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Covid-19 Fans Turbulence in Chemical Industry

ASPRI2021_ED01a_Pix01An unprecedented crisis of global proportion, Covid-19 has challenged many industries including oil and gas. Since March 2020 the industry has been hit by a slew of troubles, from tumbling global demand and massive over supply to sagging oil prices and asset under-utilisation, disrupting activities everywhere, both upstream and downstream.

BP CEO Bernard Looney in a TV interview could not have said it more aptly, “it is a very brutal environment” that “will have a lasting impact on future market developments, dampening growth rates and increasing uncertainties". Petrochemical projects have been delayed due to supply chain disruptions and difficulty in deploying labour. According to GlobalData’s Oil & Gas Intelligence Center. the United States heads the list with the largest number of postponed projects followed by China. Nothing is spared, whether they are in early stages of development or pending final investment decisions.

McKinsey& Co, in its May 2020 report “Oil and gas after Covid-19: The day of reckoning or a new age of opportunity?” said the immediate effects were “staggering”.

It said “..companies must figure out how to operate safely as infection spreads and how to deal with full storage, prices falling below cash costs for some operators, and capital markets closing for all but the largest players.”

On 15 May, the Asian Development Bank in its report estimated that the global economy could suffer losses of between US$5.8 trillion and US$8.8 trillion, equivalent to 6.4 percent to 9.7 percent of global gross domestic product (GDP).

This is significantly higher than an earlier estimate made on 3 April which placed the losses caused by the pandemic to between US$4.1 trillion and US$5.4 trillion.

Singapore's chemical cluster not spared the infection
Even before the health crisis hit, the chemical cluster in Singapore was experiencing a slowdown. In 2019, manufacturing output from the chemical cluster slipped 13% from the year before to S$86 billion, reversing the 17% gain in 2018.

According to the Department of Statistics, declines were recorded in all three key sectors – petroleum, petrochemicals and specialty chemicals. The petrochemicals segment suffered the sharpest drop, easing 18.8% to S$32.2 billion (37% of total), followed by petroleum, which fell 12.4% to S$38.5 billion (45%), and specialty chemicals, 1% to S$10.2 billion (12%). Others (including organic and inorganic chemicals) bucked the trend, rising 5% to S$5.2 billion (6%).

Value Added (VA) also fell, with overall VA for the cluster easing 18.7% to S$10.5 billion, dragged down by sharp double-digit declines in the petroleum and petrochemicals sectors. VA per worker also dropped 18.7% to S$408.9 million.

The early months of the pandemic exacted more damage on Singapore’s chemical industry, which has activities spanning across the value chain, from oil refining to olefins production and chemicals manufacturing.

In the first half of 2020, manufacturing output from Singapore’s chemical cluster dropped 5.5% with declines recorded across all segments. Petroleum took the biggest hit of -7.3% followed by others -6.8%, petrochemicals -6.2%, and specialty chemicals -2.5%.

Besides manufacturing, the oil trading value chain was also hard hit by contagion effect of the pandemic as trade disruption and tightening credit contributed to the collapse of two Singapore-based trading houses.

One of Singapore’s largest oil trading companies, Hin Leong, filed for bankruptcy protection in mid-April with debts of nearly US$4 billion. The company’s problem was compounded by hidden trading losses of nearly US$800 million in oil futures speculation.

Just weeks after news of Hin Leong’s collapse surfaced, a second oil trader ZenRock Commodities Trading was placed under judicial management with debts of over US$600 million.

In its half-yearly macroeconomic review in April, the Monetary Authority of Singapore (MAS) raised concerns about the potential impact on the refining, transportation and storage, petrochemical and finance sectors from "contagion effects" in the event of widespread failures of firms involved in wholesale fuel trading.

The going gets even rougher for oil majors
2019 was a challenging year for oil majors such as Shell, ExxonMobil and BP which saw their revenues ravaged by weakening economic growth in major economies and intensifying trade tensions that dampened demand for oil and weighed down prices. All three reported drastic drop in earnings as well.

