Outlook 2021 +

For the past few years, we have been witness to a slowdown in the growth rate of demand for crude oil due to the ongoing electrification of passenger transport, improved efficiency of internal combustion engines, and a growing share of biocomponents, alternative fuels and alternative modes of transport. This is occurring alongside forecasts of declining demand for crude oil and liquid fuels and the world approaching ‘peak oil’. OECD countries have already reached a peak in oil demand, and according to some scenarios global demand for crude oil and liquid fuels will never recover to the pre-2019 levels. The prospects of a shrinking market, social, regulatory and financial pressures on rapid decarbonisation of transport and the size of oil resources already discovered are not conducive to investment in oil production or the refining industry as businesses fear stranded assets. What discourages investment in the oil and gas sector are increasingly frequent steep price declines caused by the occurrence of sustained periods of oversupply, be that due to new technologies (unconventional and deep-sea mining) or reduced demand in the wake of such events as the COVID-19 pandemic. As a result, many international oil and gas companies are limiting investment in exploration and production assets or abandoning it altogether.

On the other hand, new renewable energy sources are becoming fully competitive in terms of prices (e.g. wind power) or increasingly competitive because of the growing scale and technological progress (e.g. solar PV systems). The potential of renewable energy sources is fostered by the rising popularity of prosumer Energy. A great advantage of electricity production based on non-depletable energy resources is the stability and predictability of generation costs (depreciation of Energy, storage and transmission facilities).

Investment in renewable energy sources is driven by the growing environmental awareness of the general public, reflected in new, ambitious climate objectives set in new agreements (Paris Agreement, New Green Deal, RED II in the EU, restrictions on the production of disposable packaging) aimed at driving progress towards energy transition. Currently, the countries that have made a commitment to achieve net zero carbon footprint by 2050–2060 (China, the European Union, Canada, Japan, South Korea), including the US, which is likely to make a similar declaration, account for 65% of global emissions. The list of oil and gas companies making this commitment is also growing. Finally, we are witnessing change in customer expectations, including preference for digital distribution channels and tailored product offering with information on carbon footprint.

The International Energy Agency expects that demand for green energy in 2018–2040 will be increasing at a blistering rate of nearly 7% annually. The second important source of zero-emission energy is nuclear energy. Demand for nuclear energy in 2018–2040 is set to grow at approximately 2% per year, much faster than demand for natural gas.

However, a complete transition from molecules to electrons is impossible with the current state of knowledge and technology. Having no access to electricity carriers (storage systems) with sufficient energy density, we may not phase out usable energy generation based on burning fossil fuels completely, and the process entails carbon dioxide emissions. Two significant areas where obtaining energy from combustion will be necessary are the Energy industry, as mentioned above, where burning natural gas will be indispensable for a period of time, and transport, in particular heavy duty vehicle transport, which will continue to use liquid fuels produced from crude oil for many years to come.

The petrochemical industry will remain an important buyer of crude oil. The world needs materials and research shows that petrochemical materials have a considerable advantage over alternative materials, in terms of both their utility value and their impact on climate and the environment. For example, the climate and carbon footprint of packaging obtained from petrochemical raw materials in the full circle is comparable to the footprint left by alternative packaging, but its weight is four times lower and this is what makes plastic packaging less harmful. But on one condition, namely that it is not discarded once used, but put back in circulation.The outlook for the circular economy, which starts from designing objects and equipment that are durable, upgradeable and easily repairable and can finally be disassembled into recyclable components, in combination with business models of a product as a service, as well as material as a service, places the petrochemical sector on a high place in the ranking of rapidly growing industries. Another advantage of petrochemicals in circular economy is energy consumption savings due to a significant reduction in the weight of products, machinery, equipment and structures that use petrochemical materials, compared to alternative materials. This leads to lower energy consumption and lower emissions compared with alternative materials².

² For more information, see https://ffbk.orlen.com/files/Raport/Orlen_zeszyt_12_EN_FINAL.pdf

Energy transition is inevitable, and we know its overriding objective, which is to restore a balance between humans and nature. We know the numerical goal for 2050: Net Zero Emissions. However, we do not know what paths we will follow to achieve this goal.The further we go, the more uncertainties we encounter.

The Net Zero Emissions horizon reaches into the sphere of technological uncertainty. It remains unknown what technologies will prevail in the energy sector after 2030 – what will be the role of utility energy generation and that of prosumer generation? How will energy receivers used by end consumers develop?

The energy sector is unlike the IT sector, where needs and technologies are changing at a record pace, not just keeping pace with, but staying ahead of consumer preferences. In the energy sector, things are different. Change is slow – it does not even take years; it takes decades. Consumers want to be supplied with green energy and to phase out energy from combustion, but this cannot happen overnight. And not because the energy sector is populated by snails and turtles. The change is taking so long because of the long life of the units, machinery and equipment used to generate energy and transform it into a utility. This inertia has serious consequences.

