Is the future of refiners in petrochemicals?

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IS THE FUTURE OF REFINERS IN PETROCHEMICALS? | 2

In the last decade, the world saw a drastic shift from worrying about peak oil supply to considering peak oil demand to be a reality in a not-too-distant future.

This shift in perception of supply and demand has triggered some rethinking about the refining business. In particular, petrochemicals are seen as an increasingly important target for refiners.

However, while petrochemicals are no doubt an opportunity, not all of this opportunity will be available to refiners, and certainly it will not be an option open to all refiners.

Fortunately, while petrochemicals will play an increasingly important role in future oil demand, there remains a story for refiners beyond petrochemicals.

The Petrochemical Market OpportunityWe can hardly ignore the potential of the petrochemical market. Petrochemical products are everywhere, and they are integral to our modern societies – packaging, clothing, and gadgets, just to name a few.

While there is growing public awareness of the need to reduce single-use plastics, there is no fundamental change in the consumerist culture today. We are always on the quest for the next new goods – to be on-trend with fashion or to get hold of the latest mobile phone model.

This behavior is set against the backdrop of growing urbanisation and middle-class populations, especially in the developing economies, which will drive more consumption as disposable income increases.

Is the future of refiners in petrochemicals?

MAN YIU TSE MARCH 2020

2040ICIS expects that in the long term to 2040, total petrochemical demand

will grow at 3.2%/year on average,

Petrochemical Demand AAGR% 2018-2040

0 1 2 3 4

Polyolefins

Key Elastomers

Polyesters

Other Key Plastics

TOTAL

Source: ICIS Supply and Demand Database

Global Incremental Petrochemical Demand 600

500

400

300

200

100

0

Polyolefins

Other Key Plastics

Polyesters

Key Elastomers

2018 204020300

Mill

ion

Tonn

e

Source: ICIS Supply and Demand Database

3.2

2.5

3.6

2.1

3.3

Copyright 2020 Reed Business Information Ltd. ICIS is a member of RBI and is part of RELX Group plc. ICIS accepts no liability for commercial decisions based on this content.

IS THE FUTURE OF REFINERS IN PETROCHEMICALS? | 3

The Brookings Institution, a Washington-based non-profit public policy organisation, estimates that every second, there are five people entering the middle-class population.

ICIS expects that in the long term to 2040, total petrochemical demand will grow at 3.2%/year on average, slightly above that of GDP, with polyesters and polyolefins seeing the strongest growth.

Looking at growth in absolute terms, ICIS expects that between 2018 and 2030, the world will see an incremental petrochemical demand of around 193m tonnes, and an additional 162m tonnes in the next 10 years to 2040. Polyolefins will be a major contributor to that growth.

Feedstock Diversification and Growing Recycling EffortsAs such, the feedstock required to satisfy some additional 355m tonnes of petrochemicals will be a target for refiners. However, not all petrochemical feedstocks demand will be available to refiners due to diversification of feedstock and growing recycling efforts.

While steam cracking remains the key workhorse for petrochemical production, non-traditional routes such as coal-to-olefins (CTO), methanol-to-olefins (MTO) and propane dehydrogenation (PDH) are expected to gain an important share – as much as 12% 10 years later, from just 2% 10 years ago.

The rise of PDH has been supported by the availability of imported NGLs, particularly from the US and Middle East, and growing propylene demand. On-purpose propylene production has become an attractive option that is less capital intensive to meet propylene demand without having to manage the co-products.

It is worth noting that close to 30% of propylene capacities added between 2010-2018 globally were PDH. More PDH capacities are expected, and PDH is expected to account for around 18% of propylene supply globally by 2030.

Meanwhile, investments in CTO and MTO have continued to be made in China. While there are environmental concerns over coal, feedstock diversification and economic growth for these coal-rich inland provinces are also priorities for the Chinese government.

More PDH capacities are expected, and PDH is

expected to account for around 18% of propylene supply globally by 2030

Changes in Global Feedstock Slates

0%

20%

40%

60%

80%

100%

2025202020152010

Ethane LPG Heavier LiquidsNaphtha

9%

47%

13%

30%

6%

40%

15%

38%

Source: ICIS Supply and Demand Database

Global Olefins Feedstocks

0%

20%

40%

60%

80%

100%

2030202520182010

2%8% 11% 12%

Steam CrackingNon-Traditional Routes

Refinery gas/FCC/MetathesisOthers

Source: ICIS Supply and Demand Database

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IS THE FUTURE OF REFINERS IN PETROCHEMICALS? | 4

About 5.9mtpa of CTO and MTO capacities are expected to be added between 2020-2022. Further out, the development of MTO, which relies on imported methanol, is expected to fizzle out.

