ESG Database

Oil and Gas Industry

According to the Organization for Economic Co-operation and Development (OECD), petrochemicals generate about 1.8 billion tonnes of greenhouse gas emissions annually, accounting for 3.5% of global emissions. Petrochemicals are part of our daily lives, from cosmetics and cleaning products to the packaging of various consumer products such as food and beverages. The process of manufacturing petrochemical products involves exploration, mining, and refining of crude oil by upstream companies, which is then transported to the midstream segment and cracked to produce a variety of chemical raw materials. These components are further processed by downstream companies to become our daily necessities. Therefore, even seemingly ordinary products like a skincare bottle can contribute to a significant amount of pollution.

In the petrochemical industrial chain, crude oil comes from oil giants and national oil companies, which play a significant role in political and economic jockeying in each country, hence a resource that are hard to relinquish despite the high level of pollution. The midstream segment covers chemical raw materials such as ethylene and benzene, commonly used in various petrochemical products. Downstream companies of the sector include cosmetics brands and consumer goods companies, such as Estee Lauder and Unilever, whose products are widely used in our daily lives.

Due to different levels of energy consumption, emission sources, and pollution across the industry, the focus of sustainability for each segment of the petrochemical and petroleum industries varies. Taking the downstream segment as an example, product usage and disposal are among the primary contributors to carbon emissions, such as expired skincare products and food packaging. In terms of discarded petrochemical products, 40% end up in landfills, 14% are incinerated, 14% are recycled, and the remainder enters the natural environment. Since incineration produces the largest amount of carbon dioxide, increasing the recycling rate and expanding waste utilization have become essential efforts to be made.

By the end of 2022, many markets including Asia, Europe, and the United States have implemented carbon trading systems. Although the petrochemical industry has yet to be included in some of the carbon markets, it is expected to be regulated within five years as the third largest emitter overall. In 2021, Shell spent US$331 million to comply with the EU ETS and expects its annual carbon cost exposure to increase annually over the next decade as the Carbon Border Adjustment Mechanism (CBAM) comes on stream. While other carbon regulations, such as EU's carbon tariff and national carbon taxes, are still in their infancy, they are expected to create a cost exposure of US$1-2.5 billion a year for the petrochemical industry once implemented.

Currently, the reliance on the petrochemical industry is difficult to reduce in the short term, and this sector is highly susceptible to international regulations. Therefore, it is important for petrochemical companies to estimate the potential cost incurred by future carbon regulations and maximize the value of carbon reduction investment funds. In addition, petrochemicals will no longer be cheap in the foreseeable future. The costs associated with carbon reduction, technology transformation, and carbon regulations will be passed on to the downstream segment. When the prices of petrochemicals reach a critical point, consumers will be prompted to choose non-petrochemical alternatives, marking the beginning of a decline for the petrochemical industry.