How leaders leverage the energy crisis for future growth? - Chemicals

Expert Profile

Section 1: Energizing Growth During Crisis

1.1. How have increased energy prices impacted your industry?

The chemical side of the business can pass on the costs and the volatility to a certain extent. One unusual aspect of this current crisis is how it’s affecting Europe, because natural gas cannot be shipped easily overseas, so it’s land or pipeline based. You are bringing gas in from Russia, they cut off the pipeline supply and you do not have other pipelines that you can just turn on.

You are able to pass those prices on through the value chain, but competition limits this effort because goods can be manufactured and distributed elsewhere. I worked much of my career on the plastic side of Dow, and you can ship plastics from North America, and other places, as opposed to manufacturing them in Europe.

Our global connectedness limits your ability to always raise prices. COVID, followed by the situation in Ukraine and the energy volatility has brought in a lot of new aspects to how you manage your business and how you plan. And that is where this is leading to – companies are realizing that they need to become much more serious about transitioning away from full reliance on hydrocarbons.

1.2. Has it changed the way you manage your energy?

Yes and no. The chemical industry has very expensive assets, and so you need to procure raw materials that you need to keep those assets running to meet your customers’ demands. And so, you do what you have always done. And these are global commodities, and so, in many senses, no, nothing is really changed.

But the searching for alternative supplies and looking at what are the assets that we need to begin to change, there’s a lot of new discussions taking place. Where are our future assets going to be built, what are future alternative energy supplies, what are those going to be that aren’t reliant on the whims of political figures in the east?

1.3. What practices have you applied to maintain business performance during the energy crisis?

We’d already been pursuing CPPA agreements for years. Most of the big chemical companies and oil and gas producers have goals around reducing their carbon footprint. And the easiest way to do it’s to move to renewable electricity, so you have the purchase of power agreements.

So that’s 10-12% of your energy and your carbon footprint there. But after that, it quickly gets into burning hydrocarbons. And then, this is where you could start looking at buying credits. Those can get very expensive very fast. So, then you start looking at what are the assets and how do you become more efficient?

But the industry has been working on efficiency for decades, and typically, those are very capital intensive. The industry is going in the direction of moving away from burning hydrocarbons for cracking or the oil and natural gas products to make the monomers and the precursors to all of what we know is the chemical and plastics products that we have.

Those are very energy intensive, and so they’re moving to electrifying those. There’s lots of consortia out there working on electrification of crackers. And we look forward to that. But that will need a lot greener electricity as those start being built and come online. And that’s not going to happen at much of a scale for another five years, even 10 years.

1.4. What immediate changes did you implement to your operations?

We have had energy volatility. Back in 2010, oil got up to $140 a barrel. We have seen this before. The supply chain understands what is coming, but you do hedge where you can, and if you see trends coming, you buy ahead at lower prices.

The smart guys were buying lots of futures when COVID hit, when prices were down at $20 a barrel. But regarding the volatility, you try to mitigate that, and to keep things as consistent as you can to be consistent with your customers, which allows our customers in the chemicals and plastics industry to make things that would then go on to consumer product companies, to automotive companies, to the Unilevers, P&Gs of the world.

And they do not pass on costs, although right now, with inflation around the world it’s easy to pass on higher costs. Everybody is doing it and you just accept it, which makes it easier to manage the volatility.

1.5. Where do you see opportunity in leveraging the current energy crisis into a long-term benefit?

The volatility and the high prices are driving the question – How do we get away from this?

And the way to get away from it’s the diversification of feeds. But especially the liquid hydrocarbons and to a lesser extent the gaseous are very energy dense, so batteries can get you so far, but not flying across the Atlantic.

I believe that when you have a crisis, it drives creativity, it drives change. This is what we’re going to experience, but it’s going to take 5 or 10 years for it to really play out in terms of commercial viability. You’re going to see changes in feed stocks. You may see some more plant-based oils and feed stocks. You will see a lot of electrification and green electrification. There are all sorts of renewable sources of energy, and there’s going to be a big push. And you’ll see governments funding these because they don’t like to see the volatility that’s happened either.

The other thing is the small footprint nuclear. For example a firm called TerraPower, that uses the waste products of old nuclear power plants to generate energy. It’s got a very low carbon footprint and the technology that’s being developed in these small footprint power plants, is not going to blow up or meltdown. And you’re going to see very competitive and sustained power generation capabilities out of these plants. That’s where the renewables suffer. The wind doesn’t always blow, the sun doesn’t always shine. Batteries are expensive, very expensive.