On average, Brent crude was trading at US$64.12 a barrel in 2019 as against US$71.67 in 2018 and US$80 in 2010.

Shell’s net profits plunged 32.4% to US$15.8 billion on a 11.2% drop in revenue to US$352.1 billion. Similarly, ExxonMobil Corp’s net profits fell 31% to US$14.3 billion on 8.7% decline in revenue to US$264.9 billion, despite the sale of its Norwegian North Sea assets. It was one of Exxon’s worst earnings performance in history.

BP plc was not spared. Weakened oil consumption plus slowed global macroeconomic growth due to growing trade tension saw its revenues decline to US$278.4 billion from US$298.8 billion in the previous year. Profit too was hit by a 57% drop to US$4 billion. Subsequently, in July 2020, BP announced it would sell its petrochemicals business with interests in 14 manufacturing plants across Asia, Europe, and the US to INEOS for US$5 billion. Its CEO Bernard Looney called the deal "another significant step" in his plan to "reinvent" the British oil major.

INEOS, a global chemicals company, had previously acquired a number of businesses from BP, most notably the US$9 billion purchase of Innovene in 2005, a BP subsidiary holding most of the group’s then chemicals assets and two refineries.

Closer to home, PetroChina, which owns the Singapore Petroleum Company, enjoyed a revenue increase of 6% from the previous year to RMB 2.52 trillion (US$360 billion), but suffered a 14% drop in earnings to RMB45.7 billion.

Covid-19 impact flowing into 2020
If the 2019 earnings performance was an uncomfortable read, worst was to come. As countries were forced to lockdown in an all-out effort to contain the virus, economic activities screeched to a near standstill. During the months of March and April, travel restrictions and quarantine lockdowns were announced around the world almost on a daily basis, causing the world’s biggest demand shocks in history.

The early eighties was the only time in recent history that the oil industry had experienced something similar. Even then, demand fell by just over 4% in 1980 as against a projected 9% this year.

To protect balance sheets, maintain shareholder pay-outs and preserve cash, oil and gas companies have gone into survival mode, reducing forecast expenditure where possible to weather the impacts of Covid-19 and oil market volatility, said GlobalData, a leading data and analytics company. As expected, the oil majors’ 2020 first half results were dismal with losses posted across the board. As ExxonMobil Senior Vice President Neal Chapman told investors in a conference call after the company released its second quarter results, “Absolute demand fell to levels we haven’t seen in nearly 20 years. We’ve never seen a decline with this magnitude and pace before, even relative to the historic periods of demand volatility following the global financial crisis as far back as the 1970s oil and energy crisis.”

Following two consecutive quarters of losses, ExxonMobil booked a first half net loss of US$1.69 billion compared to a profit of US$5.5 billion for the previous year, on revenue of US$88.8 billion that was 33% lower than 2019.

Shell plunged into deep red with loss attributable to shareholders of US$18.1 billion (US$9.0 billion profit previously) in the first half of 2020, mainly due to an impairment charge of US$16.8 billion post-tax “as a result of revised medium- and long-term price and refining margin outlook assumptions in response to the COVID-19 pandemic and macroeconomic conditions as well as energy market demand and supply fundamentals”.

Its total revenue for the first six months suffered a 47% drop to US$92.5 billion from US$174.3 billion a year ago.

Even before it announced its second quarter results, Shell had at the end of June said it would be writing down between US$15 billion and US$22 billion for 2020, as fuel sales plummeted and production slowed.

On its outlook for the third quarter, Shell said, “As a result of COVID-19, there continues to be significant uncertainty in the macroeconomic conditions with an expected negative impact on demand for oil, gas and related products. Furthermore, recent global developments and uncertainty in oil supply have caused further volatility in commodity markets.”

Like Shell, BP bled heavily with first half loss attributable to shareholders of US$21.2 billion compared to a profit of US$4.8 billion for the 2019 period after downgrading the value of some of its assets on expectations of lower commodity prices.

