Decarbonizing Petrochemicals

And what are some of the company strategies. These are some of the things my colleagues il Han and c C looked at when writing Decarbonizing petro Chemicals Corporate Strategies and a second research piece titled Decarbonizing petro Chemicals Technologies and Costs. They're both part of a Decarbonizing Industry series we've written. Ilhan Savut writes about sustainable Materials for BENF and C. C. Tang is an oil and petro chemicals analyst. Here.

Both of these reports can be read at b NF on the Bloomberg terminal, on BNF dot com, or the b NF mobile app. A quick reminder, B and E F does not provide investment strategy advice and we have a full disclaimer at the end of the show. And now let's speak with Ilhan and c C about decarbonizing petro chemicals. Illan and c C, thanks for joining today to talk about petro chemicals. Thanks for having us to be here. Thanks DNA. So we're going to get to the elephant in the room at a point, which is

this hundred dollars of barrel. But before we go there, let's start with some fundamentals because it's important that we all understand what we're talking about here, which is petro chemicals. So what are they and what are we talking about today. Petro Chemicals consist of mainly ethylene, propoline, and aromatics, which we refer to as high value chemicals. So these are

some of the most diverse materials in industry. They're using everything from wind turbine blades, two car seats, pains, detergents. Also a massive ndmark it are plastics. So any type of finished product that you can think of probably has a component that's derived from petro chemicals. So ubiquitous they're everywhere, and what is their carbon intensity? So when it comes

to petro chemicals, there are two issues. One our scope po emissions, So essentially the emissions that arise during their production, which is mostly done through steam cracking where you take some sort of oiler gas based feedstock, you put it into a steam cracker where you react that feedstock with steam at very high temperatures, and that uses fossil based fuels, So then you have a source of seal two emissions there.

But then there's also another aspect to it, and that's because what's and I find it's quite fascinating when we talk about the cartonizing petrick chemicals. Um the petro chemicals themselves consist of carbon molecules, so they're made of carbon themselves, So there are emissions associate did with end of life, such as incineration of plastic waste. So there are two

sources of emissions there. But I think it's just important to point out that pet Kim's is one of the major imagers among hard to abate sectors, and demand for petro chemicals are expected to increase significantly over the coming decades. So whatever whichever way you look at it, it's crucial

that we decarbonize this sector. So the hard to abate sectors, these are the ones where we don't have the solutions yet, and I guess we'll come to that in terms of some of the solutions that are starting to present themselves. But even within this class of hard to abate, where would you put them? Are they one of the biggest concerns or are they one where you feel like maybe they're going to make their way off of the hard

to abate lest soon. In terms of carbon footprint, petcams follow cemented steel closely, and I would say that they're not as hard to abate. So pet Kim's is a bit easier compared to steal and cement. That's actually whatever it presents on decarbonizing petro chemicals. That's actually how I make the audience feel better is talk about the fact that they could be much worse off if they worked in the steeler cement sectors. So you're telling me there's

a chance, I'm sure you may age their movie clothes. Okay, here we go. So can we talk about who the players are in this space? Would be really useful to understand if these are the big oil majors that we know, or if this is a really fragmented market. I think there are different types of petcam producers. Some oil majors.

They have their petcam segments, the names we are all familiar with, Shell, Exallmobile, and they all have their downstream pecam business, so they used their upstream oil and gas as feed stock to feed into their petrol chemical facilities. And then we have dedicated petrol chemical producers also, I think familiar names like BSF and Doubt. They are not that upstream into oil and gas, but they are pretty focused in petrol chemicals calls from this basic petrol chemicals

and specialty petrol chemicals. And then we have the end users, the consumer brands that use this plastics in their products. Il Han mentioned that we are likely to see more petro chemicals in various aspects of our lives in the future, and this is the potentially growing space within the businesses that you've just mentioned. CC. Is this a really growing and strategic part of the business and where does it rank, I guess in terms of their other business activities these

businesses look at the future. I think it's very important to all these different types of petrochemical companies because we have seeing growing demand for petrol chemicals, so everyone is investing heavily to boost their capacities, especially for this oil and gas companies they are seeing challenges in other segments

