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Opportunities and challenges for chemicals: Pivotal role of the Middle East
Remarks by Steve Pryor
President, ExxonMobil Chemical Company
Gulf Petrochemicals and Chemicals Association Forum
Dubai, UAE
December 9, 2009
Thank you all very much.
I'm delighted to be here to discuss the challenges facing our industry and more importantly, the keys to our continued success. Let me say upfront that there is arguably no better venue to discuss our industry's issues than here in the Gulf region, which is the emerging epicenter of the global petrochemical trade.
Consider this. A decade ago, Middle East imports and exports of the primary petrochemicals – polyethylene, polypropylene and paraxylene – were balanced. Since then, world trade in these products has doubled, with the Middle East now accounting for more than 25 percent of net exports. By 2018, we project that world trade will double again, with the Middle East expected to capture 75 percent of net exports, while Europe and North America swing into a net import position.
The success story unfolding here is in part based on an endowment of advantaged feedstocks associated with the region's leadership in oil and gas production. It also reflects world-class manufacturing facilities, favorable logistics and supportive government policies aimed at industrial diversification by upgrading hydrocarbons.
That's why it's a time of great opportunity in the region, both for Middle East producers and their international company partners who can provide product and process technology, market knowledge and global reach. It is this emergence of the Middle East as the preeminent global supplier of primary petrochemicals that brings us here to GPCA.
With these opportunities come challenges. Despite the recent resumption of demand growth, broad-based recovery in petrochemicals will not come quickly. For example, we estimate that combined demand for polyethylene, polypropylene and paraxylene, will not reach 2007 levels until 2011. Moreover, unprecedented announced capacity additions should come on-line during this period, resulting in weak capacity utilization for several years to come.
Significant policy challenges are also looming which will impede global trade in chemicals. These include growing tariff barriers, climate change regulatory costs and proliferating product management regulations – I'll touch on each of these later in my remarks. And more than ever, consumers are demanding increased value and sustainable solutions from the products of modern chemistry.
Do these challenges suggest an uncertain future for the petrochemical business? Has the petrochemical success story of the past 70 years seen its best days? Not in the least.
ExxonMobil continues to see the chemical industry as an attractive growth business for the foreseeable future. Why? Because the products of modern chemistry are essential to improving living standards – especially in the developing world – keeping people safe, healthy, warm, cool, fed, in motion and connected.
Beyond that, it's a little-known fact that the chemical industry is part of the solution to reducing greenhouse gas emissions. Policy makers should carefully consider a recent study by McKinsey and Company, which found that for every unit of carbon dioxide emitted by the chemical industry over the product lifecycle, two units of carbon dioxide are saved through the use of our products. The net effect is that the world's greenhouse gas emissions are 8 to 13 percent lower today than they would be without the use of chemical products.
In short, just as in the past, the chemical industry will continue to grow by delivering economic, social and environmental benefits, meeting today's needs without compromising the ability of future generations to meet their own needs. And that is the essence of sustainability.
So let me now address the outlook we see for petrochemical demand and how industry leaders can profit from this growth through a long-term sustainable approach to the business.
Given the unexpected demand contraction accompanying the global recession, my company just completed a fundamental relook at long-term growth prospects for key petrochemicals, specifically polyolefins and paraxylene. We analyzed historical consumption in 72 countries and 96 sectors of these economies. Future consumption was then modeled based on the economic outlook for these countries and sectors over the next decade.
The conclusion: long-term petrochemical growth will average two percent above GDP, similar to the 2000 to 2007 period. Growth in mature regions will be about equal to GDP and 2 to 3 percent above GDP in the developing regions.
This bullish outlook will continue to be driven by population growth, rising household incomes, and the substitution of petrochemical products, like plastics and synthetic fibers, for traditional materials. Asia, and in particular China, will remain the engine for world petrochemical demand, accounting for more than 60 percent of global demand growth.
So with increasing demand and a highly-competitive global market, what's the key to participating profitably in this growth? In a word: innovation. Innovation in low-cost feedstocks, in more efficient manufacturing processes, and in high-performance products. Innovation in these three areas is the difference between higher volumes and profitable growth.
Starting with feedstock innovation, the search for abundant, advantaged feedstocks has seen the chemical industry's center of gravity shift over the past century – from coal-based feedstocks in Europe, to refinery-based liquids in the U.S. Gulf Coast, to gas-based capacity, with the Middle East producers generally advantaged today versus liquids-based capacity in other regions. However, the story will not end there, because if you look beyond the current slate of Middle East projects, supplies of accessible low-cost ethane may be more constrained in the future.
Technology is the key to creating new options for advantaged feedstock, from the heaviest liquids to methane and even bio-based feedstocks. At ExxonMobil, we have productive, long-term research programs in all of these areas, illustrated by our major expansion in Singapore featuring unique heavy feed flexibility. We have also recently announced a 600 million dollar, ten year commitment to develop algae-based biofuels, with potential extension to chemicals and lubricants.
Bio-based chemical products will play a growing role in the future, but today represent less than one percent of the mix. History shows that development, scale-up and penetration of new technologies takes decades, just as is the case for biofuels despite widespread subsidies and mandates on these products. Hence, to meet growing demand for chemicals, our industry must continue to invest in hydrocarbon-based technology and manufacturing capacity, while pursuing alternative sources.
