Big Oil needs big plastic.
earned that moniker for a reason, but as the petroleum market gets less lucrative and demand projections wane, their investments have shifted.
Not long ago it was in the direction of natural gas, oil’s cleaner-burning hydrocarbon cousin. But so much of the fuel is being produced out of U.S. shale formations that the focus has shifted to adding value to it now. Investing in petrochemicals is as close as one can get to a no-brainer given the surfeit of the feedstock in North America.
That is ironic given rising environmental concerns about plastic pollution that could threaten demand growth in much the way environmental rules challenge petroleum demand. A booming market in building new petrochemical plants is afoot, though. It is a huge shift from the situation a little over a decade ago when making any such investments in the U.S. seemed foolish.
In the mid and late 2000s, domestically-produced hydrocarbons were expensive and demand was outstripping supply. Now companies in the shale patch struggle to generate enough cash flow to keep growing while slowing global economic growth has prompted groups including the International Energy Agency to cut demand outlooks for 2019. Longer term, a shift towards cleaner fuels is threatening to push up the date some prognosticators think petroleum demand will peak. Meanwhile, the oil patch delivering virtually all the output growth, U.S. shale, requires constant reinvestment.
This is reflected in Big OIl’s returns. Exxon’s return on invested capital has fallen from 27% in 2012 to less than 10% last year, according to FactSet. Now they are starting to converge with chemicals companies.
’s average ROIC over the past five years, for example, was 11%.
Resigned to more pedestrian returns, integrated oil companies see a strong case for investing in a business that was once a sideshow. Exxon has stumped up more than $6 billion in capital expenditures in the past two years to bolster its chemical business, a more than fourfold increase from fiscal 2003 and 2004. It and Saudi Arabia’s state-controlled petrochemicals company recently agreed to build the world’s largest steam cracker—a facility for converting ethane into petrochemicals—in Texas. The Chevron Phillips Chemical Company, a 50-50 joint venture between parents Chevron and
recently signed a deal with Qatar Petroleum to build a facility on the Gulf Coast.
They aren’t alone. Since 2010, 334 new chemicals projects in the United States alone have been announced, according to the American Chemistry Council. On the current trajectory, demand for primary chemicals is set to increase by around 30% by 2030 and almost 60% by 2050, the IEA says. Wood Mackenzie estimates the chemicals industry currently accounts for less than 15% of petroleum liquids demand. But it will become the single largest demand growth segment starting in the mid-2020s when it surpasses the transport segment.
There are risks, of course, especially if an economic downturn takes hold.
’s margins were compressed in the second quarter as supply growth outpaced demand. Environmental concerns are there, too. Governments from China to India to Canada and California are trying to crack down on waste from packaging. But the flaring of associated gas from U.S. oil fields is an environmental headache as well.
Meanwhile, plastics aren’t going away. Even if demand projections prove too optimistic, low-cost producers will grab share from higher cost ones. The U.S. Gulf Coast is in a sweet spot today in that respect. Energy producers who face a problem of too much gas are making figurative lemonade out of lemons and the literal plastic bottles in which it is served.
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