Cheap shale gas has fed an investment boom in products that often end up as waste. Has the petrochemicals industry miscalculated?
Along the banks of the Ohio River in Beaver County, Pennsylvania, giant cranes whir overhead as thousands of construction workers toil away at what will be one of the largest plastic factories in the world. Once complete, the citadel of smokestacks and pipeworks will churn out 1.6m tonnes a year of pellets for manufacturers in a wide range of industries. They will then make things such as shrink wrap, shampoo bottles and garden furniture which remain popular products in spite of an environmental backlash against plastic. The multibillion-dollar Royal Dutch Shell plant, on the site of an old zinc smelter in the American rust-belt, is the biggest investment in the state since the second world war and further evidence of a hydrocarbon-based manufacturing revival in the US. “We’re taking shale gas from the Marcellus and Utica fields [in north-east US],” says Hilary Mercer, the executive in charge of the development. “Then we’re converting it, first from ethane into ethylene, then into polyethylene.” Donald Trump, US president, visits the Shell Pennsylvania Petrochemicals Complex, which when completed will be one of the largest plastics factories in the world © Reuters The Ohio River complex is one of many hotspots in a 21st century plastics boom, even as consumers across the western world turn against the material. Over the past decade, an unprecedented wave of expenditure — at least $200bn, according to the American Chemistry Council — has been pledged by companies including ExxonMobil, Dow and BP for new chemical production facilities like Shell’s to take advantage of the shale rush in North America. These rock formations have gifted not just cheap natural gas, but also the raw materials for petrochemicals: the basic building blocks of products like paints, adhesives, dyes, detergents, fertilisers and, of course, plastics.
At a time when the oil industry is gripped by fears that demand for petrol will collapse in an era of electric vehicles, many hydrocarbon producers are betting on petrochemicals — and in particular, plastics — to fill the gap. But doubts are emerging about the wisdom of a huge expansion in capacity that will leave the world awash in products that can take hundreds of years to decay. Images of oceans and rivers clogged up with discarded single-use plastic have raised public awareness about the impact on the environment and human health. This poses a conundrum for producers chasing maximum sales of a versatile substance for which the main ingredient is cheap and abundant. Unless it is seen to respond to these concerns, the industry risks falling foul of public opinion, changes in investor strategy or government clampdowns. Authorities from Brussels to Beijing are already imposing bans on disposable plastic items. “Plastics is the most egregious example of a gap between what the industry is expecting and what society demands,” says Kingsmill Bond, energy strategist at Carbon Tracker, a think-tank. “The risk to investors is that [plastics companies] are building for demand that may not come.” At the same time as the supply splurge, trade tensions and a weak global economy have contributed to a slump in prices for many plastic grades, squeezing profits at petrochemical producers. Campaigners fear this could hold back industry efforts to take greater responsibility for plastic waste and develop eco-friendly substitutes. Prices for high-density polyethylene, one of the biggest selling plastics, recently fell to their lowest levels in a decade in the US and China and for five years in Europe, according to ICIS, a market information service. “You have lower than expected growth, this big capacity increase and trade wars. On top of that you have the drip-drip of the plastic rubbish crisis. That’s hitting polyethylene, because most of it goes for single-use throwaway applications like plastic film, bottles and pouches,” says John Richardson, a senior consultant for Asia at ICIS. A fracking station in Texas. The shale boom in North America has provided the raw materials for petrochemicals © Bloomberg When the shale revolution took off in North America more than a decade ago, it promised a plentiful and cheap source of oil and gas that would rival Middle Eastern producers and put the US on a course towards energy independence. Just as profound was its impact on the country’s petrochemicals industry. The shale extraction method of hydraulic fracturing, or fracking, generates byproducts known as natural gas liquids, among them ethane and propane. Around the US Gulf Coast new crackers, facilities where ethane and propane are broken down into smaller molecules, have sprung up.