It said the “ongoing severe impacts of the COVID-19 pandemic continue to create a volatile and challenging trading environment”. Looking ahead, the outlook for commodity prices and product demand remains challenging and uncertain, it added.

Earlier, Shell had said it would cut capital expenditure to “US$20 billion or below for 2020 from a planned level of around US$25 billion” in its last annual report. At ExxonMobil, capex is expected to be reduced by nearly US$10 billion to US$23 billion for 2020. Chevron said it was reducing its 2020 capex guidance by up to US$2 billion to $14 billion. BP indicated it would pare down its capex by 25% to US$12 billion for the year.

Oil prices suffer heavy knocks
As early as mid-February, the International Energy Agency (IEA) had begun to cut its growth forecast for 2020 by 365,000 barrels per day (bpd) to 825,000 bpd, the lowest since 2011, as it expected the impact of the health crisis on global oil demand would be "significant".

The oil market had suffered a big blow when Saudi Arabia announced on 8 March that it planned to raise its production significantly after the collapse of the Organization of Petroleum Exporting Countries (OPEC)'s supply cut agreement with Russia. Following the announcement crude prices plummeted 33% as the increased production would exacerbate the oversupply of crude. One report said Brent crude and U.S. crude futures slipped by as much as US$14 to US$31.02 and US$27.34 a barrel in a flash of turmoil before recovering some of their losses. Another said that on the same day US oil prices crashed as much as 34% to a four-year low of US$27.34 a barrel “as traders brace for Saudi Arabia to flood the market with crude in a bid to recapture market share”.

Following that historic collapse, the market was again shaken by further spectacular price declines. On 21 April, Brent crude price fell to as low US$19.33 a barrel and on 28 April, West Texas Intermediate (WTI) prices fell to as low as US$12.34 per barrel. A day before that US futures plunged into negative territory. US traders were forced to pay as much as US$37 per barrel to dispose of unwanted American crude.

Also, in April, it was reported that 50 million barrels of crude were going into storage every week, “enough to fuel Germany, France, Italy, Spain, and Britain combined”. And traders had to use tankers for storage as onshore facilities ran out of space.

As expected, “global energy demand declined by 3.8% in the first quarter of 2020, with most of the impact felt in March as confinement measures were enforced in Europe, North America and elsewhere”, the IEA reported in its April update. First quarter oil demand was down nearly 5% while gas demand declined 2%.

By June, the outlook seemed to take a turn for the better as economies such as China and India had begun to reopen for business and driving demand, while global oil supply fell following an agreement within OPEC plus to restrict production, boosting crude prices.

In its July report, the IEA projected oil demand for 2020 to be 92.1 million bpd (mbpd), 7.9 mbpd lower than in 2019, as a result of the biggest declines seen in the first half of the year. Its forecast growth of 5.3 mbpd to 97.4 mbpd for 2021 is still 2.6 mbpd below that of 2019. The agency expects curtailed jet and kerosene deliveries to impact total oil demand up to 2022.

Although the first half ended on a more optimistic note, IEA cautioned that the oil market remained fragile. Without an effective and widely distributed vaccine, fears of infection would continue to limit social and economic activities.

The resurgence of infections in some countries that had reopened their economies renewed possibility of new lockdowns that could again dampen commercial and industrial activity leading to curtailed demand for not just oil, but gas as well.

Shale oil players get blown off track
As the pandemic crashed the oil market, US shale oil, which catapulted the country to the top spot in global oil production, hit the skids. According to a June 2020 study by Deloitte, the challenging oil market and economic conditions could prompt “the shale industry in aggregate to impair or write-down the value of their assets by as much as US$300 billion”.

This may trigger the deepest consolidation in the industry, noted the report, saying “The oil industry is currently experiencing a ‘great compression’ in which companies’ room to manoeuvre is restricted by low commodity prices, reduced demand, capital constraints, debt loads, and health impacts of Covid-19. Unlike in previous downturns, these effects are now simultaneous - creating a higher-level risk of technical insolvencies and building intense pressure on the industry.”

