Big Oil Flashes the Plastic
28 Juillet 2019 - 6:05PM
Dow Jones News
By Lauren Silva Laughlin
Big Oil needs big plastic.
Companies like Chevron and Exxon Mobil earned that moniker for a
reason, but as the petroleum market gets less lucrative and demand
projections wane, their investments have shifted.
Not long ago it was in the direction of natural gas, oil's
cleaner-burning hydrocarbon cousin. But so much of the fuel is
being produced out of U.S. shale formations that the focus has
shifted to adding value to it now. Investing in petrochemicals is
as close as one can get to a no-brainer given the surfeit of the
feedstock in North America.
That is ironic given rising environmental concerns about plastic
pollution that could threaten demand growth in much the way
environmental rules challenge petroleum demand. A booming market in
building new petrochemical plants is afoot, though. It is a huge
shift from the situation a little over a decade ago when making any
such investments in the U.S. seemed foolish.
In the mid and late 2000s, domestically-produced hydrocarbons
were expensive and demand was outstripping supply. Now companies in
the shale patch struggle to generate enough cash flow to keep
growing while slowing global economic growth has prompted groups
including the International Energy Agency to cut demand outlooks
for 2019. Longer term, a shift towards cleaner fuels is threatening
to push up the date some prognosticators think petroleum demand
will peak. Meanwhile, the oil patch delivering virtually all the
output growth, U.S. shale, requires constant reinvestment.
This is reflected in Big OIl's returns. Exxon's return on
invested capital has fallen from 27% in 2012 to less than 10% last
year, according to FactSet. Now they are starting to converge with
chemicals companies. BASF's average ROIC over the past five years,
for example, was 11%.
Resigned to more pedestrian returns, integrated oil companies
see a strong case for investing in a business that was once a
sideshow. Exxon has stumped up more than $6 billion in capital
expenditures in the past two years to bolster its chemical
business, a more than fourfold increase from fiscal 2003 and 2004.
It and Saudi Arabia's state-controlled petrochemicals company
recently agreed to build the world's largest steam cracker -- a
facility for converting ethane into petrochemicals -- in Texas. The
Chevron Phillips Chemical Company, a 50-50 joint venture between
parents Chevron and Phillips 66, recently signed a deal with Qatar
Petroleum to build a facility on the Gulf Coast.
They aren't alone. Since 2010, 334 new chemicals projects in the
United States alone have been announced, according to the American
Chemistry Council. On the current trajectory, demand for primary
chemicals is set to increase by around 30% by 2030 and almost 60%
by 2050, the IEA says. Wood Mackenzie estimates the chemicals
industry currently accounts for less than 15% of petroleum liquids
demand. But it will become the single largest demand growth segment
starting in the mid-2020s when it surpasses the transport
segment.
There are risks, of course, especially if an economic downturn
takes hold. Dow Inc.'s margins were compressed in the second
quarter as supply growth outpaced demand. Environmental concerns
are there, too. Governments from China to India to Canada and
California are trying to crack down on waste from packaging. But
the flaring of associated gas from U.S. oil fields is an
environmental headache as well.
Meanwhile, plastics aren't going away. Even if demand
projections prove too optimistic, low-cost producers will grab
share from higher cost ones. The U.S. Gulf Coast is in a sweet spot
today in that respect. Energy producers who face a problem of too
much gas are making figurative lemonade out of lemons and the
literal plastic bottles in which it is served.
(END) Dow Jones Newswires
July 28, 2019 11:50 ET (15:50 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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