It was supposed to be a blockbuster moment for the U.S. plastic industry. With an abundance of cheap natural gas at hand, thanks to the country’s fracking boom, U.S. energy giants were pouring billions of dollars into building new plants to turn that gas into plastic. As the world was poised to slowly turn away from fossil fuels as an energy source, plastic seemed to be a feasible replacement and possibly even a potential cash cow—overseas, demand for plastic was projected to explode in the coming decades.
But the rosy projections may not be panning out. With the oil industry in freefall, and a pandemic gripping the globe, the U.S.’s other major fossil fuel play—petrochemicals, of which plastic is the biggest part—may also be in trouble.
Until the coronavirus pandemic, every indication seemed to suggest that the U.S. was poised for a plastics boom of epic proportions. In February, 343 new plastic production plants and expansions were permitted or planned in the near future, according to the American Chemistry Council. Globally, in the next five years, the rate of plastic production had been projected to increase by a third. By 2050, it was expected to triple.
The plastic buildout in the U.S. is clustered in the Gulf of Mexico region, where much of the U.S. petrochemical industry is already located, and in the Ohio River Valley, which is close to major U.S. fracking fields. The plants chemically “crack” ethane, a component of natural gas, into ethylene, a main building block of plastics. Last year, South African company Sasol Ltd. opened the first of seven planned new plastic plants in Louisiana. In January, Louisiana issued permits to Taiwanese company Formosa Plastics Corp. for a sprawling complex of 14 new plants. And outside of Pittsburgh, Penn., Shell is building a 386-acre cracker campus with the capacity to produce 1.8 million tons of plastic each year.
But now, with the coronavirus outbreak sending the oil industry into a tailspin, plastic is feeling the effects, too: Shell has suspended construction on its Pennsylvania complex over worker safety concerns. Thai company PTT Global Chemical just announced it was indefinitely delaying plans to build an Ohio plant with six ethane-cracking furnaces, citing uncertainty amid the coronavirus pandemic.
Some experts say the writing was on the wall for the plastic industry before the current crisis. Last year, industry news site Chemical Week forecasted “growing pains” for the industry, as more and more cracker plants opened, and the rate of production threatened to exceed consumption. Meanwhile, other problems were appearing earlier in the supply chain: Natural gas prices had dropped so low that gas producers were burning off their supply on-site; it wasn’t worth the cost to transport it to cracking facilities.
In mid-March, analysis firm IHS Markit removed the PTT Global Chemical project in Ohio from its long-range plastics supply forecast. There was already way too much polyethylene in the market, the type of plastic the plant was set to make, IHS said. The firm predicted that oversupply would last for at least three years.
Last July, Brazilian company Braskem pulled out of its plans to build a cracker plant in West Virginia. And $84 billion in Chinese investment in West Virginia’s plastic and energy industries, promised in 2017, has yet to show up.
Now, with the coronavirus pandemic halting construction and likely tightening future cashflow for new projects, the U.S. plastic boom may be teetering on the edge.
“We’re in unprecedented times, and companies, not only just chemical companies, are doing their best to conserve right now.” says Kevin Swift, managing director for economics and statistics at the American Chemistry Council. “We’re seeing that manifested in some of these projects that have been delayed or put on hold for a while. Nobody knows.”
Too much plastic, too little demand?
The plastic-production boom in the U.S. was based on the bet that there would be ever-growing demand for plastic overseas. But that demand might not be materializing, says Carroll Muffett, the president of the Center for International Environmental Law, a not-for-profit environmental law firm which put out a report on this topic this month. About 40% of all plastic made globally is for single-use packaging, but China recently announced a sweeping ban on the use of all single-use consumer plastic; the ban is expected to reduce demand from manufacturers by about 4.5 million tons of plastic per year. The European Union ban on several single-use plastic products in its 27 member nations is set to take effect next year, as will a similar ban in Canada. In Africa, 34 countries already impose some restriction on single-use plastics.
A federal bailout for the U.S. oil-and-gas industry would only be a temporary splint for an already broken system, Muffett says. “What we’re seeing is that regardless of how it plays out in the medium term, in the long term, these businesses were already financially unsound, and no amount of government intervention is going to remedy that,” Muffett says. “This crisis is exposing just how weak the business models really were.”
But the American Chemistry Council says it is optimistic that countries with expanding middle classes will want more and more cheap plastics. They say the bans only affect a limited number of consumer plastic products, and they haven’t seen widespread implementation. Besides, plastic use in other sectors—like textiles and construction—is still growing. “I think long-term trends for plastic growth continue to remain very strong. We have a growing middle class around the world that is going to continue to demand plastic products,” says Keith Christman, managing director of plastics markets for ACC.
Right now, eight U.S. states have implemented their own bans on plastic bags, as have hundreds of individual towns and cities. But the plastics industry is now using public health concerns over the pandemic to try to roll back these bans; In the U.S., PLASTICS, a plastic industry association, sent a letter on March 18 to the Department of Health and Human Services, requesting a federal declaration in favor of single-use, disposable plastic bags as the “most sanitary choice,” despite evidence that the coronavirus can live on plastic surfaces up to three days, whereas evidence suggests that the virus does not survive as well on soft surfaces, like fabric.