The impact will be felt across the oil and gas sector, as well as throughout the financial markets more broadly, Deloitte added. Whiting Petroleum became the first casualty when it filed for bankruptcy protection on 1 April with debts of US$3.6 billion. In the months that followed, there were more casualties with Chesapeake Energy, a pioneer of America’s drilling renaissance, being the largest victim in the first half of 2020. It declared bankruptcy on June 28 with more than US$9 billion in debt.

Moderate impact on gas market
Annual gas consumption had started to slow before the crisis hit. In 2019 demand rose 1.8% – down from 4.6 % in 2018 - on slowing economic growth in China and warm winter weather in the northern hemisphere.

China’s imports grew 12% in 2019, a pale shade of its booming 2016-2018 years, while India’s imports rose 6% after a slow first half. Two other major Asian importers, Japan and South Korea, saw their consumption decline.

For 2020, global gas consumption was slated to suffer the biggest fall in its history. In its annual Gas Report in June 2020, the IEA predicted global gas demand would fall by 4%, or 150 billion cubic metres (bcm) in 2020, twice the size of the drop experienced in the aftermath of the 2008 global financial crisis. While the impact is more moderate compared with oil, it is still a huge blow to an industry more used to robust growth in consumption.

As of early June, the IEA said all major gas markets worldwide were experiencing falling demand due to the economic slowdown with more mature markets across Europe, North America and Asia expected “to see the biggest drops, accounting for 75% of the total decline in gas demand in 2020”.

Due to the pandemic the natural gas markets it said were “going through a strong supply and trade adjustment, resulting in historically low spot prices and high volatility”. Record oversupply had dampened prices and affected spending on investments by oil and gas companies to make up for falling revenues. Demand is expected to gradually recover in the next two years led by China and India. Liquefied natural gas (LNG) will drive the growth in global gas. By 2025, the IEA projects that global LNG trade will rise 21% from the 2019 level to reach 585 billion cbm.

China will become the biggest LNG buyer by 2023, overtaking Japan, while India's requirement will approach that of South Korea, now the third-biggest consumer.

IEA also cautioned that new production and infrastructure projects were likely “to come online amid growth trends that are markedly below earlier expectations, reinforcing the prospect of overcapacity and low prices… and cast a shadow over future investments”.

Meanwhile, there were increased reports on gas decommissioning as companies began slashing exploration and production budgets. According Rystad Energy estimates, the total value of decommissioning projects globally could reach US$42 billion by 2024.

The heat descends on refineries too
As early as March 2020, there were reports that the pandemic had triggered an “unprecedented” oil product demand decline with demand destruction most severe in Europe and North America. For that month alone, IHS Markit predicted that global gasoline consumption would be down 18% compared to the year before, and the following months would see decline “a staggering 33% year on year”.

It expected jet fuel demand to fall 60% in April year on year. While diesel and residual fuel would hold up better, they would still experience double digit declines. Also, in April, PwC - one of the Big Four accounting firms - observed that market behaviour for refining was different from previous crises. While refining margins and volumes would typically grow with falling crude prices, it was different this time round.

It said, “while crude oil prices are falling due to oversupply, there is also a rapid decline in demand — both domestically and internationally” in the wake of Covid-19.

With the pandemic shuttering large parts of the economy, it was estimated that gasoline demand could plummet “by 50% during the months most impacted by the Covid-19 outbreak”.

PwC said depleted demand was already creating inventory problems in both the distribution network and at the refineries with “many markets experiencing negative crack spreads”.

“As spreads invert and inventories begin to top out across the fuels distribution and retail network, refinery shut-ins will be required, with output necessarily shunted to the export markets,” it added. At the same time, global natural resources consultancy Wood Mackenzie said that both refinery utilisation and profitability had fallen sharply as a result of the crisis.

