Our latest Sunday Thematic report, "Damned if you Dow and Damned if you Down’t. Hard to win", centers around Dow's announced development of a new net-zero carbon emissions site in Alberta, Canada. It discusses company-specific and sector ramifications for Dow's strategic move to produce low-cost low carbon polyethylene in Canada while also expanding capacity.
Our conclusions are a result of months of research. The Dow announcement played precisely into the hands of our analysis and resulted in our positive conclusions following the news. We invite you to take a look at our work to gain an appreciation for its thoroughness. You will find an excerpt from this report below, and we have also provided links to previous relevant C-MACC reports:
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These are trying times for chemical companies – almost anything you do will encourage criticism. You have your plastic haters and your emissions haters – often the same groups - and you have dissatisfied ESG investors, even if they are not completely sure why they are dissatisfied because they do not know what to measure and how to measure it. This is not unique to chemicals but much more intense in complex industries. But you still have a business to run, capital deployment decisions to make, and long-term shareholder goals to meet. The market discounts a 2020/21 margin peak, which further adds to corporate stress, as noted in our research titled, The Weary Kind… and Time For A Change At LyondellBasell… We are well known for our broad understanding of ESG issues and spend a lot of our private engagement time on corporate strategy. With that in mind, had we been advising Dow, we would not have come up with a better idea than the one announced Wednesday for Canada. But let's start with the need for polyethylene.
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The analysis in the image above is derived from work we published in our Sunday piece from September 26th, where we assumed very high rates of renewable-based polymers, significant improvement in mechanical recycling, and a conservative demand growth rate. Our analysis suggests that the world has overbuilt polymer capacity in the near term and that poor profits in 2022 could dissuade new capacity, especially in Asia where margins are currently close to zero. We do not feel the oversupply yet in the US because of the very high costs of container freight. One of our conclusions in the earlier report was that someone had to build the new capacity for the second half of the decade and that it should go where feedstocks were cheap and where carbon abatement costs were low – on that basis, thanks to Dow for allowing us to look like we know what we are talking about!!
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The group is talking about sequestering 100 million tons per annum but 2040, and given that emissions are likely to shrink rather than grow in this area, especially from 2030, we are assuming that the plan would be to spread the infrastructure to a broader geography. Looking at the participants, there may be a push to extend the project east to Beaumont and Port Arthur, as the volumes are high. The counties further south and west of Houston might better suit another cluster/hub, centered around Corpus Christi. The cost of transportation is high, given the need for high-pressure pipelines and the compression itself, and we suspect that the initial focus will be on Houston, with a “wait and see” approach to expansion, as there are a couple of likely lower-cost onshore plans for Louisiana (as well as a large Talos offshore idea) that might provide a cheaper option for east Texas volumes.
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As the news headlines often confuse the issues of waste disposal and the carbon footprint of polymers, several companies are coming to the surface offering unique solutions to one or the other, or both. The grid in exhibit below helps to explain who is offering what and the polymers themselves are summarized in Exhibit 2. There have been both bio-based and biodegradable polymers around for decades, but they have generally had either property or cost limitations that have driven far lower market shares than initially expected. Today, with a more aggressive focus on waste and carbon, some of the older technologies/products are likely to get as much attention as the new kids, but we see significant challenges for all.
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- Recent Alberta gov’t initiatives suggest “Canada” may be little different to Aramco in terms of future behavior with respect to hydrocarbons investment. Do Dow and/or Nova step up? Or does this attract a newcomer, or no-one?
- Investment incentives are in focus and being pushed higher, as evidenced by the Alberta gov’t launching of a 10-year program that will issue grants rather than royalty credits for new chemical projects. And, this adds to benefits from an abundant supply of chemical feedstock in the region looking for a home.
Alberta natural gas sells at a discount to Henry Hub, and while recent weakness in the US has closed the gap, the trend since 2012 has been widening. If ethane is valued at its extraction cost, Alberta has some advantage. If the alternative for ethane is expensive – the advantage could be wide.
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