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Oil Gas and Petrochemicals

Posted By NAEP, Monday, December 12, 2016

By: Neil Markee
Editor in Chief-Purchasing Link

My 1975 Random House College Dictionary suggests “ambivalence” can be defined as, “uncertainty or fluctuation especially when caused by inability to make a choice or by a simultaneous desire to say or do two opposite things.” Should U.S. national policy actively encourage the development of oil and gas natural resources domestically and internationally (Canada, for example)? Should we drill-drill-drill off the east and west coast, in Alaska, North Dakota and Texas and wherever these resources may be found, as we have in the gulf and elsewhere? Should we encourage pipeline construction to hopefully streamline distribution and reduce costs?

Some say cheap and plentiful gas would speed the shift away from using coal to generate power and see that as a worthwhile and reasonable mid-term goal. Others agree shifting to gas may be a convenient and maybe sufficient short-term bridge to a cleaner future now, but point out both oil and gas are carbon emitting fuels and not the clean sources of energy, where we should be invested long-term.  The duration of short-term has not been established.   Some argue that focusing on cheap gas and oil will divert resources from the innovative clean sources of energy we must have eventually. Others point out that, in any case, currently we don’t have a clean energy source with the capacity to replace coal, oil and gas and none has yet been recognized on the horizon.  The back and forth discussion between realists and dreamers or pessimists and visionaries continues, but few have considered what lies beyond that happy day when we have viable, affordable, truly clean sources of power, whatever they might be. But oil and gas are not just fuels. 

Among the few who are publicly thinking beyond the future of oil and gas as fuels are the sultans of oil in the Middle East, the Saudis. Change has long been a constant in the oil and gas production industry.  They have seen the dilution of their once all but absolute dominance of the industry by other large-scale sources of oil and gas from shale formations. There have been major changes in power production as well.  After decades of dependence on coal, my local power plant went from coal to oil to gas rapidly, in the few years I was at college. Nuclear power must once have been seen as a serious threat to the Middle East’s major source of wealth but that receded as we wrestled with what to do with the radioactive waste. However, nuclear may be a major part of the solution in the future.  

Natural gas frequently burned off in the day as a waste product; now it is seen as a potential dominant source. Current thinking threatens the value of crude oil, the product the Saudi government sells to support its economy. One obvious solution is to sell another or other products, but what? Maybe the next big shift in the use of oil and gas for the Saudi economy will be to petrochemicals.  An in-depth article titled “Aramco’s Grand Plan To Move Beyond Oil,” in the November 21, 2016 issue of The Wall Street Journal, offered an answer.  Like many developing countries, the Saudi government apparently would prefer to sell manufactured products rather than raw materials—in this case, petro chemicals rather than crude oil.  If and when we cease to see crude oil and natural gas primarily as fuels, they hope to have already shifted to providing needed, commercially viable products produced from crude.  As such, they are following the path of other countries that have shifted to selling steel rather than iron ore, or aluminum rather that bauxite, for example.  Plastics of many kinds come to mind and there are a host of other products in common use that are produced from crude by the likes of Exxon-Mobil, Royal Dutch Shell PLC and others.  The change is designed to provide jobs and increase the net income for the countries involved.    

According to the WSJ article by Russell Gold, Bill Spindle and Summer Said, to implement their plan the Saudi government and the Saudi Arabian Oil Company have begun a corporate transformation.  “Aramco, as it is commonly known, until recently focused on pumping great quantities of oil and, like the standard oil companies of John D. Rockefeller, processing it through its refineries.  Aramco now aims to vastly expand its petrochemical operations, turning itself into a modern integrated energy company along the lines of Exxon Mobile Corp.” But it plans to continue as a major supplier of crude and refined products.  Even at relatively depressed prices that might drive other suppliers out of the market, Saudi crude at a production cost of, “perhaps $6 a barrel compared with an average of $10 in Texas’s Permian Basin” would remain an attractive proposition.  Perhaps ultimately crude is worth more as feed stock than it is as fuel.        

Aramco already has a facility in Holland known as its Arlanxeo plant that makes an assortment of products from synthetic rubber derived from crude. Another plant is under construction ($20 billion) in Saudi Arabia known as the Sandara petrochemical complex.  A joint venture with Dow Chemical Co., the plant will produce butadiene, a commonly used chemical world-wide. In addition, Aramco has a joint venture with Lanexx AG, a German company.   Apparently, the plan drawn up with the assistance of McKinsey and Co. is for the money earned by its petrochemical enterprises  and continued pumping of its crude resources will be used to shift the country away from its dependence on petroleum as a fuel in the belief that the “demand for  petrochemicals is likely to remain strong.”  By diversifying now in this area and presumably others, the Saudis are preparing for the time when the demand for oil as a fuel may decline, or maybe for the time when its currently huge current supply tapers off.

Obviously, seriously planning bodes well for the Saudi economy long-term.  If they have had all of their eggs in one basket for too long, it seems they have seen the light. The same need for a new direction might apply to Norway and other countries heavily dependent on oil. However, I suspect, like Norway, they have prudently buffered their dependence short-term with a huge national portfolio invested in major corporations and government bonds, etc., world- wide. Is this planned change in direction good news or bad news globally, or just an interesting development but not a solution to the carbon emissions issue for the rest of us? What might be the short, mid and long impact of a shift to petrochemical production on carbon in the atmosphere?

I don’t know how much carbon the petrochemical industry emits. What are the life cycle carbon contributions of the plastics and other products produced from crude? Are there ways to render these products finally biodegradable when they become waste?  Certainly in transition, the oil pumped and refined and burned to provide power will continue to be a major contributor to atmospheric carbon until and unless we find ways to eliminate or capture the carbon.  How long that transition might last and what and when technological breakthroughs might occur along the way is anybody’s guess.  Saudi funded breakthroughs would benefit both the planet and the Saudis.  I wonder if investment there is part of the plan. How about the crude we produce and our petrochemical industry?  If nothing less, understanding the industry can help us make sense of campus protests and contribute to finding solutions.  The November 21, 2016 article in the Wall Street Journal is a valuable educational contribution.  You might want to take a look.   What’s happening on your campus?

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