“Refiners have started to reduce runs, margins are coming under severe pressure and some refineries will close, albeit temporarily,” it added.

Alan Gelder, vice president, refining and chemicals at Wood Mackenzie, said, “Within the next five years, the risk of cannibalisation – when each new refinery project prompts the closure of assets elsewhere – within the sector will grow. World-scale refineries are getting bigger while the energy transition is weakening the global growth in oil demand.”

He suggested that new refineries would have to be “heavily integrated with petrochemicals to ensure they are highly competitive”.

In April, Marathon Petroleum, one of the biggest US refiners, announced it would stop production at a plant near San Francisco. Royal Dutch Shell had idled several units in three US refineries in Alabama and Louisiana. And across Europe and Asia, many refineries were running at half-rate.

US oil refiners processed just 12.45 million bpd in the week to April 17, the lowest amount in at least 30 years, except for hurricane-related closures.

More refinery shutdowns are coming, oil traders and consultants said, particularly in the US where the pandemic has run well into the summer months.

However, there were no reports of serious impact on production at the major petrochemical complexes in Singapore.

In its new report, the Goldman Sachs Group predicts the refining industry would enter a consolidation phase as slow demand has coincided with the completion of large-scale projects.

Between 2021 to 2024, as new mega oil refineries come online in the Middle East and China, it will force all refineries to lower their utilisation rates by 3% over that timeframe compared with 2019. The margin squeeze may result in closures of older refineries in developed countries, as the new mega-refineries will be located close to demand – in the emerging markets, which Goldman Sachs expects to account for most of the oil consumption growth up to 2025.

Gasoline was projected to lead the recovery in fuel demand, with slower demand for jet fuel and diesel consumption to be impacted by uptick of electric vehicle usage in the medium term.

Petchem to expect demand shock too
Petrochemicals are widely seen as the next frontier for oil demand as gasoline, diesel and jet fuel consumption is projected to peak over the coming years. But the coronavirus outbreak and the ensuing collapse in economic activity have dampened the outlook.

Chemicals used for cleaning products, supplies to the healthcare industry as well as single-used plastics have reported big demand increases, but those for major end-use segments like automotive and construction have taken a hit. While the jury is still out on the plusses and minuses, Mark Eramo, global vice president/oil, midstream, downstream, and chemicals at IHS Markit, told the 2020 World Petrochemical Conference Online strategic dialogue forum in April, “we expect a sizeable demand shock.”

As the Covid-19 outbreak continues unabated, several companies have announced project delays. According to GlobalData, the US had the largest number of project delay announcements by mid-May, followed by China.

Said Dayanand Kharade, oil and gas analyst at GlobalData, “Investments that are in early stages of development and projects targeting final investment decisions (FIDs) in 2020 foresee postponement, as the current situation intensifies and uncertainty in market growth continues. Companies are expected to re-work on investment strategies for new projects, which could possibly defer their FID plans.”

Around mid-year, Offshore Technology conducted a survey to find out which oil and gas segments among petrochemical, refinery, upstream, and midstream will pick-up faster than others after the pandemic. Thirty-two percent thought the petrochemical segment would bounce back first, followed by the upstream and refinery segments with 26% and midstream 15%.

Billions of dollars in expenditure erased
Although integrated oil and gas companies were expected to fare better than standalone refiners and finished products manufacturers, many have not been spared by the crisis. GlobalData had predicted in May that more than US$85 billion in expenditure had been slashed by over 100 companies across the industry.

“These measures have been taken to survive the unparalleled market uncertainty and it is likely that more companies will follow in the near term,” Daniel Rogers, Oil and Gas Analyst at GlobalData, said. ExxonMobil, Shell and BP have already announced cuts in their expenditure for 2020.

In the Middle East, multilateral development financial institution Arab Petroleum Investments Corporation (APICORP) has estimated that planned and committed investments in the Middle East and Africa (MENA) region will exceed US$792 billion between 2020 and 2024, US$173 billion lower than previous estimates.