The resulting ethylene and propylene are joined up inside reactors into long-chain polymers that form the two most important commodity plastics. Polyethylene (PE) is the most common, used in everything from shopping bags to bottles, tubes and laminates. Polypropylene (PP) is found in car interiors, carpets and crisp packets. And with more output than the domestic market can absorb, US producers have turned to China and other growth economies for buyers. “Historically, North America had not been a major exporter of polyethylene for a long time, or an exporter of petrochemicals in general,” says Mark Lashier, chief executive of Chevron Phillips Chemical. “But the ability to access feedstocks like the gases coming out of the Permian [basin in south-west US] creates economics that allow North American assets to compete with anywhere in the world.” The effects have stretched as far as Europe. With North Sea oil supplies dwindling, Ineos in 2016 became the first chemicals company to ship shale-origin ethane across the Atlantic to feed its plants and is now spending €3bn on new facilities, including the continent’s first new cracker in 20 years. Cracker plants such as the BASF facility in Mannheim, Germany produce ethylene and propylene that are turned into the two most important commodity plastics © Bloomberg Yet shale is not the only factor. For oil majors, the petrochemicals business many wanted to walk away from a generation ago is now seen as a way to offset volatile oil markets. With fuel consumption in transport forecast to peak towards the end of the 2020s, it also offers the industry a hedge against the impact of electric vehicles. And as living standards rise in developing countries, plastics demand is expected to outpace wider growthin the global economy. “Petrochemicals are rapidly becoming the largest driver of global oil consumption,” said a report published by the International Energy Agency in 2018. “They are set to account for more than a third of the growth in oil demand to 2030, and nearly half to 2050.” Giant complexes costing billions of dollars are under way in Russia, India, the Middle East and China, as many integrated energy groups prioritise chemicals. South Africa’s Sasol, for instance, has declared it will not invest in any new refineries or gas-to-liquid plants because of what chief executive Fleetwood Grobler described as the “sunset of the energy industry”. “The whole megatrend with respect to urbanisation, population growth and expansion of the middle class really points to growth in chemicals, rather than the energy sector,” he says. For a period, everything came together and petrochemicals producers enjoyed record profits. But the good times are now over. ExxonMobil’s chemical business sank into a loss in the fourth quarter of last year, weaker chemicals margins contributed to a drop in earnings at Shell, and BP reported a fall in profits at its petrochemicals division. Authorities from Brussels to Beijing are imposing bans on single-use plastic items such as bottles The trade war hit the plastics market just as a number of new facilities were cranking up. Chinese tariffs on certain key grades of US-made PE, imposed in August 2018, had the intended effect. American exports of the plastic to China fell in the first nine months of last year, forcing US producers to find other buyers. The surplus of material spewing on to global markets fuelled what was already a downwards trajectory in prices. Even more significant for producers is the difference between input costs and selling prices that are a proxy for profitability. Producers’ margins have almost halved in the US for high-density PE, since touching peaks in 2017. At European facilities, using naphtha as their feedstock, margins fell by more than three-quarters by the end of 2019; and were in negative territory in Asia, according to ICIS. “The outlook broadly for the chemicals market at the moment isn’t great,” says Alan Gelder of Wood Mackenzie, a consultancy. “Now we’re on a steep downward slope. We think margins will continue to compress for the next few years.” Hurting the most are producers in Asia which rely on more expensive, oil-derived naphtha feedstock, though even US facilities fed with ethane have seen profits contract. “Asian prices across the board for all grades of polyethylene have come down tremendously,” says Hassan Ahmed, an investment analyst at Alembic Global Advisors. “They’re sitting at break-even to negative margin levels. If those margins continue for a couple more months you will start seeing capacity curtailment and shutdowns.” Many observers see the downturn as cyclical. Demand for plastics has grown faster than for any other bulk material such as steel, aluminium or cement over the past 50 years, nearly doubling since the millennium alone, the IEA says. Yet a regulatory backlash, coupled with moves by consumer brands to increase the recycled content