CTO investments, however, will remain, given China’s large coal reserves. ICIS considers around 5.2mtpa of CTO announced capacity to be speculative.

Besides the non-traditional routes that would displace some feedstock markets for refiners, the lightening of the feedstock slate in steam cracking will also reduce the naphtha requirement to some extent.

This dynamic is chiefly attributable to expansions in the US and Middle East domestic ethane cracking.

The US, in particular, has seen more than 8mtpa of ethane cracker capacity started up since 2017. Another 6.6mtpa is expected to be added from now till 2022.

There is also increased use of imported ethane and LPG in international markets, such as Asia. Future expansions in this region include the Zhejiang Satellite Petrochemical ethane cracker project, which comprises two 1,250,000 tonne/year ethane crackers, with start-up expected in 2021 and 2023.

Meanwhile, PetroChina is also planning a 600,000 tonne/year ethane cracker in Xinjiang province for start-up in 2023, which would utilise domestic ethane from the Tarim oilfield.

Global Cracker Feedstock Slate

Heavier Liquids

NaphthaLPGEthane

EUROPE

Heavier Liquids

NaphthaLPGEthane

NORTH AMERICA

Heavier Liquids

NaphthaLPGEthane

S & C AMERICA

Heavier Liquids

NaphthaLPGEthane

AFRICA

Heavier Liquids

NaphthaLPGEthane

MIDDLE EAST

Heavier Liquids

NaphthaLPGEthane

FORMER USSR

Heavier Liquids

NaphthaLPGEthane

NORTHEAST ASIA

Heavier Liquids

NaphthaLPGEthane

ASIA AND PACIFIC

68% 74%

19% 16%8% 6% 5% 4%

37%37%

8% 8%

56% 56%47%52%

79%73%70% 69%

20% 20% 10%11%0% 0%

39%

17%

52%

23%

0%

60%

8%1%

35% 27%

10%14% 8% 6%

14%10%8%12%0% 6%

63% 59%

28% 32%

55%

34%

1% 0%10% 15% 12% 11% 15% 14%16%

34%

0% 0%

2018 2015

Source: ICIS Supply and Demand Database

In the polypropylene market, currently recycled material accounts for a mere 2% of the global PP production. ICIS expects its share to more than triple by 2040

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IS THE FUTURE OF REFINERS IN PETROCHEMICALS? | 5

Furthermore, recycling efforts, particularly in plastics, are gaining traction, driven by an aspiration towards circular economy adoption. Some portions of virgin resin demand, and thus feedstock demand, will be displaced, although the effects will likely be felt more in the longer term.

In the polypropylene market, currently recycled material accounts for a mere 2% of the global PP production. ICIS expects its share to more than triple by 2040.

Nevertheless, naphtha will remain an important and viable cracker feedstock outside the US and Middle East. In Asia, ICIS expects over 210m tonnes of incremental demand for naphtha between 2018-2040, of which 157m tonnes will come from Northeast Asia and about 54m tonnes from Asia and Pacific (Indian sub-continent, Southeast Asia and Oceania).

To put that into perspective, that is double the size of the current market. Despite the dampening factors of feedstock diversification, lightening of cracker feedstocks, and growing recycling efforts, there is still a very sizeable naphtha requirement to be fulfilled by refineries, especially in Asia.

Navigating the Challenging Market EnvironmentHowever, this scenario will not benefit all refiners. Firstly, ICIS expects naphtha supply to remain sufficient to satisfy the rise in demand until post-2025.

The Middle East would be the key supplier, with its supply tending to be lighter as more naphtha is used for gasoline and aromatics.

Shale development in the US has enabled this market to emerge as an additional supplier of light material – pentanes plus. Asia will be the largest importer, but demand will be contained by domestic refinery expansions.

It is not always easy to anticipate how markets evolve in the petrochemical industry and even harder to foresee the repercussions of these changes to your company’s growth strategy.

With the ICIS Supply and Demand Database, you gain a long-term view of rapidly changing petrochemicals markets and end-to-end perspectives across the global petrochemical supply chain, including refineries, more than 100 petrochemical commodities and 160 countries.

ICIS Supply and Demand Database has all the data and analysis you need from 1978 and forecasts up to 2040. This powerful data and analytics tool helps you to optimise opportunities, manage risks and enhance growth strategies.

Identify opportunities with ICIS Supply and Demand Database

IMPROVE YOUR STRATEGY NOW

ICIS expects over 210m tonnes of

incremental demand for naphtha between

2018-2040

Copyright 2020 Reed Business Information Ltd. ICIS is a member of RBI and is part of RELX Group plc. ICIS accepts no liability for commercial decisions based on this content.

