Big Oil's Gamble on Petrochemicals: A Disappointing Outcome

Key Highlights

• The big oil firms, Exxon and Chevron, are expected to post substantial losses in profits due to lower gas, oil, and Petrochemical margins.
• The petrochemicals industry, previously a security net for these businesses and their employees, is now experiencing a slump due to a shortage and low consumer demand. Some analysts claim it's the "Lehman 2" moment for the sector.
• Big Oil companies invest in "New Energy" technologies as traditional revenue streams fail.

Petrochemicals Margin Struggles

In recent days, Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) have been in the news for the prospect of a decline in profits mainly due to lower gasoline and oil prices compared to previous years. The 2nd quarter of 2023 is expected to be an enormous setback to Exxon and Chevron, with profits per share (EPS) predicted to decrease by a whopping 50.4 percent in the range of $2.04 from $4.14 during the second period in 2022.

Revenues for the company are expected to decrease by 31.8 percentage points year over year, dropping by $115.68 billion up to $78.85 billion due to the lower natural gas prices and crude refining margins. Chevron's current situation could be better as it is expecting a 50 percent reduction in its earnings during the second quarter compared to its previous year. Chevron's initial results indicate a profit of $6 billion in the second quarter. This is an approximate 48.3 percent decline. However, it is better than Wall Street's estimates for $5.5 billion.

But the problems facing Big Oil extend beyond fluctuating gasoline and oil prices. Their investment in key business areas like petrochemicals needs to show more. A glut of chemicals as well as low consumer demand with the opening of a number of new manufacturing facilities in the last few times have led to an ongoing decline in the profits from petrochemicals. The current situation is enough of a problem that the company based in Cologne Lanxness AG has likened it to a "Lehman 2" moment for the chemical business.

Petrochemicals as Growth Engine

Since the beginning of time, Big Oil has heavily depended on petrochemicals as the engine of growth. They use to hedge against gas and oil price fluctuations and as a development driver as we move to clean energy. Wall Street analysts have predicted that oil consumption will increase over the next decade, mostly due to the rising demand for petrochemicals.

The previous year it was reported that The Energy Intelligence Group projected that worldwide demand for oil would continue to increase by 1.5 million barrels of oil per day (mb/d) by 2023 and with China being the biggest contributor, contributing 650,000 barrels per day after relaxing its zero-Covid policies. The average demand for oil this year will surpass the record of 100.6 millibars/day set in the year 2019, and it is expected to keep expanding, averaging 106 mb/d by the year 2030. Notably, this increase is mostly driven by increasing demand for petrochemicals that transportation fuels. The Energy Intelligence Group's baseline scenario is that there will be a plateau, not a drop. The optimistic forecast is echoed by more than 10 organizations, including OPEC, Exxon Mobil, and the Energy Information Administration (EIA), and all of them predict an increase in the global demand for oil within the next couple of years.

Petrochemical Overkill

However, Big Oil companies have taken a risk in the use of petrochemicals in order to protect against gas and oil bets. S&P Global reports an astonishing 49.5 million tons of fresh capacity for ethylene that is either in operation or set to go in 2020 or 2024. This is more than the projected demand by nearly 55 percent. More than half of the new capacity is from China in the context of how China seeks to decrease the imports of essential chemicals for the manufacturing sector, which is its biggest.

Embracing New Energy Technologies

Despite the difficulties faced by the industry of petrochemicals, hopes are not gone in the eyes of Big Oil investors. The companies have turned their attention towards promising "New Energy' techniques, such as the renewable energy sector and carbon capture, use as well as storage (CCUS).

Carbon capture is a method designed to slow global warming and combat climate change's effects. The Intergovernmental Panel on Climate Change (IPCC) and International Energy Agency (IEA) view carbon capture, utilization, and storage (CCUS) as an ideal solution for challenging-to-decarbonize sectors, such as aviation, hydrogen production, and cement production from fossil fuels.

The big Oil companies have started making major investments in CCUS. For example, Exxon Mobil recently agreed to a long-term deal with the industrial gas firm Linde Plc. (NYSE: LIN) to eliminate carbon dioxide resulting from Linde's clean hydrogen plan located in Beaumont, Texas. Exxon will be able to transport and conserve up to 2.2 million tonnes of carbon dioxide released from Linde's production facility each year.

Furthermore, Linde's personal plans call for the construction of the $1.8 billion project that will feature auto thermal reforming that includes carbon capture as well as a massive air separation plant that will provide the cleanest hydrogen as well as nitrogen. Exxon's chief executive, Darren Woods, has stated that he is confident that Exxon's Low Carbon business can surpass its traditional petroleum and gas division in the next ten years and generate significant revenue.

In a bid to not be left out Exxon's peer in the oilfield service industry Schlumberger Ltd. (NYSE: SLB) has created Schlumberger Ltd. (NYSE: SLB) has established the SLB New Energy unit, which is investing in five niches comprising hydrogen, carbon solutions, geo-energy, geothermal energy storage as well as crucial minerals. Each of the five niches has a 10 billion market that can be tapped. Schlumberger has big plans for its upcoming business CEO Rennick expects revenues of 3 billion by the close of this decade and a minimum of 10 billion by the year 2030.

In a world where the energy sector is constantly evolving, Big Oil's shift to embrace new technologies for energy could be a path toward future growth in spite of the challenges faced by the industry of petrochemicals. The ability to adapt and adapt to the demands ever-changing demands will decide the longevity and ability to compete within a constantly changing world.