a $213.6 million loan guarantee from the U.S. Department of Energy’s Office of Loan Programs last month to finance a new plant in Minnesota that will buy sugar from Archer Daniels Midland of Chicago .

The challenges for these companies include the transportation, scale and power of the oil companies they want to dislodge, which is one of the reasons they are eager to align themselves with politically influential US agribusinesses like ADM.

Whether such bio-based products are greener than their petroleum-based predecessors is also debated, in part due to challenges in sustainably sourcing the biomass. But the chemicals that power modern life—including green energy—will have to come from somewhere. “We can decarbonize, but there is no scenario in which we dematerialize,” Yankovitz said.

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