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Peak oil and the Aramco/SABIC petrochemical project

Consumption

THERE is an important connection between this week’s announcement by Saudi Aramco and SABIC of an MoU for a direct oil-to-chemicals complex and the Tesla Semi electric truck, which is being trialled by DHL and other logistics companies.

To fully understand this link, let’s first consider the wider context behind the Tesla truck story. This story tells us is that it is not only the electrification of passenger vehicles that is a major threat to oil demand. Why not electrification of the transportation of goods as well?

Right now, conventional wisdom suggests that this won’t happen, resulting in the standard view of continued strong growth in diesel consumption. But today’s technologies never stand still. Just look at US shale oil and gas as an example that most of us can relate to.

And in general terms, one very likely scenario is where electrification of transportation in general follows an S curve. Improvements in the critically important battery technologies seem likely to reach a tipping point, as happened with hydraulic fracturing. Substitution will then speed up.

China will be crucial here. For environmental reasons, and because it needs to escape its middle-income trap, it is pouring vast sums of government money into developing local electric battery technologies.

And what about India, which is possibly tomorrow’s great economic hope? Given its terrible air pollution problems, it seems one-dimensional to only plan for gasoline and diesel being the dominant fuels feeding its growth in auto ownership.

Key to the successful electrification of the transportation sector is of course not just improvements in battery technologies. It is also the availability of low cost electricity that is environmentally sustainable.

If electricity is too expensive, and is generated by dirty old coal and considerably cleaner natural gas, then electrification of transportation cannot follow an S curve – even if the right breakthroughs in battery technology happen. Whilst coal is definitively awful for the environment, natural gas is better but is only a “bridging fuel” towards decarbonisation.

Is the bridge already being crossed because of the increasing economic efficiency of renewable electricity generation?  Very possibly, yes. As the International Energy Agency (IEA) writes in its 2017 World Energy Outlook:

In 2016, growth in solar PV capacity was larger than for any other form of generation; since 2010, costs of new solar PV have come down by 70%, wind by 25% and battery costs by 40%.

This is based on today’s data. But it is again important when you are doing your scenario planning to think of the S curve. How much further might the cost of renewables fall? What will this mean for renewables replacing coal and natural gas in electricity generation?

As for sustainability, think again of India. The IEA says that India will be the biggest driver of global energy demand growth in general up until 2040.

How realistic is it that India can make use big use of its domestic coal reserves to satisfy this demand? In 2015, no less than 2.5m people died from pollution in India, according to The Lancet Commission on Pollution and Health. This was higher than any other country including even China where 1.8m people died.

Add many hundreds of thousands more to this number over the next few decades and this could negate India’s demographic dividend of a very youthful population. India might well face nothing short of a public health disaster.

India’s answer could be to make much greater use of renewables to generate electricity which will feed electric vehicles.  A clear sign of its intent in this direction is that it has set itself a target of generating 40% of its electricity from renewables by 2030.

Pollution isn’t the only issue for India. Think here of villages short of electricity because of the country’s poor electricity infrastructure. Local solar arrays seem like a cheap as well as a sustainable solution.

The risk of being forced to leave oil in the ground

The Aramco/SABIC MoU is for a chemicals complex at Yanbu on Saudi Arabia’s Red Sea coast. The complex would produce 9m tonnes/year of chemicals from 400,000 bbl/day of oil with completion set for 2020.

What could be part of the project is the Aramco/SABIC technology that allows crude oil, once it has been treated, to be fed directly into a steam cracker. As my ICIS colleague, John Baker, writes in this excellent article:

The process begins by feeding the crude oil into a hydrocracking unit which removes sulphur and shifts the crude’s boiling point curve significantly to lighter compounds.

The gas-oil and lighter compounds are then fed to a traditional steam cracker and the heavier products to a proprietary Aramco-developed deep fluid catalytic cracking unit that maximises olefin output.

Here is what might be some of the motives behind this proposed investment.

