By some reports, China is expected to account for 50% of all growth in the petrochemical sector through 2025. As the country rushes to attempt petrochemical self-sufficiency – China remains deficit particularly in ethylene and benzene, as also derivatives, as its domestic demand booms – its petrochemicals sector is reaping the rewards. But there are also risks ahead.
Data for 2017 released by the China Petroleum and Chemical Industry Federation indicated a bumper 2017 for petrochemicals. Revenue rose to US$2.27 trillion while profits jumped by 30% to US$130 billion. International trade represented about a quarter of all revenue, indicating that much of the production and consumption of petrochemicals is taking place domestically. China is already a significant exporter of PTA, and also exports polyethylene and polypropylene, but these numbers will generally play a secondary role in response to booming domestic petrochemical demand.
Some observers have identified China’s state edict in 2016 to improve competitiveness in the petrochemicals industry as the reason for the industry’s improving bottom line. State-sanctioned and directed mergers bundled major and minor, private and public producers together over 2016 and 2017, creating a network of stronger and unified players. If that has been responsible for the success in 2017, then another state drive might slow things down in 2018.
To deal with the environmental impact of the petrochemical sector, China is mandating a ‘green tax’ across the industry to fund anti-pollution schemes. Energy consumption per yuan of output must also be reduced by 8%, CO2 emission by 10% and water consumption by 14% in 2020 from their 2015 levels, targets issued by the National Development and Reform Commission. Scores of plants that now operate within densely populated and growing urban areas must also relocated to more remote areas; some estimates suggest that some 500 ‘toxic’ plants must relocated, with 185 in Shandong province alone.
This accelerated environmental drive could see the Chinese petrochemical sector slow down in 2018, as it grapples with additional costs to promote efficiencies. But as always, the Chinese also have an answer to that. If it is getting too difficult to grow wantonly domestically, then why not do it overseas? In the last month, Tianjin Bohai Petrochemical agreed to construct a US$4.3 billion petchems complex in Aktyubinsk, Kazakhstan, while an unnamed private Chinese firm is building a PP plant in Kharvana, Iran. It may be far from Chinese borders, but will still contribute to the growing strength and clout of China’s petrochemicals industry.
China’s Petrochemical Industry in 2017
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Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
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Midstream & Downstream
Global liquid fuels
Electricity, coal, renewables, and emissions
2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?
Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.
ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.
But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.
Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.
So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.
Supermajor Net Profits for 4Q18 and 2018
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)