As gasoline demand wanes, oil industry looks to petrochemicals
March 11, 2018
In 2010, the Middle East was beginning to run out of the cheap natural gas that had transformed the region into a major petrochemicals hub. Houston’s Chevron Phillips Chemical, which had spent a decade building four plants in Saudi Arabia and Qatar, needed a new place to expand.
In the U.S., Texas energy producers hadn’t yet unleashed the flood of shale oil and natural gas that would transform the industry and spur an explosion of petrochemical construction and expansion along the Gulf Coast. But Ron Corn and his team at Chevron Phillips, intrigued by budding oil and gas production in the Eagle Ford basin south of San Antonio, anticipated a seismic shift in domestic energy output and convinced company executives to build a multi-billion-dollar processing plant in Baytown to produce ethylene, a natural gas-derived feedstock for plastics.
“It was quite a radical concept,” said Corn, who now serves as the company’s senior vice president for petrochemicals. “There hadn’t been a whole lot of construction.”
Eight years later, that early bet promises to pay off in spades for Chevron Phillips, a joint venture of the oil company Chevron and Houston refiner Phillips 66. The processing plant, known as a cracker, is near completion as petrochemicals emerge as a savior for an oil and gas industry facing a future of electric cars, renewable power and intensifying efforts to wean the global economy from fossil fuels.
The growth in petrochemicals is a key reason that oil industry executives and analysts are discounting predictions that peak oil demand — the point at which oil consumption begins a steady, long-term slide — is imminent. The International Energy Agency anticipates that petrochemicals will account for a quarter of the growth in global oil consumption during the next five years, replacing gasoline as the driver of crude demand.
"The petrochemical sector is one of the blind spots of the oil markets debate," Fatih Birol, the IEA’s executive director, said at the CERAWeek by IHS Markit energy conference in Houston last week.
Executives from major energy companies agreed that global population growth and expanding middle-class markets in India, China and other emerging nations will support petrochemicals even as gasoline consumption in the U.S. and elsewhere erodes. In its most recent outlook, the IEA projected that global gasoline demand will grow only 0.2 percent a year through 2023 as 10 of the world’s largest vehicle markets, including the U.S., implement stricter fuel efficiency standards and develop more electric models.
Mary Barra, CEO of General Motors, said during an address at the CERAWeek conference that her company plans to roll out 20 new electric models over the next five years. The company is also working to make a range of other vehicles, including the gas-guzzling pickup that dominates Texas highways, lighter and more fuel-efficient.
GM is doing that with high-performance plastics manufactured by specialty chemicals makers such as Huntsman Corp. of The Woodlands.
That dynamic of less gasoline and more plastics has already prompted a range of energy producers to expand petrochemical operations amid a tepid outlook for traditional refining. Exxon Mobil Chemical Co., for example, has nearly completed an ethane cracker in Baytown with the capacity to produce 1.5 million tons of ethylene a year.
The abundance of cheap natural gas from West Texas shale fields such as the Permian basin has fueled the petrochemicals boom, providing a steady stream of ethane and other natural gas liquids to be converted into feedstocks for plastics, building materials and packaging. Already, a spate of large-scale expansions have transformed the U.S. into a major petrochemicals exporter, and a second wave of multi-billion developments along the Gulf Coast promise to carry the industry well into the next decade.
Andrew Brown, upstream director for Royal Dutch Shell, said in an interview that petrochemicals are a growth priority for his company, which has a large manufacturing facility in Deer Park and several others along the Gulf Coast. It is now expanding in Louisiana and Pennsylvania near the Utica and Marcellus shale basins, major sources of natural gas.
“Unlike refining, and ultimately unlike oil, which will see a moment when the growth will stop, we actually don’t anticipate that with petrochemicals,” Brown said.
The IEA forecasts that new ethylene crackers will increase consumption of oil and natural gas liquids by at least 1.4 million barrels a day through 2023. In the U.S. alone, ethylene production is expected to increase by 13 million tons a year during that period.
DowDupont, the nation's biggest chemical company headquartered in Michigan and Delaware, has led much of the growth to date. The company’s Freeport complex, one of the first major ethylene plants in the region, began operating last year with a 1.5 million-ton annual production capacity.
“We feel very strongly the demand growth is going to continue,” Dow Chemical CEO and president James Fitterling said during a CERAWeek panel.
Industry leaders are planning even larger complexes along the Gulf Coast. Exxon Mobil Chemical, for example, has partnered with SABIC, a manufacturing company controlled by the Saudi Arabian government, to construct the world’s largest ethylene cracker as part of a massive $10 billion petrochemical complex near Corpus Christi.
Saudi Aramco, the Saudi Arabian national oil company, recently signed an agreement with Chevron and the Woodlands engineering firm CB&I to develop new crude-to-chemicals technologies.
Michael Sicker, vice president of business development for Mitsubishi Heavy Industries’ Houston-based oil and gas division, said in an interview that petrochemicals plants have for years driven demand for the company’s industrial machinery. He anticipates the second wave of projects will attract more foreign companies eager to take advantage of low-cost production in the U.S.
“Everyone is looking at the biggest plants that have ever been built,” he said.
Chevron Phillips’ Corn said that even during the oil bust, his team never doubted the potential of the massive Baytown cracker, the company’s only one in the United States so far. The facility, now undergoing the final steps before startup, will expand the company’s U.S. ethylene and polyethylene production capacity by 40 percent.
“We believed we were building a very competitive asset,” Corn said. “It was a big step for us.”