No More Oil and Gas?
Or just a lot less. What restrictions in oil and gas will do to the European chemical industry
Hi Readers,
Happy Friday. It’s the first Friday of the month and that means I’m writing about oil and gas. There is a real future where oil and gas from Russia ceases being exported to western Europe. What does that mean for us chemists? I’m not sure but I suspect it’s not going to be good in the short term, but maybe it’s what we need for the long term?
This issue of the newsletter is sponsored by:
Oil prices over the last month have been whipsawing from very high to high and meanwhile gasoline prices in much of the world (refined oil) are hitting new records as the pandemic wanes and demand continues to remain high. Readers here should remember that gasoline needs to be further refined from crude oil and refinement and catalytic cracking capacity are also key drivers in gasoline prices (not just raw materials).
Further, one thing to note on shipping is that higher shipping costs due to higher fuel prices will eventually look like inflationary pressure. Trucking companies will pass on costs to customers and those customers will pass on costs to their consumers. It’s just going to take a few months for these cost increases to work their way through the system.
Oil and gas prices are global commodities just like anything else and prices are driven by supply and demand. There is currently a lot of demand right now, but the supply side will likely continue to be constrained by OPEC+ and Russia while the war continues in Ukraine. From Stanley Reed of the NYT:
Western sanctions imposed on Russia over its invasion of Ukraine are likely to lead to the loss of substantial quantities of both crude and oil products, especially diesel fuel, from the market. Already, major buyers of Russian oil, like Shell and TotalEnergies, have said they will gradually purge petroleum of Russian origin from their vast networks.
I personally think we should do everything we can to stop Russian aggression and bring peace to Ukraine and perhaps the next step is to just stop the buying of oil and gas from Russia—100%. This will cause an immense amount of short term economic pain in Europe from fertilizer to commodity chemicals and specialty chemicals. BASF warned that a 50% cut in gas supply would shut down their Ludwigshafen site—the world’s largest integrated chemical site. From Ian Young of ChemWeek:
If the amount of natural gas supplied to BASF were to be significantly reduced, the company says it would have to cut back on the production of key basic chemicals and downstream products. The result would be that “all downstream customer industries would be affected and, in the processing industry, the production of many important substances for daily use would have to be reduced,” it says.
The thing to take away here is the term “downstream” and things that are downstream here are much of the chemicals we rely on daily. These chemicals and polymers are used in adhesives, coatings, fertilizer, and packaging. The inflationary or business halting effects of chemical plants being shut down could be catastrophic for the manufacturing economy that remains in Europe. Further, imports of chemicals to Europe would be very costly and would face additional scrutiny through REACH if it were the first time they would be imported/sold in Europe.
Similar fears of shutting down the German chemical industry typically occur in the summer when water levels on the Rhine river drop. Low water levels on the Rhine means barges cannot move commodity chemicals from one site to another and the chemical value chains gets stopped. Another good example of what can happen when integrated oil and chemical operations get shut down is when Texas froze in 2021. In many ways I feel like we have still yet to recover here in the US from that initial supply chain disruption.
A Word From My Sponsor
The team at Origin Materials is working to eliminate the need for fossil resources while capturing carbon in the process. Roughly half of global emissions are associated with the production of materials — a problem that no amount of solar panels or wind turbines can solve. By converting biomass into chemicals, Origin can tackle more than a few industries with a total addressable market of about 1 trillion dollars. Their first product is bio-based, carbon negative PET (polyethylene terephthalate).
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The Chance Renewables Have Been Waiting For
Activists from Greenpeace recently stopped two oil tankers from transferring 100,000 tons of oil off the coast of Denmark (see picture at the top). I find it ironic that the protestors are protesting in plastic canoes wearing neoprene wet-suits (all this comes from oil until companies like Origin can make them come from biomass). Halting the oil shipment I suspect isn’t going to cause rapid supply chain disruption, but it is a chance for us to discuss the alternatives to oil and gas energy sources.
Sune Sheller, who is responsible for the strategic direction of Greenpeace Denmark had this to say about renewables:
“We already have the solutions and they are cheaper and more attainable than ever before. All we need is the political will to rapidly switch to peaceful sustainable renewable energy and invest in energy efficiency. This will not only create jobs, lower energy bills, and tackle the climate crisis, it will also cut our dependence on the imported fossil fuels fuelling conflicts in the world.”
Sune is right that we do have solutions to some of the problems and they are cheaper and more attainable than ever. The price of installing solar, wind, and geothermal energy is significantly cheaper than 10 years ago. The cost of lithium ion battery production is cheaper than 10 years ago. Heat pumps are better than ever and are finding wider adoption. This is a great chance to try and kick oil and gas as energy sources to the curb.
The only problem I see here is that the renewables industry might not be able to meet the demand at the required cost to replace much of the energy demands. Then, there is still the problem of chemical feedstocks being unavailable (see BASF above). Stanley Reed again for the NYT has some great reporting around renewables such as wind energy from manufacturers such as Siemens Gamesa:
Industry executives say that despite the huge climate ambitions of many countries, Siemens Gamesa and its competitors are struggling to make a profit and keep the orders coming in fast enough to finance their factories. It doesn’t help that building plants is often a condition for breaking into new markets like the United States, where Siemens Gamesa agreed to erect a facility in Virginia.
The profitability of building these massive composite wind turbines is difficult to achieve and requires significant upfront capital to build manufacturing operations. It then also requires winning large utility projects which are often under fire from local municipalities. Cape Wind here in Massachusetts is a great example of how a big offshore renewable energy project got defeated by NIMBYism. Maybe we will get a green hydrogen hub? I wont hodl my breath.
I’ve written about some of the limitations around composite manufacturing here with start-up Apogee, epoxy resins, and GE’s plans to build the biggest wind turbine in the world. These are all great efforts and we need them, but if phenol prices skyrocket due to lack of natural gas and high oil prices it’s going to be difficult to make the polymers that enable the clean energy.
Building more wind and solar is definitely going to be helpful, but solar and wind will not be sources of chemical feedstock generation. We need chemicals and polymers to produce both solar and wind turbines. Companies like Avantium, Genomatica, LanzaTech, and this month’s sponsor Origin Materials are keystones to de-fossilization of our economy. Origin and Avantium are building their large scale plants now and showing viability of their business models will be key important milestones in a no oil economy.
This high oil price economy should provide the tailwinds they need.