The oil and gas industry generates trillions of dollars in revenue each year, and accounts for 40% to 50% of GDP in some of the world’s most oil-rich nations, such as Saudi Arabia, Kuwait, Iraq and Oman.
Business leaders in this industry are increasingly conscious of long-term threats to their businesses from two fast-growing technologies: electric vehicles, and renewable energy.
The Paris Agreement, which has seen 195 countries commit themselves to reducing their greenhouse gas emissions from 2020 onwards, will see many countries increasingly begin to focus on fossil fuel divestment and instead turn their attention (and their financial resources) towards supporting and subsidising the development and deployment of renewable energy solutions.
Meanwhile electric vehicles are forecast to account for the majority of new car sales worldwide by 2040, according to a recent market report published by Bloomberg New Energy Finance, by which time they will be displacing 8 million barrels of transport fuel each and every day – a volume that represents more than the current combined oil production of Iran and Iraq.
The future of Big Oil: Diversification into petrochemicals
The long-term threat posed by electric vehicles and renewable energy sources will by no means eliminate the need for oil and gas as a fuel source. However, in order to offset some of the fall in oil revenues, one option for most of the Big Oil companies is increasingly diversify into petrochemicals.
In fact, for some of those supermajors that process of diversification is already underway. Aramco, the state-owned Saudi Arabian oil and gas company (and the world’s single largest producer of crude oil), has already committed $20 billion to build the Sadara petrochemical complex in Saudi Arabia, in an effort to diversify the nation’s economy away from a dependence on oil refining.
Another of those supermajors, ExxonMobil, already has significant petrochemical operations, and revealed in November that it plans to invest billions of dollars to build a new state-of-the-art petrochemical complex in China’s Guangdong province. That investment is particularly significant in light of the fact that in 2015 China became the world’s single largest consumer of petrochemical products, and now consumes one-third of all the world’s petrochemical production.
The importance of Shale Gas in Petrochemicals
ExxonMobil is also a major player in the USA’s shale gas market, which has grown at a meteoric rate in recent years thanks to the discovery of new shale gas fields, and the increased application of fracking techniques and horizontal drilling to help tap those reserves. But this too is linked with petrochemicals as the rapidly growing rate of shale gas production in the USA is actually fueling the growth of the country’s petrochemicals industry, with the shale deposits-based production of ethane projected to grow from 1.73 million barrels per day in 2015 to 2.36 million by 2020, representing 26% growth.
Further to this, Shell, which has decades of experience in the extraction of shale gas in the US and already produces 17 million tonnes of petrochemicals per year, is actively exploring for new shale gas fields in Argentina, Canada and other parts of the USA.
Another of the Big Oil firms, Total SA, is positioning itself to take advantage of the shale gas revolution’s impact on the USA’s petrochemical industry, with the firm’s Port Arthur facility in Texas undergoing a recent upgrade to enable its steam cracker to meet 80% of its feedstock needs with ethane, butane and propane from shale gas instead of naphtha.
In Europe, too, leading petrochemical producers like Ineos, Sabic UK and Borealis have also recently adapted their steam crackers to handle shale gas feedstock.
And it’s not just the supermajors
While they aren’t large enough to be classed as supermajors, three oil companies in another fast-growing market for petrochemicals, India, have also revealed their commitment to diversifying away from a dependence on oil refining. Indian Oil Corp (IOCL), Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL) collectively plan to invest $35 billion in the development of new petrochemical operations, with the business leaders at those firms specifically citing the Indian government’s commitment to electric vehicles and renewable energy as a key reason for their plans to diversify.
What We Think
Richard Pitts, our Principal in the Oil and Gas sector says,
“Over the last few years large and small downstream oil business’ have been forced to streamline and diversify their operations in order to survive in the changing environment. The VW emissions scandal, IMO 2020, and as previously mentioned the impact of renewables and EV’s are all giving these firms cause to take breath and reassess their options.”
No matter what sector an organisation is in, it must be able to withstand developments in operations, innovations in their practice and, as a result, changes in demand for what they offer.
In the instance of Big Oil, due to global economic and environmental changes the industry must diversify and in some cases, move away from their biggest product completely.
Miramar Executive Search Consultants are globally reaching and have an impressive track record of success with high profile clients. With a global reach spanning a range of sectors from TMT to Industrial, our consultants and researchers are perfectly placed to broaden your search. Contact Miramar today – we have offices in the UK, the USA and Asia.