Aug-2020

How refiners can capitalise on the petrochemical industry

As the demand for refined products is falling and demand for petrochemical products is increasing, it is vital that refiners consider petrochemical integration, which offers increased flexibility and a competitive edge.

Sarah Casey
World Refining Association

Article Summary

Learn more below about the benefits, considerations and recent projects, and, how the double whammy of the oil price crash and the COVID-19 pandemic is affecting the petrochemical market.

Demand for refined products is falling and peak oil demand is being predicted, by most oil companies, to be between the late 2020s and the 2040s. The IEA however suggest that the peak will not be before 2040 due, largely in part, to the rising demand for petrochemicals.

Today, higher efficiency internal combustion engines, increasing hybridisation and the rise of e-mobility are eroding transport fuel demand, leaving refiners to seek ways to transform naphtha and diesel into more valuable products. Conversely, demand for petrochemicals continues to rise, with global demand for petrochemical feedstock accounting for 12 million bpd (circa 12%) of total demand for oil in 2017 and forecast to grow to almost 18 million bpd in 2050. Resultantly, an increasing number of refiners are looking to the petrochemical market as a vital aspect of their future strategy.

The future profit for refiners will depend largely on their capacity to produce petrochemicals and so they must now begin to focus on routing more streams from fuel products to petrochemical products, in order to maximize margins. As part of their survival strategy, it is vital that European refiners begin, and continue to, prioritise flexibility and petrochemical integration.
The market and Covid-19 & oil price crash

Before we delve into what the petrochemical path offers for refiners, the current context must be addressed. The petrochemical market is being hit with a double whammy; the oil price crash and the COVID-19 pandemic. Since the COVID-19 situation is developing so rapidly, we cannot yet assess the true impact on the market and the far reaching consequences on long term petrochemical demand. The crude price drop is the more immediate issue for the petrochemical market and the impact of this will be felt much sooner, with naphtha being the principle feedstock in Europe and Asia. Certainly the oil price crash has placed a deeper uncertainty on the outlook of the market.

In China, the extended Chinese new year holiday and restricted movement continues to affect the chemicals value chain, from demand to workforce, to shipping and operating capabilities/rates. Consultancy Wood Mackenzie has drawn a comparison with the SARS outbreak in 2003 and its effect on the Asian chemical market. The consultancy expects that Coronavirus will have a larger impact given the lower growth levels in China’s economy compared to 2003.

From a more global perspective, petrochemical prices have been tumbling throughout March. Following the crude oil price crash, prices of all the derivatives, olefins, aromatics, have been falling. Whilst there has been a major effort to maintain supply chains to enable chemical producers to operate, shipping has been a challenge and so has the supply of feedstock to keep crackers and reformers running. This has already played out in the US where in early March, some refineries reported that they will not be restarting their fluid catalytic cracking (FCC) units (which produce gasoline and propylene) until at least April.

The demand side also poses major challenges as countries worldwide are imposing strict measures on the movement of people, affecting consumer demand and the transport fuel market, with the Financial Times reporting on 24th March that estimates now suggest global consumption could drop by 25% in the coming months. Whilst the majority of petrochemical products are also seeing this downward trend, some chemical companies are seeing a massive spike in demand, especially those which produce chemicals for hygiene use. Additionally, the current situation has presented an opportunity for companies who have not necessarily produced these chemicals in the past but have the capability to, including BASF, Orlen, Shell and Irving Oil.

The petrochemical path — what benefits does it offer?
The IEA have suggested that ‘for integrated refiners, the petrochemical path can offer higher margins than fuels’ and the growth in demand for petrochemical products is set to account for over a third of the growth in oil demand to 2030. Petrochemical integration, integrating sites and creating plastics, will, and should, be part of refiners’ long term strategy and taking steps toward the petrochemical path now will secure them a competitive edge in future markets.

The petrochemical path still offers many benefits for refiners, chiefly higher operating margins. Depressed products from one can be used as valuable feedstock for the other, for example refinery gases and LPG can be used as feedstock to petrochemicals and conversely, petrochemical C4’s, py-gas/py-oil, hydrogen can be used as feedstock for refining. For refiners, integration with petrochemical production can be through feedstock provision in terms of propane, butane, or naphtha feedstocks, or through increased production of propylene and aromatics.

Vitally, petrochemical integration increases flexibility for refiners. They have a wider choice of feed streams for the petrochemical section, which can be altered in response to demand, a back-up hydrogen supply to the refinery and an opportunity to mix crudes to meet requirements of both refinery and petrochemical needs. In addition to the shared use of hydrocarbons, energy savings can be made and waste minimised through power, steam, process water and cost savings can be made through the sharing of other resources including staff, transportation and, generally, increased size means increased efficiency.

Who already has a piece of the pie?
Saudi Aramco and ADNOC are partnering with a group Indian oil companies including Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum on a US$ 44 billion refinery and petrochemicals complex in India which is expected to be completed in 2024 and produce 18 million tonnes/year of petrochemicals.