Another key to profitable growth is innovation in cleaner, more energy-efficient manufacturing processes. At ExxonMobil, we have ongoing R&D programs in our core manufacturing processes, from steam cracking, a technology Exxon invented in 1941, to specialties manufacturing at our large integrated sites, where we leverage the cost structure and feedstocks provided by commodities. This long-term commitment to improving our core technologies and process know-how enables us to capture substantial self-help benefits not available from technology licensing.
Finally, product innovation that improves consumer use of energy drives profitable growth and sustainability. Examples of sustainable specialty products were featured in ExxonMobil's energy efficiency car at the opening reception last evening. These included light-weight plastic parts, which reduce vehicle weight by 10 percent; synthetic lubricants which reduce engine friction; and state-of-the-art butyl rubber innerliners for tires, which improve air retention and reduce weight. If just one-third of the U.S. auto fleet used these products, it would reduce fuel consumption and greenhouse gas emissions equivalent to taking 8 million cars off the road.
For Middle East producers of commodity petrochemicals, partnering to add energy-saving specialty products can be an effective strategy to enhance portfolio returns, which is particularly attractive when commodities are in the downcycle.
In summary, a long-term commitment to innovation, across the ups and downs of the business cycle, has and will continue to underpin the chemical success story. It's how industry leaders deliver economic, social and environmental benefits, enabling progress across every facet of society. Said differently, innovation drives sustainability, and that is what keeps us in business.
I'd like to now turn to the policy challenges I mentioned earlier, which can impede trade and therefore innovation and investment. These include: growing tariff barriers, climate change regulatory costs and proliferating product management regulations.
As global trade in petrochemicals has grown, there has been an increase in dumping charges and tariffs leveled against our industry. This is a concern for an industry built on free trade and open access, and a particular issue for Middle East exporters with their expanding role in the global petrochemical trade. Trade barriers also have negative consequences for consumers, as well as for the economies they are intended to protect.
As an industry, we must be vigilant and proactive in defending free trade and responding swiftly to these threats. Initiatives like GPCA's work with GCC governments to address recent dumping claims should be welcomed. State-to-state engagement is essential to an effective response.
A related emerging issue is climate change regulations, which also have the potential to precipitate trade conflicts. As some governments impose carbon emission costs on their trade-exposed domestic manufacturers, this has triggered calls for protection against both imports which do not bear equivalent carbon costs, and production leakage to countries with lower emission standards. Concerns about trade conflicts are heightened by complex emissions trading and allowance allocation schemes which obscure carbon emission costs, increase their volatility and invite manipulation in the market for allowances.
There are no easy answers to avoiding these conflicts. We must remember that all people, in developing and developed countries alike, deserve access to energy to better their lives – which will increase greenhouse gas emissions. It should also be recognized that individual nations will take different approaches to managing the risks of climate change.
But regardless of policy differences, all nations should focus squarely on the wise use of energy. Climate policy should drive challenging but realistic improvements in energy efficiency, across every sector of society, without governments picking winners and losers. For the near term, energy efficiency offers the largest potential for reductions in greenhouse gas emissions, and effective policy needs to encourage and reward efficiency improvements.
For our industry, this should start with the energy intensity of our manufacturing facilities, an area in which Middle East producers have the potential to excel. Efforts should extend to development of new energy-saving products as well as research in both hydrocarbon-based and alternative technologies. By improving sustainability performance in these ways, Middle East producers and our industry as a whole will continue to demonstrate that we are part of the solution to climate change.
Another policy challenge is the proliferation of complex product management regulations. Declining public confidence in the safety of chemical products has led to a variety of new regulations as well as actions to deselect chemicals based on the precautionary principle. REACH in Europe and U.S. efforts to modernize its product safety laws are prominent cases in point. As regulatory requirements increase and overlap around the world, this will add costs and could impact trade.
As petrochemical suppliers to the world, Middle East producers should consider the Global Product Strategy or GPS, a United Nations endorsed, voluntary initiative to provide transparent, standardized information on the safety of priority chemicals. GPS is a practical way to improve product stewardship, enhance global reputation and avoid further proliferation of regulations. And, GPS has been incorporated into Responsible Care, the global chemical industry's signature environmental, health and safety performance system covering chemical facilities and their supply chains.
A final point is on the connection between free trade and successful global partnerships. The success of the Middle East petrochemical industry has been built on strong partnerships between Middle East producers and international companies. ExxonMobil has been in the region for over 60 years and our successful joint ventures in energy and petrochemicals are a testament to what is possible when national and international companies come together. And we continue to build on this positive experience.
We are working to expand our joint ventures in Saudi Arabia with SABIC to produce specialty products for the automotive industry. We're progressing studies with Qatar Petroleum to build a state-of-the-art petrochemical complex. And, together with our partners, Saudi Aramco and Sinopec, we have just started-up China’s first fully-integrated refining, petrochemical and fuels marketing joint ventures with foreign participation.
It's important to remember that international partnerships are forged through the free flow of goods, services, technology, capital and expertise across borders. Free trade and investment propel the innovation cycle forward, bringing together the best minds and latest technologies to profitably grow our business. The point is that successful partnerships and protectionism cannot coexist.
In closing, I would reemphasize the bright future we see for the petrochemical industry despite the challenges associated with downcycle conditions and the ongoing globalization of trade. Industry leaders will look through the ups and downs of the business cycle and steer a steady course, continuously improving operational integrity, environmental impact, product performance and shareholder returns.
And as in the past, innovation in chemistry will enable a sustainable future.
Thank you.
