Oil and gas firms risk stranded assets by betting on petrochemicals: report

Oil and gas majors that are betting on a rise in petrochemical demand to make up for the planned decline in fossil fuel demand for transportation are putting their investors at risk, a new report argues.

Most fossil fuel companies have dropped plans to reduce production output in recent months, based on the belief that oil and gas demand will continue to rise in the coming decade – if not for transportation, for plastics and fertilisers.

In fact, industry lobbyists were present en masse at the latest round of negotiations around a legally binding Global Plastics Treaty, blocking progress on upstream restrictions. 

But Carbon Tracker calculates that to make up for the planned decline in fossil fuels demand for transportation, petrochemical demand would have to grow by 3.9% per year until 2035 – a rate that is at the top end of the range of the industry’s expectations.

Saidrasul Ashrafkhanov, Oil & Gas Associate Analyst and report author, said: “Companies are gambling that petrochemicals will save the oil industry from decline, but if they overestimate future demand, they risk locking in long-term production that’s unlikely to be profitable, as revenues fail to meet expectations. Shareholders will be the ones to take the hit.”

Fossil fuel sector overestimating petrochemical growth

Road transport currently accounts for more than half of total oil demand, but Bloomberg expects this to peak at 49 million barrels a day in 2027, before falling rapidly to 35 million by 2040.

To make up for this loss, oil majors expect demand for plastics, fertiliser and other petrochemicals to grow at 2-4% a year to 2030, driven by higher GDP and a rising global population – but may be overestimating GDP growth amid an intensifying climate crisis, the report adds.

In addition, governments around the world are looking to implement more restrictions on the use of petrochemicals and plastics: at the Global Plastics Treaty negotiations, nearly 100 countries called for a production cap. Tougher regulations could also hamper the sector’s projections.

Mike Coffin, Head of Oil, Gas and Mining at Carbon tracker, explained: “Transport fuel demand for oil and gas is around four times larger than it is for petrochemical feedstocks. As fuels demand plateaus and starts to decline this decade, petrochemical demand growth will increasingly struggle to offset fuels decline, given this scale difference. Investors must challenge the assumptions underlying corporate forecasts of oil demand, and the commercial viability of new capital developments across the petrochemical value chain.”