Oil demand for petrochemicals expected to grow significantly, says IEA expert
In his view, the chemical industry has a crucial role to play in the transition to a low-carbon economy, not only by improving its own energy efficiency, but also by driving innovation in clean technologies. Tae-Yoon Kim encourages the industry to embrace the challenges that will result from this transition in order to facilitate it and to benefit from new business opportunities.
Taking into account COP21 pledges, how does the IEA expect oil demand to evolve until 2040? What about oil demand for petrochemicals?
Tae-Yoon Kim: Taking into account COP21 pledges – as we do in our main scenario of World Energy Outlook 2016 (WEO-2016) – we see that global oil demand continues to increase until 2040, albeit at a steadily slower pace. In some parts of the energy system, such as power generation and buildings, we project a decline in demand as alternatives to replace oil are readily available in these sectors. Likewise, oil demand for passenger cars falls amid a huge increase in the global car fleet, primarily due to improved efficiency but also because of fuel switching to biofuels and natural gas and of a significant increase in the number of electric vehicles on the road.
“However, there are sectors in which alternatives are not readily available and efficiency measures are often challenging to implement; notably road freight trucks, maritime, aviation and most importantly petrochemicals, where we expect a continuous demand increase.”
The demand growth in these sectors is greater than the decline in other sectors, which is why we do not project a peak in oil demand before 2040. With robust demand for plastics, petrochemicals are central to our projected oil demand growth. Oil demand for petrochemical feedstocks increases from 11 mb/d today to around 16 mb/d by 2040, which is equivalent to 45% of the total oil demand growth during the same period.
In the IEA 2°C scenario, the petrochemical industry is the only sector for which oil demand continues to increase. Can you explain why? Do you see a realistic chance to replace fossil feedstock by alternative feedstock?
TYK: In the 2°C scenario, much stronger policy actions are required to decarbonise the energy system and make it much more efficient. Keeping emissions down to a level consistent with a 2°C target means that global oil demand peaks by 2020, at just over 93 mb/d, and declines thereafter. Oil use in the transportation sector is replaced to a much greater extent by the uptake of electric vehicles and higher penetration of biofuels, and the use of oil for freight trucks, maritime and aviation is also curtailed as natural gas and biofuels make further inroads and more stringent efficiency policies take effect. However, consumption of oil for petrochemical feedstocks remains largely the same; there are fewer substitution options away from oil available in the petrochemical industry. As a result, petrochemicals are the only sector consuming more oil than today in this scenario, and its share in global oil demand in a 2°C world is projected to increase from 12% today to 21% by 2040.
Bio-based feedstock offers a potential avenue to reduce oil demand and CO2 emissions, but the success of bio-based chemicals will be determined by the cost competitiveness of the production process and the future availability of biomass feedstock. For the moment, there is a considerable cost gap that bio-based processes need to close to be competitive, which would require some very rapid technology advances or breakthroughs. Moreover, in the 2°C scenario, the chemical sector has to compete for biomass with other sectors such as transportation and the production of heat and electricity, areas where bioenergy might enjoy a strong policy push. Designing suitable prices for bio-based chemicals to compensate a high cost of production is also challenging. For these reasons, our modelling in the 2°C scenario has only relatively limited penetration of bio-based feedstock (although growing fast) and dependence on fossil feedstock remains high. Stronger policy support, and/or a major technological shift, would be needed if we are to see a much higher share of bio-based feedstocks.
Do you believe that petrochemicals are essential to enable innovation in low-carbon technologies for other industrial sectors?
TYK: “The chemical industry can play a crucial role in the low-carbon transition not only by reducing energy and emissions in the sector itself, but also by helping improve the performance of low-carbon technologies with innovative materials.”
Renewable energy is a case in point. Over the past decade, the cost of renewable energy technologies has dropped significantly, primarily through economies of scale and improved manufacturing efficiency. Material innovation could play a crucial role in the next round of cost reduction. For example, in wind turbines, lightweight materials can help address the challenges of making longer-blades, thereby enabling a step change in generation efficiency. Innovative chemicals can also contribute to increasing the durability of wind turbines, which in turn reduces the cost of maintenance, especially in harsh environments such as offshore wind. By facilitating greater penetration of low-carbon technologies, material-driven innovation can help wider industrial sectors save energy and curb emissions, which will benefit society and create a virtuous circle of new business opportunities for the petrochemical industry.
To what extent is improving material efficiency expected to decrease energy demand and CO2 emissions? What is the role of petrochemicals in this process?
TYK: Achieving a greater reduction in energy demand and emissions in petrochemicals is challenging given that the bulk of its energy demand is for feedstock, which is difficult to displace, and that many of the low-hanging efficiency opportunities have already been captured by the industry over the past decade. There is always room for further efficiency improvements, but reaping the benefits of material efficiency improvements can be an important complementary strategy to energy efficiency.
Increasing material efficiency means delivering the same material service with less overall production of materials. It can take several forms: reducing the weight of products (light-weighting), reducing yield losses in the process, and re-using and recycling of plastic products. These measures lower demand for materials and in turn reduce demand for energy required in the production of materials: for instance, recycled plastic production requires 70-90% less energy input (including feedstock) compared with virgin plastic. In order to assess the impacts of improved material efficiency on energy demand and CO2 emissions, we developed a WEO scenario (in the WEO-2015) that assumes greater adoption of material efficiency measures, for example doubling the recycling rates for plastic products. The modelling suggested that material efficiency could deliver larger energy savings in energy-intensive industries than energy efficiency – reducing energy demand for petrochemicals by more than 10% compared with the main scenario.
While opportunities are vast, realising the potential of material efficiency requires additional efforts from both industry and policy-makers. There is huge scope for technological improvement which the industry needs to pursue. Development of light-weight, longer-lasting and high-performance materials is certainly needed, and much more should be done to improve the efficiency of the recycling process. For example, around 14% of plastics are recycled today, but when we factor in additional value losses in sorting and reprocessing processes, the actual contribution of recycling in final consumption is much less than what is perceived, which necessitates further technological breakthroughs. Policy-makers also need to put in place measures to incentivise technology innovation and regulate the inefficient use of materials. They also need to think about their role in creating an environment conducive to recycling and reusing materials. Material efficiency clearly warrants more attention from various stakeholders.
The European Commission published its clean energy package in November last year. In your view, what challenges and opportunities does it represent for the European petrochemical industry?
TYK: Overall, we think the “Winter Package” released by the European Commission will contribute to accelerating Europe’s transition towards a low-carbon economy. Among its various components, it is the Energy Efficiency Directive that could affect the petrochemical industry the most. With the commitment to put energy efficiency first, the package proposed a new efficiency target of 30%, increased from the previous target of 27%. While less aggressive than in the 2°C scenario, the revised target is higher than the level of efficiency improvements currently assumed in our main scenario. This poses challenges to energy-intensive industries which have made considerable efforts to improve efficiencies over the past decade, implying that the industry needs to look for tougher options to implement such as measures with longer payback periods, novel technology options and ways to exploit the potential of material efficiency. While tough, the process of addressing these challenges can bring new business opportunities for chemical companies to serve wider energy-consuming industries.
“With increased pressure on energy efficiency, virtually all industries will need innovative solutions that help them reduce energy consumption and emission profile, and this is where the European petrochemical industry can play a significant role. “
The building sector would need chemical materials with better insulation performance, and the transportation sector would need light-weight materials that help increase its fuel efficiency. There is ample scope for chemical-driven innovation across sectors. Those who embrace the challenges are likely to be the ones enjoying the benefits from emerging business opportunities.