IS THE FUTURE OF REFINERS IN PETROCHEMICALS? | 6

Meanwhile, a global gasoline surplus is expected to develop, thanks to efficiency improvements and greater penetration of EVs, leading to a growing share of naphtha to be used as petrochemical feedstock.

Secondly, many new sites are very heavily integrated, pushing towards a so-called crude oil-to-chemicals operation – achieved by increasing conversions through existing conversion technologies. In particular, the refineries of Hengli and Zhejiang Petrochemical, which have already started operation, have an impressive 40% petrochemical yield.

Of note, Tangshan Risun has reworked its configuration from the time the project was first conceived to achieve higher conversion of chemicals. Meanwhile, existing refineries could also raise their conversion to chemicals.

Reliance has an ambition to transform its business and has set an ultimate goal to achieve greater than 70% conversion of crude refined in Jamnagar to competitive chemical building blocks of olefins and aromatics.

Around half of the additional ethylene supply between 2018-2025 in Asia will come from refining-petchem integrated complexes.

Refiners hoping to gain shares in the petrochemical feedstock space by supplying to the merchant market will find it challenging, given the ample supply of naphtha in the market.

As such, refiners need to expend effort in achieving greater operational excellence in all aspects, such as production and supply chain management through partnerships with others as well as research and development in technologies so as to move themselves more to the left of the cost curve.

Integration, or closer cooperation and partnerships, between refineries and petrochemical plants are also needed. A more seamless operation will be beneficial for both the refiner and the petrochemical producer.

While petrochemicals will be an increasing target for refiners, it is not the only target left. The oil product market, after all, is more than 10 times bigger than the petrochemical market.

The narrative in the oil industry has changed

entirely from just 10 years ago, necessitating shifts in

business strategies.

Naphtha Supply/Demand Balances Petrochemical Yield of Select Refineries

150

100

50

0

-50

-100

-150

2030202520202010 2015

mill

ion

tonn

es

North America South & Central America Europe

Former USSR Africa Middle East

Northeast Asia Asia and Pacific World

Source: ICIS Supply and Demand Database

wt %

Pet

roch

emic

al Y

ield

Minor Integration Integrated Refinery Proposed COTC Future COTC?

Dangote, SA Jazan

0 10 20 30 40 50 60 70 80 90 100

Sinopec / KPC RAPID, Brunei HengyiSaudi COTC, Shenghong, Tangshan Risun

Hengli, ZhejiangHPCL BarmerSTAR, Turkey

Source: ICIS Supply and Demand Database

Copyright 2020 Reed Business Information Ltd. ICIS is a member of RBI and is part of RELX Group plc. ICIS accepts no liability for commercial decisions based on this content.

IS THE FUTURE OF REFINERS IN PETROCHEMICALS? | 7

Asia Product Balances

LPG Naphtha (net) Gasoline

Kerosenes Gas Oils Residual Fuelv

2010 2018 2020 2025 2030 2035 2040

2010 2018 2020 2025 2030 2035 2040

150

100

50

0

-50

-100

-150

-200

-250

150

100

50

0

-50

-100

-150

-200

-250

Northeast Asia

Indian Sub-Continent

South Asia

Growing deficit of petrochemical feedstocks but growing surplus of fuels

Strong demand growth among the developing economies but lack investments in refining

More refinery investments needed post 2025

2010 2018 2020 2025 2030 2035 2040Source: ICIS Supply and Demand Database

Man Yiu is an analyst in the energy and refining sector, with a focus on the Asian region. He manages and develops large databases on energy and refining analysis, and performs medium-to-long term forecast for energy and oil products demand.

Man Yiu TseSenior Analyst,

Energy and Refining

There is still demand growth for fuels (gasoline, diesel and jet kerosene), especially in the Indian sub-continent and Southeast Asia. Without new refining investments, the Indian sub-continent will see a deficit in fuels.

Moreover, there is a lack of refining investments in Southeast Asia, with fuel and petrochemical feedstock deficits continuing to widen amid strong demand growth among the developing economies.

Between 2020 and 2025, oil demand in Asia and Pacific is expected to grow 3.3m bbl/day. In northeast Asia, on the other hand, there is a growing deficit of petrochemical feedstocks, but growing surplus of fuels.

Thus, refiners need to carefully study and understand the market demand profile in order to plan and strategise how to map supply to demand. It is imperative for refineries to stay relevant to the needs of the world, giving the right product mix to the market.

The narrative in the oil industry has changed entirely from just 10 years ago, necessitating shifts in business strategies. In the next 10 years and beyond, we should not expect less dynamism.

There are downside risks amid a renewed and stronger attention to climate action and sustainability, should we see concrete actions to that end. Refiners need to continue to prepare themselves to be timely for changes in the industry, always keeping a medium- and long-term view of the market.