of their business. They have challenges from electric vehicles. They are not sell more gasoline as they are now in ten years, so they need to find out a solution for all the oil and gas they're producing, so they or pivot to petrol chemicals. They see it as a like solution for when we hit like pick oil, the oil demand destruction from electric vehicles. That's certainly a space that b ADF does talk about. So let's go to the elephant in the room, the thing that I promised

at the beginning. So we have seen record oil prices well over a hundred barrel CC. Can you talk a little bit about what it means for the petro chemicals industry and ill hand, can you talk about what it might mean a little bit on NINT carbonization side. I think high oil prices definitely a pain for the petrol

chemical producers. They are seeing much much higher costs because their feedstock, the NAZA and eating they're using are correlated with oil and gas price and now we have like record prices, so they are taking higher cost and the problem here is whether they can pass on this cost to their customers. If they can, then that's not a problem.

They still have their margins. But if they cannot, which I'm afraid that's basically the case here in Asia Pacific especially, so if they cannot pass on this additional cost to their customers, they are bearing this pains of higher feast dock cost. The reason why they cannot pass on the cost is because that the competition is really high here. We have a lot of capacity additions from China, from like Asia and also from the Middle East, so we have a lot of producers coming into this field. We

also have relatively weak demand. The producers cannot raise their product price alongside with the feast dock price when it comes to the decorbonization aspect of things. So, just to give some context, pet Kim's players have actually made some of the most ambitious net zero targets out there. If we compare it to the other hard to abate sectors, petcamps put players have actually made the most netser targets.

So we think that over fifty of petro chemical production capacity is un covered by a net zero target right now. So all these players that are in this market right now that are maybe if if they're integrated players enjoying higher cash flows or pure petro chemical players that are may be suffering from higher feeds prices. So regardless, they're going to have to spend billions of dollars per year between now and to decarbonize their asset bass and reach

those net zero bles. So that's just something important to keep in mind. And will discuss a bit more the technology options and where the costs are leader, but there's no other way of looking at this. This is going to require billions of dollars and investments each year going forward. Before we do get into those technology things. Let's just close off, and you know, we could probably sit here and talk about it all day, but for our purposes,

what are the inputs? What are the primary inputs they are going into these high prices for the oil space right now because the war in the Ukraine certainly is one of them, but we were seeing these prices going up before that started. I think the market is was already really tight before we have this uh Ukraine walk. That is because after like two years into COVID, we have seeing like oil demand is getting back to pre virus levels, so people are driving, people are even flying more.

So we have more demand, but on the supply side, we do not have enough supply coming either from the OPEC producers in the Middle East or from the U S show producers. For OPAC, they're gradually lifting up their supply for shall they have for the show producers, they have more concerns about their supply is coming like slower than demands. So that's why we are having like a tight market before the war, but now currently with a

lot of uncertainties around the sanctions in Russia. There's no direct sanction on oil, but the oil sector is self sanctioning themselves. The ship owners are staying away from Russian oil and the refiners are staying away from Russian oil, so we have people are worrying we might lose the supply from the Russia side, So that's another hit from the supply side. Then we are the market is further into on balance. I would say, wow, so they're being cautious.

And you mentioned that flights are resuming. I definitely am feeling that I'm seeing people travel worst. I'm glad to know that my personal experience is reflective of what we're seeing in the market, because that's another thing that I know that we track closely is is flights and oil demand coming from that? So let's go into this space.