Energy transition requires financial resources. Therefore, over the next ten years we must be able to make money on what we have, generating maximum value from our existing assets while meeting the declared emission reduction targets. This is needed in order to exploit those assets while they are still generating value, which we believe will be at least another 10 years.

However, we are aware that the success of energy transition mostly hinges on technologies and business models that are yet to be invented, designed and implemented.

These include:

• efficient large-scale energy storage and new mobility, which are linked by hydrogen technologies;
• meeting the needs of a growing population with various materials. The technologies and business models for recycling and circular economy are helpful in this respect, as the goal is to reduce demand for all types of raw materials.
• The modern petrochemical and chemical industries will also be useful here, as crude oil and natural gas are the raw materials whose acquisition is much less harmful to the environment than the acquisition of available alternative materials.

In each of these areas, the next 20 years are bound to see technological black swans that will change the rules of the game. Twenty years ago, no one expected that the fracking technology would transform the global markets for natural gas and crude oil, resulting in the undersupply of these hydrocarbons giving way to oversupply. Over the past 20 years, wind and solar energy generation technologies have been slowly building their commercial potential. And technological progress is rapidly accelerating. Who knows, perhaps in 20 years wind and solar energy generation technologies will be overtaken by controlled nuclear fusion, which, with the expenditure concentrated on a few reactors, is taking giant strides forward.

In far future, we will be making money from innovations, and this is where we see our big role. Carbon neutrality cannot be achieved by 2050 without developing innovative proprietary technologies. By investing in R&D&I today, we finance the materialisation of a distant future. The problem is that we are moving in an uncharted territory, not knowing whether we will be able to find the necessary solutions before the world surprises us by changing the rules of the game.

As stated above, energy transition requires large capital expenditures, especially on new innovative technologies, and businesses need to first make money to be able to afford them. We have also said that because of the high asset inertia in the energy sector, over the next decade businesses will need to rely on the assets they already have. Because we want to grow and change, in the future we will need to make money also on assets that are not yet in our portfolio but have already been invented and are available in the market. We call this investing in strategic growth areas, because the problem, or the source of value, is not to invent the technology, but to correctly identify the investment focus, in line with mega trends and the goal of reaching the carbon neutral position by 2050. Those are assets that we intend to develop during this decade to provide revenue streams in the decades to come. They include petrochemicals, renewable Energy, gas-fired Energy, and non-fuel retail. Those assets, and specifically the markets in which they operate, are affected by the economic and geopolitical uncertainties in a shorter time horizon of up to five years.

In a nutshell, we are seeing the following trends likely to drive the situation in the commodity markets in which we are present now: the markets for crude oil and fuels, petrochemical raw materials and electricity.

• The world is changing, with the centre of global economic growth and technologies shifting from the US and Europe to China and Asia. The largest population growth rates are seen in Africa, where the climate change is most severe, while Europe, with its ageing demography, is under increasing migration pressure.
• The COVID-19 pandemic has broken many inter-continental supply chains. The ‘just in time’ logistics models have been linked to or supplemented with ‘just in case’ models, increasing the current costs of economic activity but reducing the risk of interrupted supplies and the related costs. The continuing digitisation, which is in the intensive investment phase, builds the potential to reduce the cost of activity and enhances the ability to respond promptly to changes as they emerge.
• Capital is flowing to areas where the growth rates are higher and where real interest rates are positive. The capital flow from the US and the EU to China and Asia strengthens RNB against other currencies. This time, China is refraining from measures to control appreciation of its currency, which is reflected in the weakening US dollar exchange rate.
• The stronger RNB is translating into higher prices of Chinese products all over the world, both in the case of consumer goods (imported inflation in the US and the EU) and electronics and RES technologies, which drives up the cost of energy transition as the lion’s share of such equipment in the US and Europe originate from China and Asia.
• The rate and cost of energy transition depend on access to scarce minerals and metals produced in China and Asia.

• Petrochemicals are the oil industry segment that is expected to grow faster than GDP. As discussed above, the world needs materials, and their production from crude oil and natural gas is more environment- and climate-friendly than production of the required materials from alternative inputs. This is why the global potential of the petrochemical business is growing, while expectations of low prices of gasoline and naphtha relative to oil prices over the next few years increase the attractiveness of naphtha -based petrochemicals.

• On a global scale, experts even speak of a potential risk of overinvesting in the petrochemicals segment, by analogy to the situation that occurred in the global oil industry in connection with the IMO regulation, when the decline in demand was accompanied by the emergence of a new bunker fuel, pushing bunker diesel out of the market.

• We believe that in Central Europe, the risk of overinvesting in the base petrochemicals is mitigated by the shortening of supply chains and using local sources of raw materials.

• Petrochemical margins should remain close to their past ten years’ average. The increase in petrochemical margins in 2015–2018 was exceptional and due to a sudden decline in oil prices following the shale revolution.

• Fluctuations in petrochemical margins in the short term will be driven by the expected higher volatility of oil prices.