The pushback appears to be working, at least in some places. On March 21, New Hampshire banned shoppers from bringing reusable bags to stores and ordered stores to use only new paper or plastic bags. Maine delayed implementing its bag ban, which was scheduled to begin on April 22.
Another plastics trade association, European Plastics Converters, recently requested that the European Commission lift all bans on single-use plastic items and delay its E.U.-wide ban by a year, arguing that its “hygienic properties” were the best choice to “safeguard consumers.” The E.U. has dismissed the request, although the U.K. has postponed implementing its ban on some plastic items until October, citing coronavirus.
As the Intercept notes, industry groups have pushed for plastic bans to be lifted in Turkey, Germany, and Italy as well. “We’re definitely seeing the plastic industry trying to use this as an opportunity to turn around the political discourse, which has been focused on limiting their use,” says Fredric Bauer, a postdoctoral fellow at Lund University in Sweden who studies the plastic industry. Plus, he says, while 40% of the plastics production sector is devoted to packaging, another 20% of plastic goes towards synthetic textiles. “Polyester is the single most common textile fiber used in the world. That’s not being regulated,” he says.
Meanwhile, a surge in demand for personal protective equipment (PPE) during the pandemic may result in a short-term spike in demand for certain plastics used in medical masks and gowns.
The Exxon example
In a presentation to investors in January, Neil Hansen, the vice president of energy giant ExxonMobil, said the company had lost $355 million on its chemicals business—which is dominated by plastics—in the fourth quarter of 2019. Overall, chemical earnings were down over 80% for the year, according to the presentation. Royal Dutch Shell reported similar losses in its chemicals business in the same quarter. An analyst with RBC Capital Markets told Reuters that the firm did “not expect a significant recovery” for the sector in 2020.
Exxon’s petrochemical losses coincided with its entrance into a precarious financial position. A few months before the investor presentation, Moody’s readjusted Exxon’s credit rating to “negative.” In 2019, ExxonMobil fell out of the S&P 500’s top-10 stocks for the first time since the index was launched in 1957.
The $355 million loss isn’t much for a business that made $14 billion in profits in 2019. But as Muffet, of the Center for International Environmental Law, points out, it may be a worrisome indicator of a larger trend. “This is a loss in a sector that was supposed to be a major driver in their future growth,” Muffett says.
Throughout the 2010s, the cost of producing new plastics was kept low in part because of subsidies long granted to the fossil fuel industry. In 2015, for example, 10.8% of Exxon’s revenues came from the “chemicals” arm of its business, which is chiefly plastics. But that same line of business accounted for more than 27% of its profits, because so many of its upfront costs were already taken care of. For example, the infrastructure to extract and refine the gas to make plastic was already in place—and heavily subsidized by the government.
Burning gas as soon as it comes out of the ground
Problems are now being felt all the way up the plastic supply chain, starting with the natural gas used to make plastic in the first place. The price of the fracked natural gas is so low that drillers can’t justify the cost of preparing it to be transported via pipelines, so many producers are simply burning it off on-site, in the form of flares normally meant to burn off excess gas in an emergency situation. In the Permian basin in Texas, one center of the U.S. fracking boom, the gas industry burned off an estimated 810 million cubic feet per day of natural gas in 2019, or almost enough to supply 5 million U.S. homes for one day, according to Rystad Energy, a Norway-based firm that analyzes flaring data.
That was in 2019. The value of natural gas has fallen further this year: The U.S. Energy Information Administration estimates that the price of the Henry Hub in Louisiana, the benchmark indicator for U.S. natural gas, will average $2.33 per million BTUs in 2020, 24 cents lower than the 2019 average of $2.57. As of April 30, the price was dramatically lower than that—$1.87 per million BTUs. The price hasn’t been above $1.91 since February.
“It’s a sad scenario in West Texas,” Eric Smith, associate director of the Tulane Energy Institute, told industry news outlet 1020 Industry Report earlier this month. “This is perfectly good natural gas, but it’s being flared. The price is so low that there’s no incentive for them to do anything else.”
As fracking activity freezes up, sand mines in Wisconsin have begun shutting down. The mines are one of the key suppliers to the fracking industry of the copious sand needed to “fracture” shale rock; the sand, along with water and a mix of chemicals, is forced down wells cut in the rock, which releases natural gas. Now, those Wisconsin sand mines are closing.
For now, it seems, the only way for the petrochemical industry to save itself is to try to rapidly expand demand for plastic products worldwide. One way to do that is to push back on plastic bans—as the industry is endeavoring to do. Another way is to increase the number of products wrapped in plastic in countries where plastic use is not already as widespread. The most obvious place to do that is in developing nations; whereas in the U.S. the demand for plastics hovered around 80 kilograms per person per year in 2015, the demand per person in India was just 9 kilograms. In Africa as a whole, it was only 6 kilograms. And because plastic is cheaper than any other alternative materials, barring strong anti-plastic laws, the industry is likely to find demand in these parts of the globe.
“The world is flooded with plastic already, and it seems that supply is going to continue to grow, and they will do everything they can to find markets for that output—especially if the whole oil industry is betting on petrochemicals and plastics to save their businesses,” says Bauer, from Lund University. “I’m afraid we’re going to drown in it.”