Saudi Arabia’s biggest national asset is of course its hydrocarbon reserves. But as we approach Peak Oil Demand – for the reasons described above, and because of today’s ageing populations – Saudi Arabia confronts the risk of being forced to leave much of its most valuable asset in the ground, for good.

What Aramco and SABIC  seem to be planning to do with this investment is bypass traditional oil refining as a hedge against the day when gasoline and diesel demand might collapse.

If it built a conventional refinery, the risk is that the fall in demand for transportation fuels would leave the refinery underutilised.  In other words oil would, as I said, be left in the ground for good. But turning oil directly into petrochemicals could help ensure continued development of the country’s oil reserves.

The project also fits in with Saudi Arabia’s Vision 2030, one of the main objectives of which is to create more employment for the country’s very youthful population. A means to this end is growth in industries downstream of oil production.

But as with all hedging strategies, there are many different approaches to the same challenge. The refining industry is obviously not going to collapse any time soon. Even if demand peaks for transportation fuels, existing steel on the ground will remain important to local economies. Hence, Saudi Arabia is also building new refinery-petrochemicals complexes in China to again lock-in consumption of its oil.

But what about the demand for petrochemicals?

How might the development of autonomous driving technologies reshape the demand for petrochemicals? If people hire autonomous rides when they need them, rather than own vehicles,  auto sales could collapse.

This is just one of the many unanswered questions about future demand growth in petrochemicals. So is the extent to which the move towards a Circular Economy will undermine petrochemicals consumption growth.

As we’ve just discussed, sustainability is a major driver behind major upheavals in transportation. There is no logic behind the view that petrochemicals will not be subject to the same pressures. Another S curve might apply here – the sudden take-off of legislation that prohibits the use of virgin polymers in some end-use applications.

This is clearly a challenge for Aramco and SABIC, and for all the other proponents of petrochemicals projects. You cannot just assume that turning oil directly into petrochemicals avoids the broader risk of a decarbonising world.

The answer is focusing petrochemicals production on where it creates real, lasting societal value – for example, less plastic mineral water bottles which are non-recyclable and more plastic piping and irrigation that can improve crop yields. In this way, companies can justify to legislators why they must retain their licenses to operate.

icis



13 Comments on "Peak oil and the Aramco/SABIC petrochemical project"

  1. rockman on Sat, 2nd Dec 2017 4:14 pm 

    “This story tells us is that it is not only the electrification of passenger vehicles that is a major threat to oil demand.” Not only are electric passenger vehicles NOT a threat to ICE’s today they are currently losing the race at the rate of 55 to 1: 2016 ICE sales of 84 million to EV sales of 1.5 million.

    Many years down the road EV’s may well become a threat to oil production. But today, in absolute terms of gallons per day, the increase in oil demand to fuel NEW gasoline/diesel powered vehicles is increasing at a much greater rate then EV’s are decreasing that demand. IOW electrification of vehicles is falling further and further behind with every day (and ICE sold) that passes.

    Throwing out the % increase of EV’s on the road compared to ICE’s is nothing more then an attempt to placate the weak of mind.

  2. Sissyfuss on Sat, 2nd Dec 2017 10:24 pm 

    Why do I feel so placated, Rock?

  3. cam on Sun, 3rd Dec 2017 9:25 am 

    Every scenario for renewable energy seems to hinge on rapid and continuing improvement in battery technology and renewable energy generation at ever lower costs out into the future. Of course making predictions is difficult, particularly about the future (Yogi). What if things do not go as hoped? Is there a plan B?

  4. Davy on Sun, 3rd Dec 2017 9:43 am 

    There is no legitimate plan or plan b. Science denial is the name of the game. It does not matter if you are a fake green peddling fantasy futures or status quo “I don’t care, I don’t know, or my science says differently”. This is not voluntary. This is mandatory. We are late term civilization. The question is how long not “IF”.

  5. rockman on Sun, 3rd Dec 2017 1:02 pm 

    Sissy – Not placated. Just frustrated by those pretending the situation isn’t BAD but not getting worse. It would be great if just 50% of new vehicle sales were EV’s. We would still see increasing demand for motor fuels but at a rate better for the climate then the current BAU.

