Finding feedstocks in a quickening energy transition scenario
Global energy markets are embarking on a transition to lower carbon sources. The pace of this change is uncertain, but the direction is set and undeniable. As always, petrochemical feedstock markets will be buffeted by changes in energy demand, supply, and pricing. A central challenge for petrochemical producers and "integrates" (integrated energy and petrochemical companies) will be the supply of oil-based feedstocks if oil demand declines rapidly.
The history of energy and oil markets demonstrates there are often surprises in supply, policies, and geopolitics that shape oil markets in unanticipated ways. Today there is no shortage of uncertainties in the outlook and hence scenarios are increasingly important for developing business strategies and portfolios. To help the process, IHS Markit employs a set of energy scenarios constructed from over two decades of client workshops and interactions.
The Rivalry Scenario - considered the "base case" - assumes an evolutionary energy transition over the coming decades, as policies and technologies advance to reduce the carbon content of fuel. This scenario assumes notable improvements in energy efficiency in key sectors and markets that reduce hydrocarbon fuels demand. However, it also assumes moderate levels and pacing of fuel substitution, such as electrical vehicles, natural gas-powered trucks and ships, and solar panels. The result is a relatively stable oil contribution to the global energy mix, falling from 32% today to 29% by 2040. Coal falls from 26% to 21% and natural gas increases from 23% to 26% over the same period. Gas plays a key role in reducing carbon emissions, as its lower price supports penetration into power, industrial, and transportation markets. Non-hydro renewables increase from 2% to 6%.
The Autonomy Scenario offers an alternative forecast. In this scenario, revolutionary changes in market, technology, and social forces decentralize the global energy supply and demand system. The result is an accelerated transition away from fossil fuels as low-cost renewables rapidly displace hydrocarbons from energy supply. Coal demand falls, and its share of the energy mix shrinks to 15% by 2040. Oil demand peaks sooner and declines more rapidly to 10 million barrels per day (bd) below today's level. Gas demand increases more slowly as more low-cost renewables capacity is added. While the scenario significantly reduces the growth in carbon emissions (about 14% reduction by 2040 compared with a 13% increase in Rivalry), it does not achieve the more than 50% reduction needed to reach a "2 degree C pathway."*
Enablers and disruptors of oil consumption
To understand how we move to tomorrow's energy market, it is important to consider oil demand trends and disruptions in key sectors. Oil demand analysis is multifaceted, complex, and quickly evolving, but a sector-wise overview provides context for IHS Markit expectations.
- Transportation, light duty - Increasingly stringent fuel economy standards dominate fuels demand for light-duty vehicles in the coming years. Compounding these trends are major mobility disruptors, including ride hailing, electric vehicles (EVs), and autonomous vehicles. For example, in China, India, the EU, and the US, we forecast EV sales to increase to 39% and 78% of total light-duty vehicle sales for the Rivalry and Autonomy Scenarios, respectively, by 2040. In Rivalry, lower EV cars (those with a charging plug) are significantly replaced by gasoline-hybrid models.
- Transportation, commercial trucking - Globalization has driven rapid growth in commercial trucking, with a two-fold increase in total global ton-kilometer of goods movements between 2000 and 2017. Policymakers and national environmental authorities have only recently started to regulate consumption and carbon emissions from this large oil sector. For example, the US implemented its first commercial truck fuel economy standard in 2010. These standards will reduce diesel consumption in medium- and heavy-duty fleets through a combination of more efficient diesel-power platforms and fuel substitution with liquefied natural gas (LNG), compressed natural gas (CNG), and electricity.
- Aviation -Aviation growth is expected to increase about 130% by 2040. As tough long-term carbon reduction targets are established, aircraft manufacturers are focusing growing research and development on reducing fuel consumption.
- Marine - The underlying demand for ton-kilometer of waterborne freight has increased at an astonishing compound growth rate of nearly 8% per year from 2000 to 2017. The International Maritime Organization has set a 50% carbon emissions reduction target for 2050 with an interim intensity target in 2030. While the industry has demonstrated substantial efficiency gains in recent years, in part due to trends in reduced vessel speed and larger vessel size, it will be a challenge to achieve carbon targets given increasing demand for shipping.
