Petrochemicals’ production to be most important growth driver for global oil demand up to 2030, says McKinsey expert
Interviewed by Petrochemicals Europe, Jasper van de Staaij, Manager, McKinsey Energy Insights and leader of the Global Energy Perspective team, points out that the petrochemicals sector will be the most important growth driver for global oil demand, adding four million of the predicted seven million barrels MMb/d (million barrels per day) oil demand growth between 2020 and 2030. He also underlines the fact that since using renewable feedstock for chemicals’ manufacturing is not yet economically viable for mainstream applications, uptake on the short term will be driven by specific customer preferences or regulation and is likely to be moderate.
How do you forecast the evolution of energy demand up to 2050?
The Global Energy Perspective (GEP) is McKinsey’s long-term view on energy demand until 2050. We model all the important energy demand sectors like Transport, Chemicals, Industry, Buildings and Power based on the key drivers and trends for each. Sensitivity and disruptive scenarios provide insight about elasticity of demand. Our supply teams use the demand outlook in fuel specific models to determine global balances and marginal cost of oil and gas projects. By selecting four sets of coherent assumptions, resulting equilibrium market prices yield four price scenarios called ‘Geopolitical shock’, ‘Under investment’, ‘Lower for longer’, ‘Lower forever’. In general, the demand for fossil fuels is expected to increase up to 2035 driven mainly by chemicals. However, it is important to stress that the demand from the chemical industry will be different from what it is today in terms of type of fuels and this will drive a lot of changes in the fuel mix underlying it. Coal demand is expected to decrease in some sectors especially in the power sector in Europe while in other countries like Indonesia or China, it will continue to be important. Coal demand will still be driven the cement and iron sectors.
Our chemicals model projects fuel and feedstock demand across the main chemical value chains. It includes country-level projections of ethylene and key derivatives, as well as ammonia and methanol. In the short to medium term, we expect the chemicals market to continue to grow with rates above GDP until 2030. Especially non-OECD regions are expected to drive strong growth in petrochemical demand. Ammonia demand is showing lower but steady growth rates along with world food production. However, during the coming decade we expect that a number or trends will lead to a slowing down of growth rates beyond 2030.
GEP is developed by McKinsey Energy Insights, the energy analytics group within McKinsey, wholly devoted to helping clients navigate the changes in the energy sector. Energy insights bundles the experience of sector experts with proprietary market models and benchmark databases.
You said during your presentation that petrochemicals will become the key growth drivers for oil and gas. Can you explain why?
Oil and gas demand in the chemicals sector show strong growth rates. This has historically been the case and we expect to see this continue to 2030. Although the chemicals sector accounts for less than 15% of oil demand today, it will be the most important growth driver for global oil demand, adding four of seven MMb/d oil demand growth between 2020 and 2030. There are two main reasons for this:
First, in developing economies, we observe an increase in use of plastics, translating in a growth rate of petrochemical demand which is higher than GDP growth rates. Also in developed economies, chemicals demand continues to grow, albeit at slower pace.
Second, in contrast, other sectors for oil and gas demand are expected to show slower growth rates and in some cases even decline. For example, global oil demand for road transport is expected to peak before 2030, driven by higher efficiency standards for internal combustion engines (ICE) and uptake of electric vehicles (EVs) because of declining battery costs.
What trends will shape the future of the petrochemicals industry?
We have recently published a perspective on the future of the petrochemicals industry.
The four main trends that are likely to shape the future of petrochemicals are the following:
– A slight reduction of demand for petrochemicals roughly by 10% by 2050 due to more efficient packaging and a decrease in the consumption of plastics driven by regulatory measures
– An increase of recycling rates due to improvements in waste collection, technological breakthroughs and industry scaling
– A moderate uptake of renewable feedstock use: renewable feedstocks, such as bio-ethanol for bio-ethylene, are projected to increase from base rate of 0.5% globally (2015) to 4% by 2050
– Changes in fossil fuel and feedstock mix due to modifications in upstream production
of hydrocarbons, downstream configuration and prices
Do you think that regulation in Europe is a driver of innovation or a threat to competitiveness?
Clearly, getting the regulatory balance right is critical both for the sector and for governments. As plastic waste becomes an environmental and public health focus and carbon abatement is required to achieve climate targets, governments are more likely to intervene. And any new regulatory obligations have the potential to create additional compliance costs for industry.
At the same time, the chemicals industry will undergo changes as part of the global trend towards low carbon and circular economy. A regulatory framework that takes account of these developments can only be beneficial for the chemical industry as it prepares for them. This holds especially if the regulation helps in the commercialization of new technologies and developing new cooperation standards and supply chains. For example: low-carbon production routes in the presence of carbon prices; development of biodegradable plastics; design-for-recycling in plastics production and industry wide quality standards that help the commercialization of plastic recycling technologies.
To what extent do you think renewable feedstock will replace fossil feedstock for the production of petrochemicals by 2050?
We expect that by 2050, the supply mix for petrochemicals will comprise a portfolio of hydrocarbon sources. It will combine fossil which is the large majority today, with recycling – utilizing recycling options along the value chain i.e. mechanical, chemical and thermal recycling, as well as renewables. However, since using renewable feedstock for the production of chemicals is from a business-case perspective more expensive, its increase will mainly be driven by customer pull in specific applications or regulation. There is also a very strong push towards recycling led by Europe, but also by other regions in the world like Asia. For instance, 60% of plastics in the oceans come from five countries in Asia. Therefore, there as well there are discussions on whether to abandon landfills and opt for more incineration and/or recycling. In addition, we expect further demand reduction due to more efficient use and wide use of refurbish/remanufacturing solutions.
Jasper van de Staaij is a Manager with McKinsey Energy Insights and leads the Global Energy Perspective team. He has over 10 years of experience in renewable energy strategy and policy, resource productive manufacturing and operations management in the energy and chemicals sector.
Theo Jan Simons is a partner with McKinsey and leads its global Petrochemicals practice. He has over 25 years of industry and consulting experience in Petrochemicals.