INSIGHT by the Institute for Energy Economics and Financial Analysis (IEEFA)
The oil and gas industry and its petrochemical counterparts generate millions of tons of plastic waste that are polluting the worlds waterways and millions of tons of greenhouse gases (GHGs) contributing to climate change. The warnings from scientists, regulators and credit agencies are increasing, but capital investment from industry leaders are going in the wrong direction.
IEEFA’s report, released yesterday, analyzes six integrated oil and gas companies (ExxonMobil, TotalEnergies, Eni, Chevron Phillips Chemical, Repsol, Shell) and three petrochemical companies (LyondellBasell, Westlake, and Dow) regarding the issue of sustainability in the petrochemical and plastics industries, specifically the production, use and disposal of single-use plastics.
“These companies and new investments all advertise that they are on the path of sustainability. Yet we have identified a significant number or long-term investments that are going in the wrong direction on ocean plastic pollution, climate change and profitability. The projects ignore a series of risks which, taken together, are a financial red flag for investors,” said Tom Sanzillo, Director Financial Analysis and the report author.
〉The report identified twelve new petrochemical plants worth approximately $70 billion that expand the production of virgin plastics. Eight of the nine companies identified in this study are actively sponsoring projects and investments collectively worth more than $70 billion on ethylene, polyethylene and other assets that support the expansion of single-use plastics. The projects enter the market at a time of oversupply, slowing economic growth and rising competition.
〉TotalEnergies’ sustainability plans support a substantial expansion of single-use plastics. Expanding its market share in the United States, its joint venture with BASF is adding a 1-million-ton ethylene cracker in Texas, as well as more polyethylene capacity.
〉Eni has embarked on development of chemical recycling initiatives that rely on unproven technical and waste management techniques. It plans to spend upward of $9 billion annually to increase its natural gas holdings, including its recently announced project to expand natural gas production in Australia, a move tied to a plan for a major increase in risky petrochemical production.
〉Repsol has been criticized for using green bond proceeds to support a corporate structure overly reliant on fossil fuels.
〉Shell invested more than $6 billion in a petrochemical hub in western Pennsylvania that has caused pollution problems, lacks transparency and has opened to a weak market.
〉Chevron Phillips Chemical has announced $14.5 billion in investments that expand ethylene and polyethylene capacity in the United States and Middle East.
〉LyondellBasell is helping to support a 1.5-million-ton annual polypropylene buildout in South Korea and Thailand.
〉Dow Chemical is moving forward with a $9 billion integrated cracker plant in Canada that would produce 1.8 million tons of ethylene and polyethylene every year. The project plans to use natural gas as a feedstock and rely on unproven carbon capture and sequestration (CCS) technology.
“Billions of dollars are being deployed on business-as-usual investments that will fail to achieve climate and pollution reduction goals, maintain profitability and encourage investor confidence,” Sanzillo said. “New market formations, policy initiatives, warnings from credit raters and technological innovation around the world strongly suggest reduced demand for single use plastics and the fossil fuel infrastructure that has supported its growth. The industry can no longer rely on historical growth patterns to absorb the current oversupply conditions.”
Most of the major oil and gas and petrochemical companies cited in the report have five-year investor performance that has lagged the Standard and Poors 500 index. The Report identified the following risks facing the companies and raise questions about the specific investments identified:
〉Market growth unreliable, profitability unstable: Markets for ethylene, polyethylene and polypropylene resins – the core elements of virgin plastics are currently oversupplied. Short- and long-term analyses point to slower growth, lower operating rates, and reduced profitability. Traditional business assumptions that rely on robust growth are facing disruption from competitors and policy interventions along the value chain. Even if market share grows over the long run, its pace and size will disappoint and strike at the core of investor value.
〉Sustainability is credit positive; fossil fuels are not: The three major credit agencies—Moodys, Standard and Poors and Fitch—have all issued warnings related to climate and environmental risks. The effects are already having an impact. The agencies have tightened credit standards that clearly point to deteriorating creditworthiness for companies that neglect to address the twin objectives of curbing climate and environmental degradation and fail to invest in the credit positive business lines of the future.
〉Favored technologies not commercially viable: Most technological innovations offered by oil and gas and petrochemical companies are insufficiently mature to count as generalized solutions to the problem. Commercial viability in the most prominent technological solutions is far off. One prominent pollution control mechanism that some expect will allow continued drilling of fossil fuels used in plastics production—carbon capture and sequestration (CCS )— has a 40-year history of technological underperformance and no chance of commercial viability absent long-term subsidization from taxpayers.
〉A Lack of Uniform Standards and Transparency. Major companies have made environmental and climate promises, but now they are entering a phase in which they must meet stringent implementation targets. For the most part, the industry as a whole and most companies in particular have not adopted uniform standards of accountability or made the disclosures needed to evaluate their performance.
〉Policy Consensus moving away from virgin plastics: A global consensus is emerging among nations, industry groups and environmental stakeholders that there is a need to reduce the production of plastics. Despite some in the industry looking to weaken these agreements, the consensus is moving away from virgin plastics production. The recent negotiations in Nairobi regarding the United Nations Treaty on Plastics set the stage for next year’s continuation of the consensus building effort in Ottawa.
“This report is a research tool that asks questions about the work of petrochemical companies, including integrated oil and gas majors, in the arena of sustainability in plastics production. All of the companies in this report are promising new directions to address ocean plastic pollution and climate change with forward looking business models,” said Tom Sanzillo, IEEFA director of financial analysis and author of the report. “Now is the time for the companies to tell their investors how they will get from today’s heavy reliance on fossil fuels to climate friendly, emissions reducing and profitable companies. The companies included in our analysis were chosen because they are industry and market leaders.”
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