in their packaging, or switch into different materials like cardboard or glass, threatens to eat into demand for virgin plastic resins. Recommended FT CollectionsClimate and energy transition Lex in depth: the $900bn cost of ‘stranded energy assets’ China last month unveiled curbs on products like disposable and non-degradable carrier bags, plastic straws and wrapping for deliveries of online purchases. ICIS says the move could hit 9.4 per cent of what is the biggest polyethylene market. It followed an EU decision to ban single-use items such as cutlery, straws and cotton buds by 2021. With Alembic Global Advisors estimating that only 14 to 16 per cent of global waste plastic is recycled, there is reason to believe the overall impact of these measures and moves towards reuse will be muted. If that rate jumped to one-third, it would still only make a tiny dent in demand, leaving annual growth at 3.5 per cent and equivalent to 10m to 11m tonnes a year, says Mr Ahmed. “I think it’s much more a PR battle for the chemicals companies than it is an actual demand threat,” he says. In a region like Europe, packaging accounts for almost two-fifths of resin consumption. Even if demand for such products falls, the use of plastics for more durable applications — like cars, household goods and medical devices — is only set to continue rising. Critics argue that chemical companies’ spending on more sustainable materials and waste reduction programmes is a drop in the ocean, accusing the sector of a “greenwashing” campaign. The scope of state action against plastic waste is only likely to broaden, with implications for businesses in the supply chain. “We’ve only just scratched the surface of what can be done,” says Carbon Tracker’s Mr Bond. “We think [the plastics industry] is deeply vulnerable to these wider changes.” Men collect plastic polluting the Buriganga River in Dhaka, Bangladesh © Reuters The question is whether the industry will be willing to adapt to commercially unproven chemistry after investing billions on plants that meet proven demand for conventional plastics. For Rob Buurman at Recycling Netwerk, a Dutch NGO, as long as hydrocarbon-based production continues to rise, alternative materials such as bioplastics will struggle to compete. “We have so many single-use plastics because it costs basically nothing to produce; that will make it extremely difficult to develop other types of economy that for example rely on reuse,” he says. However, there are encouraging signs. “What we’ve seen latterly is the cost of bio-based material coming down, but also the willingness of the customer to pay more because consumer demand is increasing,” says Tom Crotty, a director at Ineos. “They are willing to pay a premium, or brand owners are willing to take a hit to protect their brand image. We’re starting to see the equation work as those two things meet in the middle.” Ultimately, the goal for some companies of a closed loop from production to waste will rely on making chemical recycling a commercial reality. Unlike mechanical methods, which chop up plastic waste for melting, this breaks down polymers into their constituent molecules, and by eliminating quality issues it promises pellets of the same standard as virgin resin. Industry figures say that rather than facilities becoming redundant as a result, the more modern assets could be adapted in order to become compatible with this recycled feedstock. “That’s the goal,” says Nigel Davis of ICIS. “Taking the plastic back to the monomer to achieve sustainable production.” Can producers bring down the cost of bioplastics? The chemicals industry is renewing efforts to develop sustainable alternatives to traditional plastics. First developed in the 19th century, bioplastics have once again captured the imagination of chemical engineers and start-ups. But despite the appealing sound of the name, they are not a panacea. Bio-based polymers made from renewable sources, such as sugar cane or starch, have a smaller carbon footprint than hydrocarbon-based varieties. Biodegradable plastics, meanwhile, sometimes require specific conditions to decompose. If buried deep in landfill without oxygen, some may emit methane — a powerful greenhouse gas. A key challenge is in replicating the strength and versatility of conventional plastics. But perhaps the greatest obstacle to widespread adoption of “green” plastics is not technical but economic. Their higher cost is the main reason they account for only a fraction of overall plastics production: price is the determining factor for commodity resin buyers. Even cheaper recycled plastics are rising in price due to tight supply, which could either dampen uptake or mean greater expense for brands or the consumer. For the first time in 10 years, recycled polyethylene terephthalate (PET) used for drinks bottles became more expensive in Europe than regular PET in 2019, according to S&P Global Platts.