Transforming the Petrochemical Landscape

The global energy industry is undergoing a dramatic shift as traditional refining processes evolve to meet the burgeoning demand for petrochemicals while contending with price volatility and environmental mandates.

Navigating Global Energy Market Fluctuations

The energy sector is no stranger to volatility, although globally Natural Gas (NG) prices have stabilized over the last few years, NG is still subject to significant fluctuations in certain regions due to geopolitical tensions and environmental factors. Examples of extreme weather events causing large fluctuations in regional NG prices include the massive freeze in the U.S. in January 2024, droughts in Columbia caused by El Nino last year and a heat wave in India.  All of these events reduced green energy production and caused heightened regional demand for coal and gas-fired generation to replace the short term loss of green energy production.

“Volatility clauses are written into insurance policies to account for these big price swings and limit loss exposure.”

Supply chain disruptions have further complicated the landscape, particularly in LNG transport, with geopolitical tensions in the Suez and Panama Canals necessitating longer shipping routes and impacting supply chains, though not significantly affecting prices thanks to available shipping capacities.

LNG supply outlook has been downgraded for 2025 with a slowing of expansion projects, regional feed gas supply issues, shipping issues and other geopolitical tensions being some of the reasons for the downgrade.

The Imperative of Carbon Emission Reduction

COP 28 sought to achieve zero emissions by 2050.  According to a contributor to the 2024 Energy Institute report “we are seeing a real disconnect with the Paris goals…”   Evidence of the disconnect is easy to see with several global oil companies making recent announcements of abandoning future emission goals and China’s continued expansion of crude oil processing capacity for COTC purposes.  In fact, refining capacity in China exceeded US refining capacity for the first time ever in 2023, although China still lags behind the US in actual throughput due to lower utilization rates.

Carbon emissions remain a critical global concern. There have been recent advancements in carbon capture technology with the introduction of direct air capture (DAC) technology.  DAC offers promise but remains economically unviable at current costs.

Overall, there has been about a 7% increase in carbon capture per annum over the last 10 years, BUT with a current carbon capture rate of less than 0.2% of global carbon emissions, the gap from carbon emissions to capture remains vast.

“We’re up to about 55 million tons of carbon capture in 2023, less than 0.2% of total emissions.”

Hydrogen Color Wheel: The Clean Energy Pillar

Hydrogen is emerging as a crucial player in the clean energy narrative. Hydrogen has been in use for many years and has been used as a clean fuel source, in fertilizer production, making food more shelf stable and in manufacturing.  The hydrogen color wheel identifies the different ways to produce hydrogen and related carbon emissions with each method.

Grey – little to no control of carbon emissions.  Traditional hydrogen production through steam methane reforming (SMR) is an example.  Globally this accounts for roughly 75% of hydrogen production.

Blue – traditional SMR hydrogen production adding Carbon Capture, Utilization, Storage “CCUS”.  Adding CCUS is very costly, increasing the cost of hydrogen by 20 to 80%.

Green – hydrogen production produces zero carbon emissions and is produced through the electrolysis of water.  The cost differential between traditional (roughly $1 per kg) and green hydrogen production (roughly $6 per kg) methods continues to challenge widespread adoption.

The transition to greener hydrogen production methods illustrates a positive trend, though cost remains a significant barrier, especially for green electrolysis methods.

The Shift Towards Petrochemical Production

The petrochemical industry is witnessing a geographical and methodological shift.  As oil demand for transportation fuels declines – driven by electrification, fuel efficiency, and climate policies – the focus is shifting towards petrochemical production.  This shift is particularly evident in Asia, where refining and petrochemical capacities are rapidly expanding, with China at the forefront.

“The petrochemical feedstock demands are rising over the same period of time.”

China’s growth is fueled by strong domestic demand, particularly from its textile sector and widespread use of PET bottles.  The country now contributes a major share of global petrochemical output.  This aligns with Asia’s broader manufacturing base and reinforces the region’s role as a key hub in the global petrochemical market.

To meet rising global demand for petrochemicals – used in packaging, consumer goods, and industrial applications – producers have invested heavily in new capacity, particularly in integrated refining-petrochemical complexes.  However, this rapid expansion has outpaced actual demand growth, resulting in oversupply.  The surplus has pressured margins, making operations less viable and prompting shutdowns in several locations.

Adding to the challenge, excess supply has made virgin plastic cheaper than recycled plastic, as recycling involves additional processing costs, while new plastic is being sold at low prices just to keep plants running.  This undermines recycling efforts and adds to plastic pollution, posing a major sustainability issue for industry.

The Rise of Crude Oil to Chemicals (COTC)

Amid changing demand patterns, Crude Oil to Chemicals (COTC) is emerging as a transformative approach.  Unlike conventional refineries that prioritize fuels, COTC facilities are built to convert a much larger share of crude, often up to 40%, into petrochemicals, substantially higher than the typical 10-15% yield in traditional refineries.  This shift supports the growing demand for chemical feedstocks used in everyday goods and industrial applications.

“COTC projects are configured to produce at least 40% petrochemicals from each barrel of crude oil.”

COTC projects are gaining momentum, particularly in Asia, with five now operational – four in China and one in Brunei.  Most are designed to maximize paraxylene (PX) output, driven by Asia’s strong polyester and PET plastic demand.  These investments are not limited to China; significant funds are also being directed towards projects in South Korea, India, and the Middle East.

Despite the high capital requirements and complex integration challenges, the long-term benefits include higher yields and reduced operational costs.  China’s success in this arena can be attributed to several factors: expedited construction timelines, lower capital expenditures, and robust domestic demand for petrochemicals.  These advantages position China as a strong leader in the global COTC landscape, setting a standard that may be challenging for other regions to replicate.

Despite their potential for higher yields and reduced production costs, COTC projects face challenges such as significant capital investment and complex technology integration. However, the promise of high returns on investment keeps them at the forefront of future development strategies.

Conclusion: Embracing Change in the Petrochemical Industry

The petrochemical industry is at a crossroads, faced with the dual challenge of meeting increasing demand while transitioning to more sustainable practices.  The shift towards COTC processes and increased production capacities in Asia is reshaping the global landscape.   However, this transformation is not without hurdles: price volatility, overcapacity, emissions targets, and the complexity of technological integration all pose real challenges.

Moving forward, success will depend on the industry’s ability to strike a balance, leveraging innovation and scale while addressing environmental and economic pressures.  This balance will define the future competitiveness and sustainability of the global petrochemical landscape.

The statements or comments contained within this article are based on the author’s own knowledge and experience and do not necessarily represent those of the firm, other partners, our clients, or other business partners.