One Word: Plastics
A company building one of the world's biggest oil refineries might be expected to bank on robust demand for gasoline, diesel and heating oil. Production of those products accounts for about three-quarters of the output of U.S. oil refiners and blenders.
So the fact that China's Rongsheng Petrochemical is instead counting on plastics and chemicals to justify a planned $24 billion refinery south of Shanghai should be a warning to the global petroleum industry. The promise of "a great future in plastics" made to Dustin Hoffman in the 1967 film The Graduate may finally be coming true.
Chemicals have long been Big Oil's poor cousin. Naphtha and other feedstocks accounted for just 2 percent of the output of U.S. refineries and blenders in 2014, according to the Energy Information Administration.
The amount U.S. chemicals companies have committed to capital spending exceeded that of refiners and marketers in only one quarter since 1996, according to data compiled by Bloomberg. The wave of dealmaking that's engulfed the industry in recent years has been driven in part by an attempt to escape weak conditions through consolidation.
It's possible that picture is changing. Gasoline and fuel oils such as diesel are at risk of long-term demand disruptions as electric vehicles and distributed renewable energy displace their use in automobiles and generators.
That shift may already be trimming about 18,200 barrels of oil per day from global demand, according to Bloomberg New Energy Finance analyst Aleksandra Rybczynska -- a rounding error next to crude output of about 95 million barrels a day, but one that's set to rise as electric car sales increase.
China's consumption of refined fuels appears to have already peaked, and the picture for crude oil as a whole looks similar. Chemicals were Exxon Mobil's biggest profit center in the first quarter of this year.
Even Saudi Arabia is preparing itself for a future where petroleum doesn't play such an important role in transport fuel. Deputy Crown Prince Mohammed bin Salman cited development of the petrochemicals industry as a key reform in an April interview with Bloomberg News and in the country's 2030 economic reform plans. In June, Saudi's sovereign wealth fund invested $3.5 billion in ride-hailing app Uber.
Plastics might end up more resilient than transport fuels in the face of global efforts to tackle climate change. Publicly traded energy companies can afford to sell less than half their oil reserves if the world is to avoid warming of more than two degrees, according to Carbon Tracker. Plastics, however, make up a disproportionately small share of the barrel, so might be able to string out their carbon budget that bit longer.
Substitution may also be harder than it is in the case of gasoline and fuel oil: In spite of its dirty image, hard evidence that plastic is less environmentally friendly than the alternatives is mixed to nonexistent. 1
Whether that's enough to accommodate Rongsheng's $24 billion refinery investment at Zhoushan is another matter.
Planned output of 10.4 million metric tons a year of aromatics -- compounds used to make polystyrene, nylon and an array of other products -- is nearly three times what's produced globally by India's Reliance Industries, owner of the world's biggest refinery in Jamnagar. Ethylene production of 2.8 million tons a year would make it the world's third-biggest site for the chemical used to make packaging plastics, based on a 2013 ranking by Oil & Gas Journal.
It's quite possible Rongsheng simply sees an opportunity to make money taking on China's state-owned oil companies in the country's newly liberalized refining sector, and is using the promise of a bright plastic future to justify its foray away from its core business of making polyester for fabric.
It would hardly be the first time an obscure Chinese firm made a giant investment in the chronically oversupplied industrial industry with minimal regard for economic imperatives. But if Rongsheng's bet on petrochemicals pans out, it could be rather more than that. A signpost for how Big Oil could survive in an alternative-fuel world, for instance.
It's strangely difficult to get hold of unimpeachable research on the environmental impact of different packaging materials. The vast majority of studies are funded by packaging companies or trade associations with a vested interest in the result.
One 2014 study found that switching to alternative packaging materials in the U.S. would increase greenhouse emissions by between 129 percent and 153 percent due to issues such as energy consumption in production and recycling and the greater weight of some materials -- but before giving too much credence to that result, it's worth reflecting that the report was commissioned by two North American chemicals and plastics industry groups. Another 2010 study with similar conclusions was funded by a European plastics industry association.
Still, those results seem consistent with research by less interested parties. A 2011 study of different types of grocery-carrier bags for the U.K. government, for instance, found conventional plastic bags had lower life-cycle greenhouse gas emissions than biodegradable or bioplastic bags, and that paper bags had a bigger impact until they were reused at least four times. Reusable cotton and synthetic bags needed to be used 173 and 14 times respectively before their impact dropped below that of conventional ones -- suggesting the best option might well be the synthetic ones, made of polypropylene.
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