We've established that petro chemicals are hard to baitsa there, that there are some solutions out there, and that it's a growing space of growing source of demand going forward, both strategically for the company's making them, but also in terms of a problem from an emission standpoint. So ill Haan, we're going to need to figure out how we fix it and where shall we start. What aspects of the value chain are these net zero targets. Many of the companies that have made them um and you noted that

they're ambitious. What are they looking to address? Just to clarify, they've made these targets for their scope one in Scope two emissions. So we'll talk a bit later about Scope three, but when it comes to Scope one in scope to it essentially comes down to de carbonizing those steam cockers that I was telling you about or coming up with alternative production processes. So I think that's that's a good and simple way of looking at it. So they're kind

of two groups of de carbonization technology. Is the first being modifying the steam cracking process, and then the second

just alternative commercializing alternative production processes. When it comes to the carbonizing steam cockers is there's some of the more kind of the usual suspects of the carbonization, so things like adding carbon capture and storage, or electrifying the furnaces, so instead of combusting those fossil fuels, you instead electrifier steam cracker and use resistance heating to get those high temperatures of up to a thousand degrees celsius, as well

as things like changing the type of feedstock you use. So for example, if you have a NAFTA cracker, you could also switch to bionafta and crack that instead. When it comes to alternative production processes, there's a lot of movement happening there. Geeks like us tend to be a bit more interesting. So there are things like rotodynamic reactors, so that's a new furnace design for example, where you

have a rotor that's just moving in place. It's again electrified and it's using the kinetic energy from spraying the little NAFTA particles to get those high temperatures. You also have other electro chemical processes, for example seal two two chemicals. So, as I mentioned earlier, petro chemicals and plastics are made of carbon, so you could actually capture use captured carbon to make these organic molecules. Now for a very short break,

stay with us, So new technology innovation. This is definitely something that I think is fun for all of the nerds out there. So how new are these technologies? Because you mentioned at the beginning, you know there's c c U S, which that one has been discussed for a long time, and I know that part of the industry is making progress, but these other things, these I'm not even going to try and repeat the technicals off that

you just said that these other technology advancements. Is this all brand new and are there a lot of bets being placed and then we'll see hopefully if one or to emerge or have these also been around for a while and now we're just sort of getting the application in the scale that they needed. It's a mix of both, but in terms of the way that we have to use them to decarbonize a set, it's all relatively new

and untested. So we really need to kind of step up and make sure that we're trying these technologies and deploying these technologies commercial scale over the next decade. If we really want to reach those targets. But so far they've been relatively untested. But we're seeing a lot of movement in terms of players trying to kind of bring

these technologies to market. So the we that needs to invest in it that they are kind of a couple of different strategies for companies to adapt technology and what is doubts our set to a startup and the other is to build a house. What's actually happening here, because this sounds expensive. One thing that's happening is there's out

of collaboration going on. So a lot of the players are kind of coming up with consortia to work together because they're facing the same the same problems, right, So it's kind of a matter of gathering resources, sharing i P. And trying to work together with your peers who are facing very similar, very similar problems. So they're sharing technology, well,

the sharing technology ideas. I mean, this is essentially in the race to net zero that is a space where actually we don't have any time to waste in terms of keeping proprietary information to oneself as a competitive edge. Is that what you're actually seeing in the industry that this kind of defies the business competitive logic. I think it doesn't really define the competitiveness side of side of business. It's more players finally realizing that net zero is non

negotiable policies around the corner. I mean, if you're not already paying carbon prices, you're you're about to. You're probably already paying carbon prices in many markets, and you're about to start paying them in many more markets. So I think it's just these players finally realizing that it's not a zero sum game. That you can collaborate, commercialize of technology and everyone can be better off for it. It's not a question of well I reached net zero, you didn't.

They all have to. They all have to reach net zero. Let's all get there together, Okay. SOE reference GOPE three emissions, and I think that there is definitely a theme emerging across a number of different shows that we've done and switched down when we bring ups three. This is a tough thing for every company because what happens to the stuff that you have made when you, in theory no longer have control over it, at least in the way

industries are currently set up. So the Scope three emissions, what talk to me about the scale of the problem for the petrochemical space and what are they facing in terms of trying to wrangle this. Yeah, well, when it comes to SCOOPE three, specifically downstream Scope three emissions, a little of the carbon footprint of these petro chemical products can actually end up coming from those downstream remissions because

there's that carbon captured inside the products. What's interesting here is that addressing those downstream Scope three emissions actually fits in very very well with the circular economy because circular economy is actually your biggest tool when addressing those downstream