    As I’ve said before I just don’t understand why those opposed to fossil fuel consumption (at least on the current scale) give false impressions of the current situation. Like boasting that not approving the Keystone XL border crossing permit would hinder oil sands development. I think Greenpeace actually gave themselves an award for their effort. LOL. This includes their unwillingness to admit that not building the northern leg of KXL resulted in the building of the much contested but eventually built Dakota Access Pipe Line. Or that the Paris Accord is nothing but a toothless pledge of CO2 reduction with no system of guaranteeing the stated goal. Or applauding President Obama as the “greenest” POTUS in history while he not only unsuccessfully pushes to have new west coast coal export facilities built but does export more coal (mostly from govt leases he administers) in one year then any other POTUS in history.

    You would think they would be the ones pointing out the hypocrisy and not someone who has made a living for 4 decades finding and producing petroleum, right? Especially a shill paid by Big Oil like the Rockman. LOL.

  6. Doug on Sun, 3rd Dec 2017 4:14 pm 

    Gasoline as 100 times the energy density of a battery. The energy of gas is based on covalent bonds; battery’s on ionic bonds. Batteries will never come close to the energy density of gas.

  7. Sissyfuss on Sun, 3rd Dec 2017 5:23 pm 

    Rock, if they could make an affordable dependable EV, not a Musk expensive toy but more like a model T then the conversion rate would amp up considerable. The Chinese are working on one but it still might poison your dog.

  8. Antius on Mon, 4th Dec 2017 6:42 am 

    If CO2 emissions or declining FF EROI are the problems, why would anyone automatically assume that Battery EV cars are the solution? It’s not like there aren’t other things on the table. The world seems to be suffering from a decline in lateral thinking.

  9. dave thompson on Mon, 4th Dec 2017 11:28 am 

    EV cars or any type of “green tech” for that matter is nothing more than industrial civilization with added complexity. And do not forget that the burning of FF continues unabated as we speak. Even with the addition of “green tech” into the mix.

  10. rockman on Mon, 4th Dec 2017 11:37 am 

    Sissy – True. But the “if” is still the hurdle to clear. But there’s another big “if”: if we increase electricity generation enough to meet that huge increase in demand. IOW if half the 84 million vehicles sold in 2016 would have been EV’s would we have sufficient generation to power them today? I haven’t seen anyone calculate that number but I seriously doubt it.

  11. Boat on Mon, 4th Dec 2017 1:13 pm 

    Rock,

    Apparently poor Obama won’t get the credit of the dramatic coal reduction that happened on his watch. The export gains recently are a paltry pittance compared to coals loss of market share over the last 9 years.

  12. GregT on Mon, 4th Dec 2017 1:40 pm 

    Boat,

    International Energy Agency

    Coal

    How much of the world’s electricity needs are provided by coal? Does still coal contribute to the energy mix globally?

    As of 2013, coal provided approximately 41% of the world’s electricity needs. And at 29% of total world energy supply, coal is second only to oil’s 31% share.

    Is coal production declining?

    No, far from it. Since the start of the 21st century, coal production has been the fastest-growing global energy source.

    What about coal consumption?

    Global coal consumption increased by more than 70% from 4 600 Mt in 2000 to an estimated 7 876 Mt in 2013, and at a 4.2% annual rate, coal was the fastest-growing primary energy source in the ten years through 2013. But demand growth has slowed of late. Preliminary data for 2014 showed the first actual decline since the 1990s, falling 0.9%; but the main driver of that result was a reported drop in Chinese demand that is based on preliminary data. Indeed, the IEA expects slowed but continued coal demand growth, with the Medium-Term Coal Report 2015 seeing a 0.8% increase through 2020.

    https://www.iea.org/about/faqs/coal/

    Apparently poor Obama’s watch was only over about 4% of the world’s population. A small drop in the global bucket. Considering the fact that the burning of coal is a global problem, and us humans don’t have another planet to migrate to, totally insignificant in the big scheme of things.

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