Policy and technology changes will strongly influence these industries, the markets they serve, and the fuel they consume. Not all of the oil consumption and carbon reduction targets will be met, but regulations will change these and other oil demand sectors. In Autonomy, oil consumption peaks in five years. By 2026, the decline rate is 400 thousand barrels per day (kbd) per year, accelerating to one million bd per year by 2037. This is a rapid pace of change, given that oil demand has been growing at over one million bd per year over the past decade.
Contrast these fuel sector trends with petrochemicals. Base olefins plus aromatics demand, the majority of oil feedstock demand, is forecast to increase by 65% by 2040 in the Rivalry Scenario. That growth rate should be less in an Autonomy Scenario, where more effective recycle and reuse of petrochemical products can be assumed and chemical recycling technology advances more rapidly. However, IHS Markit analysis on the plastics sustainability issue demonstrates that reasonably strong growth will remain**.
Natural gas liquids (NGLs) such as ethane, propane, butane, and natural gasolines have contributed notably to the global feedstock supply. For example, NGLs now contribute 55% of global ethylene production. These feedstocks have come to market largely as by-product of crude oil and liquids-rich natural gas fields, spurred by growth in transportation fuels. Lower demand growth and an eventual decline in transportation fuels demand would result in consolidation of the refining industry and reduction of crude oil processing and petrochemical feedstock production in the long term.
Crude production is one-quarter lower in the Autonomy Scenario than Rivalry and gas production is lower by 9% by 2040. In the Autonomy scenario, the appetite for residential and commercial LPGs continues to rise, reducing NGL feedstock availability to the petrochemical industry and causing petrochemical producers to rely more heavily on naphtha feedstocks.
In fact, petrochemical feedstock buyers will be confronted with shrinking supplies from both traditional sources - straight-run naphtha from refineries and NGLs from oil and gas fields. These supply constraints are present in the Rivalry Scenario forecast but are exacerbated by rapidly falling transport fuel demand in the Autonomy Scenario.
Going deeper into the crude oil barrel
Divergent trends in naphtha and NGL feedstock supply versus demand create the need to go "go deeper into the crude oil barrel" to find feedstocks. Today, most refinery-sourced feedstocks are naphtha, which trades at a price lower than crude oil. The technology exists to convert other refinery products, such as diesel and vacuum gas oil (VGO), to petrochemicals - either directly or by processing in a catalytic conversion unit. At today's refined product price structure, however, these feedstocks are not as economically attractive as naphtha or NGLs.
As an Autonomy Scenario unfolds, integrates and refiners will need such deeper integration steps. Some new integrated projects are already designed for a production yield of 25% to 40% chemicals versus the "traditional" 10% to 15%.
Today, the production of nearly all chemicals from the global refining system, even the new deeper integration projects, uses traditional refining and petrochemical process configurations. Crude-oil-tochemicals (COTC) technology has the potential to completely reconfigure the process for converting crude oil into chemicals, producing 70% to 75% chemicals. This technology could revolutionize the industry due to the refinery-sized scale and very low cash cost of production.***
The exact path and pace of the energy industry's transition is uncertain. However, the prospect of falling oil demand and refinery runs has sparked an intense conversation around the future of petrochemical feedstock supplies and the strategies to address inherent risks. As no one solution will be fit for all, petrochemical producers need to consider revisiting and testing their strategy to address this feedstock challenge.
* The Paris Agreement among international parties proposes to keep the global average temperature to below a 2 °C increase relative to pre-industrial levels. IHS Markit 2 Degree CCUS case: SDS.
** IHS Markit Plastics Sustainability Study
*** IHS Markit Process Economics Program: Crude Oil to Chemicals and Oxidative Coupling of Methane Understand gasoline & petrochemical demand growth in different regions, & whether those regions will have enough naphtha production to meet increased demand. ihsmarkit.com/naphtha
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