end of life emissions. So for example, instead of incinerating plastic waste and it's releasing that fossil based carbon back into the atmosphere, you could take that stake recycle its that's still a carbon emitting process, but it can be certain types of recycling can be less carbon intensive, so that can help the carbonize your value chain. But at the same time, there are other types of recycling, for example chemical recycling that can sometimes actually increase your carbon footprint,

so they're also moving parts. But the circular economy and net zero one area where they intersect are those Scope three emissions. And yeah, like I said, that there's just alto moving parts. Not only on the technology side and the carbon emission side, but i CC mentioned on the market side as well, So the carbonizing petrol chemicals, like kind of sometimes look at it as kind of playing wacam. Whenever you kind of hit one on the head, another

problem pops up. But if you kind of stay on top of it, you can it's actually not that heart of a game, constant work in progress, you know. I mentioned that these petrol chemical companies that haven't make sculptree commitment so far, but I think we have seeing some progress on that side because they are collecting data. I think that's the first step before you make Scopes three commitment, because you need company specific data sets to measure your

future success, your future improvement. Because currently what they are using for the moment is the industry wide default numbers. With that you cannot measure how one specific company are doing in later years because industry default numbers doesn't change really much over the time. So they are collecting data like BSF and doubt they are saying that we are working with the data side when we get enough data, which it could take long time because of this complexity

of their product catalog. But when they have that, I think it's like a more nice transition to their future commitment on Scope three. One of the things that I think is great is that we've got cc now online today from Beijing, so we're trying to cover bit more of the world in terms of the perspective. And this is a global industry, so you're seeing different petrochemicals producers and different parts in the world and invariably definitely being

consumed all over the world. And there's the parts of the petrochemical space from an end consumer standpoint that you don't see, but then there's the stuff that we do see, and definitely a rise of groups that are putting a very clear light on waste streams and not wanting to see petrochemical product waste. And so the question here is where in the world do you also see a strong desire or maybe emerging desire is the right way to

put it. From policymakers around really addressing this and maybe even putting a little additional pressure on the industry to look at Scope three. For Dumble in China, there are no direct regulations on Scope three saying you, as a petro chemical company, you need to deal with your Scope three missions. We are not there yet, but we have like policy discussions and even policy draft in place talking about the waste problem. And that's also in China's like

road map to carbon neutrality. So I think that is definitely gonna help, but it's not like a direct answer to the Scope three. Just to add, I think when it comes to Scope three spent specifically downstream scope to emissions, it's mostly being driven by the circular economy and and and the waste push. So it's it's more being framed, like you said, as a waste problem than than a than an emissions problem, which in the long run indirectly will help the carbonize a share of emissions as well.

Now for a very short break, stay with us. So in this space, there are a lot of different avenues that companies can address, and so it may be hard to really define who's succeeding and who isn't. But there are always leaders and laggards, and maybe even if we just look at how ambitious the targets are, can you name a couple of leaders. I won't make you pick laggards because that's just me, and I suppose for today we'll focus on leaders C see, I think we have

the same two names in mind. Do you want to say it one? Two? Okay? What makes them leaders? I think they're the ones that have actually, in addition to the targets that they've set, they've also kind of they've made the financial commitments, so they've actually made capex allocation commitments to decarbonize their asset bass which is extremely crucial. As I said before, we're going to need billions of

dollars of investment annually to reach those targets. And in the case of petro chemicals and those technologies that I discussed previously, it's especially important because we don't see those technologies necessarily becoming cost competitive with unabated production, so you don't have those similar deep learning curves that we've seen with renewable power, so like solder and wind or with batteries, we don't expect such massive reductions in the cost of

net zero production when it comes to petrol chemicals, which makes it all the more important that you follow up with these capex allocation commitments because it's going to cost money, so you kind of have to put your money where

your mouth is. And even for the laggers, I would say that I think they will catch up in terms of their commitment or their pledge because some of the targets we have seen by these petrol chemical producers are made, were made like a couple of years ago, and then by then they were worrying about their huge capacity expansion plans. So they say we we will cut our emission by half. But now I think with more and more countries like pledging net zeros within like for a facility within that country,