And in China, according to a Bloomberg report in May, the country’s three biggest state producers would have a combined expenditure cut of around US$19 billion, with PetroChina taking a 32% share.

Sinopec-SK Wuhan complex’s start-up has been postponed to Q1 2021 from Q2 2020, while Sinopec Hainan Refining & Chemical experienced delays in construction works due to the outbreak.

Nearer home, IRPC Pcl, part of Thai state-owned PTT Pcl, has delayed a 32.4 billion-baht (US$1 billion) paraxylene project. Slated to begin this year, the project would have added 1.3 million tonnes of paraxylene, used in the manufacturing of industrial chemicals that make plastic bottles and fabrics, and about 400,00 tonnes of benzene to IRPC’s capacity in 2024.

“We are delaying the paraxylene project for now because demand is slowing and it uses a lot of capital … it is good project, but should be delayed given the current situation,” IRPC president, Noppadol Pinsupa, told Reuters. “We have to focus on liquidity and manage investments including holding off projects that are not immediately necessary or not suitable for the situation.”

Looking forward to resumption on new project constructions in Singapore
Near term challenges remain as the coronavirus is not expected to go away anytime soon and may disrupt even the best laid out plans. But based on past records, the chemical industry is resilient. Time and again it has managed to bounce back after each setback.

In looking forward towards a post Covid-19 future, the IEA had predicted that oil demand might climb by 5.7 mbpd in 2021, the fastest annual climb on record, to an average of 97 mbpd. Though it would only partially offset the severe oil demand collapse triggered by the coronavirus pandemic, global oil demand could return to pre-crisis levels in 2022 if countries avoid a second wave of the coronavirus outbreak and restart the aviation industry, and without putting in place new plans to accelerate clean energy investment.

In Singapore, expansion and greenfield projects announced in the last two years and scheduled to begin construction have been impeded by Covid-19 as workers were locked down in their dormitories, frustrating deployment to worksites.

ExxonMobil had earlier pressed ahead with its multi-billion-dollar expansion of its refining and petrochemical complex on Jurong Island to convert fuel oil and other bottom-of-the-barrel crude products into higher-value lubricant base stocks and distillates using new catalyst and process technique.

A virtual foundation laying ceremony for the expansion was held on March 31, 2020, a year after the project was announced. The additional facilities will increase production capacity of cleaner fuels with lower-sulphur content by 48,000 barrels per day, and 20,000 barrels per day of lubricant base stocks. It can also optimise overall energy use and limit emissions at the facility. Waste heat will be recovered and used to generate steam to reduce electricity and fuel consumption.

Finnish biofuel producer and oil refiner Neste has pushed back the planned expansion of its biofuel plant in Tuas. In an announcement in July 2020, Neste said, "Without taking possible new waves of infections into consideration, the estimated start-up of the plant is moved from the middle of 2022 to the first quarter of 2023.”

Neste said the delay would raise the cost of the expansion to 1.5 billion Euros (S$2.4 billion) from an earlier estimate of 1.4 billion Euros.

When completed, the new plant, the biggest in its history, will boost Neste’s biofuel production capacity in Singapore by up to 1.3 mtpa to 2.3 mtpa.

Another project that was slated to begin construction is Linde’s single largest investment of US$1.4 billion to quadruple its current production capacity in Singapore to produce and supply hydrogen and synthesis gas to support the multi-billion-dollar expansion of ExxonMobil.

All construction work on new projects was suspended during the Circuit Breaker, Singapore’s partial lockdown, between 7 April and 1 June.

Going forward, any expansion or development of greenfield projects in Singapore would depend very much on how the coronavirus pandemic pans out as well as the new strategies of major oil and chemical companies’ in the post Covid-19 world.

Meanwhile, as Singapore prepares itself for the third phase of opening after the lifting of a partial lockdown from 19 June, plant construction and maintenance contractors are looking forward to restart work on the projects as most of the workers are expected to be gradually cleared for deployment from August.