Oil Majors Face Further Pain As Plastics Fall Out Of Fashion

Oil and gas producers are preparing for a decline in demand for gasoline and diesel as electric cars replace fossil fuelled vehicles, but they have been taking solace in the thought that the petrochemicals market would still need a lot of oil as a feedstock.

But now that source of demand may be under threat as well, thanks to the global backlash against plastics from both consumers and regulators.

That’s the view of index provider and investment analyst MSCI, which says that “amid the shift toward electric vehicles and global efforts to rein in fossil-fuel emissions, oil demand for road transport may peak in 2025”.

In response, oil and gas companies are expected to pivot toward petrochemicals, mainly inputs for plastics. Materials, rather than energy, may account for more than half of oil-demand growth by 2050, MSCI says.

But, it adds, tighter global anti-plastics regulations and shifting consumer preferences could limit the upside of these investments. “When valuing O&G companies, could a rise in recycling technologies and non-fossil-based alternatives make conventional virgin plastic the next stranded asset?” MSCI asks.

Companies such as PTT, Total, Formosa and IRPC earn more than a quarter of their revenue from selling petrochemicals, 80% of which are used to make plastic materials and products. However, “a growing legal and consumer backlash against plastics pollution may threaten the economics of further petrochemical and O&G developments”.

The number of anti-plastic pollution rules has skyrocketed over the past few years, mostly targeting single-use packaging, which accounts for as much as 40% of all plastic use. Sixty countries and around 350 US municipalities had introduced restrictions on single-use plastics by the end of last year, while the European Parliament passed a directive that calls for more than 90% of drinks bottles by 2025. “If this trend continues, petroleum assets envisioned as plastic inputs could end up as stranded as those intended for combustion,” MSCI’s report says.

It’s not just oil and gas groups that could find their revenues under threat – chemicals groups such as Dow, Mexichem, Westlake Chemical, Braskem, Lotte Chemical and Mitsui Chemicals currently derive more than 80% of their revenues from plastics-related products.

Many chemicals companies have responded to the increase in regulation and changing consumer sentiment by moving to solutions that reduce the amount of oil and gas they use.

One route is to increase their use of recycled materials. Companies such as BASF, Indorama, Eastman Chemical and LyondellBasell have developed, partnered with or acquired plastics recycling businesses, MSCI points out. Some of these businesses aim to convert or decompose waste plastics back down to their basic monomer or intermediate building blocks, which can be used as alternative raw materials to create chemicals.

This market is expected to grow, not least because recycling can cut energy and resource use. The report highlights companies such as Colgate-Palmolive, Danone, Diageo, L’Oréal, PepsiCo, Tupperware and Unilever, along with numerous other packaged good companies, that have committed to use at least 25% post-consumer recycled materials in their packaging by 2025, up from virtually nothing today.

At the same time, plastic packaging companies such as Amcor and Sealed Air have pledged that all their packaging products will be either fully recyclable or reusable by the same year.

Another alternative that could cut revenues for oil and gas groups is the development of alternative solutions, such as truly biodegradable plastics, derived from materials such as corn. There are issues with bioplastics, such as the risk of deforestation and using land that should be used to grow food, as well as contamination of conventional plastic recycling streams, but particularly if they become more biodegradable, they could contribute to a fall in demand for oil and gas.

Meanwhile, there is also a move away from plastic entirely, to alternatives such as paper-based packaging.

It is not just consumers and regulators that are driving a move away from plastics – investors are playing a key role, as well. Many have pledged to reduce their own plastic waste, but more significantly, they are starting to invest in plastic alternatives. “Additionally,” the report says, “26 financial institutions with a combined $4.2 trillion of assets under management — including BMO Global, BNP Paribas, Hermes EOS and Sarasin & Partners — have so far endorsed the Ellen MacArthur Foundation’s New Plastics Economy initiative.

“In short,” MSCI concludes, “many oil and gas producers have looked to plastics as a means of continued expansion. But our analysis suggests this shift may provide these companies only a temporary reprieve.”