1.6. How has the crisis impacted your Net Zero strategy?

Absolutely. Not so much in the numbers initially, but in the planning stages, what has happened over the past six, eight months has driven a lot more focus on moving to net zero. You’re seeing more investments towards that, and those investments take time.

The other part is the emphasis on circularity. If we can recycle products instead of producing them initially, and especially chemicals and plastics that are primarily produced from hydrocarbons, and instead we can increase circularity, then we are decreasing the need for that initial oil and natural gas, which has been so volatile. But it takes time, it takes investments, it takes infrastructure, and those things don’t happen overnight.

Section 2: Rethinking Future Energy Strategy

2.1. What are the drivers and challenges in rethinking your future energy strategy?

Policy is going to be critical because there are huge investments that need to be made, and you need smart policies by governments that will allow for a transition to renewables, or hydrogen.

You’re going to need help from governments, because this transition that needs to take place is going to cost trillions. And so, if we’re talking about hydrocarbons here, for example, if companies in the Middle East that aren’t as motivated to make the transition still will have a competitive advantage by not investing essentially. Then you’ve got companies in North America and Europe, in Japan and elsewhere in the world that are making these transitions, they’re going to be at a competitive disadvantage.

And that’s where governments need to come and assist them. Europe is working on a carbon border adjustment strategy. That could be very interesting, and we’ll see if that can work. But that would help level the playing field for European companies that are making the investment to decarbonize and do what needs to be done, and so I’m looking at that very carefully.

The consumer facing companies are seeing that their customers, the buying public, they want decarbonization, they want circularity. Upstream companies like Dow and then the O&G producers are going to follow. At least 40% of the Fortune 500 companies have net zero goals by 2050 which is going to change assets and processes, and that’s not good news for hydrocarbons. And it’s going to be good for renewable energy, but there’s infrastructure that must go along with that. So, it’ll be interesting to see what happens.

2.2. Where do you see opportunities to grow ROI & capitalize from Decarbonization, Energy Diversification and Energy Transition?

There is going to be huge opportunities without too much focus on carbon credits, because they are so volatile, and the rules are poorly defined. I am thinking of this transition to electrification of crackers and alternative sources. Hydrogen will be a part of it, but instead of blue and grey it has to be green hydrogen, which is using renewable energy to create hydrogen from water.

2.2.1. What role do you attribute to diversification of energy type?

The diversification is going to happen, but it’s going to be geography specific. In places where there is wind, you go for it. And same with solar, if you’re in the American Southwest, but if you’re in northern Europe, not so much and electric energy doesn’t travel well. You could put power lines, but there’s losses there, and so you don’t put a bunch of solar panels in the Sahara and then run electrical wires across the Mediterranean. That’s where the small nuclear comes in. Safety’s going to be critical, but even more so the base load energy.

Coal is popular again in Europe because you had facilities that could burn it. But long term, coal is the first one to go. It should be the first one to go. Carbon sequestration, you could potentially do that. But again, that’s geology specific. What’s the geology in the area? And where do you have places to put it? And all of this is, there’s motivations and the potential for cheating where you say you’re doing the right thing, but you’re not doing the right thing.

You say you’re buying green electricity, but you’re buying coal-powered electricity for cheap. In some places, corrupt governments will help companies cheat to gain a competitive advantage.

Regarding bio-based products you would start looking at costs and inputs. And they’re high. I don’t think that the cost structure of going to bio-based is going to be a long-term winner. And there isn’t enough land in the world for us to grow our way out of this either. Some niche products, but not meet the needs of society around the globe.

2.3. How do you expect the energy value chain to transform along with the decarbonization strategy?

The consensus is that batteries are going to be our savior, but the supply chain of batteries is awful. You go from needing oil and a refinery to get simple raw materials, and now you’re talking about lithium, cobalt, nickel, manganese, aluminum, and much more.

And the magnets that are needed for all these electric motors that are based on the rare earth, and this is the reality right now, I think China controls something like 90% of the refining capacity for rare earths in the globe, and they’re willing to leverage that.

This is a huge problem. Huge problem. Because all of the windmills, all of the electric cars are dependent upon the magnets that come from rare earth. And not enough people are talking about this and how critical this is. This is akin to the chip shortage that we’ve had.

2.4. What role will technology play in energy management transformation in the future?

Technology is going to be crucial, technology improvements will give you 5% here, 10% there, 20% somewhere else, but we need 100% transition. It comes down to the nuts and bolts. There’s lots of things that need to be invented, and can be invented, and will be invented to help us in these transitions. But transportation, localization is the main focus. Technology’s going to be critical, but it’s not the savior.