you eventually have to achieve net zero. So I believe they will update their targets very soon. And also we are seeing more and more pressures from the investors side, so they keep keep getting asked, what are you going to do about climate change? How resilient you are even the face of climate change? Do you have any plans? Do you see it as a risk or opportunities? So

they need to address these concerns. I think so they will come up eventually, and I think it is safe to say that those who don't have that zero targets, those would be the laggards. Get yourself a target, all right. We've talked about too potentially seemingly unrelated things, but we know that the world is complex and everything really interacts with one another. So the high oil price that we discussed at the beginning and decarbonization efforts, let's talk a

little bit about how they're related. I know we touched upon this, but this is a space for me to just sign of understand how you're thinking about the future, given that we don't know what will happen, but we want to see if they're they're going to essentially help or hurt. And the reason I really bring this up is we're seeing in other parts of the commodities space with utilities that coal is having almost a bit of a renaissance at the moment because the high gas prices

are having this knock on. So, yeah, is the high oil price helping or hurting decarbonization efforts? So do you think they will in the longer term? In your opinion, The way that oil prices fit in is it's actually

a bit more indirectly. So we think that actually when it comes to decarbonization, the integrated oil and gas players might actually be better positioned for decarbonization when it comes to petro chemicals compared to the pure play pet kim's producers, and that's because they just have more resources, and they just have more money, right, so the amount of topics that they can spend that they've already spend on these low carbon technologies can be much much higher than the

petro chemicals companies have been targeting to spend. And that just goes back to kind of even when the oil prices are high or even a bit lower, just the amount of resources those integrated players have are pretty massive. So I think it can actually mean that they're better position for decarbonization. Whether they kind of act on that

and decarbonize their downstream activities, that's that's another question. I think the higher orl price could also be a push because as we see now days like in Asia, with all the high oil prices, this Asian based can producers, they are losing money for like six months straight, so that has to push them to think what additional value cannot create then compete in this like very raw capacity competition with all this the new ones. Where is my advantages?

I think like the low carbon aspect could be a like a good cutting point because with that you could have have oh like the green premium into that and you do not need to compete with these low cost producers. You could have your own advantage, but that's also depending on the consumers willingness to pay for the screen pyramid.

I think that's another topic of another podcast. And I suppose that the investors desire, whether or not to put pressure on company is to create these products in a certain way or at least invest in the R and D end of things in order to remain appealing. On the shareholders side, one thing is not all your shareholders are activists investors. You also have to just make sure that you're navigating the space. But there are competing interests.

I think that's also important to remembers. Do we have a good feel on the consensus view on where oil price is going to go? I think the whole market is waiting for more clarity on where the sanctions might go because currently it's just a wait and see attitude. If there is full sanctions or direct sanctions on the energy sector. I know the the government are saying that they are not targeting the the energy sector, but it's I think it's it's hard to say. For the moment.

Closing question, what is the coolest technology in your opinion as an industry geek, I'm going to say so to the chemicals, even though it's very out there and it's probably never gonna be cost competitive and it will remain a niche technology. Just the potential to make these petrochemical products into carbon sinks is very exciting, but I'm very skeptical but interested. CC. Is there a technology that you

think is extra interesting? I would think from a business perspective, I would choose like pyrolysis, like that theero chemical recycling, where you get like the same kind of feedstock but from a risk leve link that can be fit into your existing facilities. I think that could mobilize more involvement from more companies so they do not need to invest additionally or massive amount on on on this new technology.

If we could have and that they were recycling and get this pyrolysis oil, then that's much easier for for those smaller players to to decarbonize. Excellent. Thank you for joining today. Thank you, Thank you. If you're interested in the things we discuss on this show and think, hey, I'd like to be involved in researching some of those types of topics are open. Roles can be found on Bloomberg dot com on the careers page. Just search for BNF. Today's episode of Switched On was edited by Rex Warner

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