Asia to lead the way for Crude-to-Chemicals

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Asian Downstream Insights sits down with José de Sá, Partner at Bain & Company, to understand where the current demand for hydrogen and other sustainable technologies will bring the oil and gas sector.

José de Sá, Partner at Bain & Company
There’s so much innovation happening in the oil & gas sector. Before we dig into your outlook on the sector and what’s on the horizon, please tell us how you got involved in the industry and your current role at Bain & Co. 

I’m a Chemical Engineer and started working with petrochemicals at the beginning of my career, mainly with polyolefins. From there I moved into consulting and progressively expanded my work experience to downstream, and later upstream, until I became responsible for the downstream sector globally at Bain.

What’s your outlook on crude oil going forward? 

Crude oil is one of the most energy dense, transportable, reliable energy sources in our existing infrastructure, advantages that led to it becoming the first energy medium to be globally commoditised. Due to increasing pressure to decarbonize and saturation of mobility in developed economies, we suspect peak oil demand is not far off, but the top of the peak could be a broad plateau as opposed to a sharp cliff, enabling crude to play an important role in our energy mix for decades to come. In the near term, the abundance of supply in the wake of COVID-19-related demand shocks has led to an unstable price regime largely supported by OPEC’s disciplined production cuts.

What do you think the shape of post-pandemic recovery looks like for Asia? 

Asia is a huge continent with countries that are going through COVID-19 in very different ways. In that sense, we are already seeing marked differences in the way economies are behaving after more than one year from the beginning of the pandemic. There are countries like Vietnam, who suffered very little and are already above pre-crisis GDP, and others like the Philippines, who are still with constrained economic activity.

Petrochemicals will account for more than a third of global oil demand growth to 2030 and nearly half through 2050, predicts the IEA. What does this mean for Asian refiners?

We see a migration of refining capacity eastward, while at the same time are seeing indications that oil companies are pursuing larger positions in chemicals both to ensure a future market for their upstream and because of the projected growth in that product, which is especially attractive compared to rest of the product suite. This will translate to a greater role for domestic refining and chemicals production in Asian countries to satisfy both domestic and international demand, and for Asia to lead the way in the buildup of capacity with the most advanced technologies, like Crude-to-Chemicals.

2020 has produced exceptionally low levels of M&A. With hopes of covid-19 vaccines and an increase in energy demand as well as pressure/opportunities from transition what are your expectations for M&A levels in Asia in 2021? How can investors take advantage of the emerging opportunities in these markets? 

M&A activity in Asia should pick up in 2021 driven by a need to reshape downstream portfolios, trimming high carbon footprint capacity and investing to become closer to the final consumer through the retail part of the business, and also by investors cherry-picking on quality refining capacity that is sitting in balance sheets of companies that have been financially battered by the COVID-19 demand destruction.

How can refiners effectively capture the benefits of the energy transition?

Large scale refiners deploying the latest technologies can produce cleaner fuels to meet the import requirements of markets struggling to produce their own fuels. Refiners who have cash to invest can lead by decarbonising their product through the integration of biofuels, low carbon hydrogen generation, and efficiency to squeeze out the full value of every carbon atom that enters the facility.

Hydrogen seems destined to play a part in tomorrow’s energy plan. How can operators best prepare? 

Refineries can serve as anchor points in the new hydrogen economy: refiners both produce and consume hydrogen at large scale and with capacity to turn up and down flowrates within some margins. This enables refiners to both support and arbitrage growing local hydrogen markets. Refiners with access to low cost renewables or appropriate sequestration geologies can become major producers of low carbon hydrogen both supporting the local market development and offsetting their own carbon emissions.

The best way to prepare for this is to examine your local conditions. Are there potential industrial partners who might form a coalition, e.g., to decarbonise a strategic steel industry or power a fleet of local service haul trucks? What is the appetite of local politicians and regulators to help reduce the risk of these proto-projects through government support?

What are some of the challenges and opportunities that downstream players will face when trying to implement CCUS technologies into their operations? 

Carbon capture will come in waves – first with pure stream CO2, then with more complex scrubbers and nitrogen removal. Refiners should focus on how much they can participate in the near term and keep an eye out for improvements to the technology. Any sequestration opportunity will require safety standards and management which should be worked out with the government and appropriate technical expertise; refiners should not get into the business of managing geological sequestration on their own unless they are prepared to take on these new risks.

Do you think that sustainability is increasingly becoming a corporate CSR and ESG concern? How can organisations adapt to stakeholders’ sustainability demands? 

The days of “get license, defend position with license” are over. Today’s challenges are brought by a diverse group of stakeholders – NGOs, locals, even customers and suppliers. Today’s companies must pursue a “social license to operate” with the same respect as the regulatory license to operate. To that end, no company in the energy space can afford to ignore CSR and ESG concerns from the various stakeholders. It is key for refiners to evolve from respondents to regulation to enablers of a net-zero future.

What is the main driver influencing change across the future of the oil & gas industry?

The downstream sector tends to focus on trends specific to it to talk about the future, but in my view the key root element causing the most dramatic change to the sector in the future is demographic – the fact that Millennials and Generation Z are already the largest group in the world’s workforce. These are the people that were taught sustainability at elementary school and have therefore grown up with it as part of their core values. They arrive at the workforce with a desire to change the world, something that I believe will accelerate the energy transition beyond what we can foresee today.

What would be the main priority for operators to survive and thrive in the post-pandemic era?

There is a dual challenge today to build refining resilience – companies will have to both work harder than ever to lead in operational excellence to sustain the traditional refining business through the tough years ahead, while at the same time evolving through a Net Zero agenda that has a clear and tangible ambition and credible collection of stepping stones connecting the present to the future. This will require companies to pursue solutions way beyond the conventional on both elements, leveraging collaborative arrangements with neighbouring facilities, financial partners and open innovation ecosystems.