Abu Dhabi National Oil Co (ADNOC) is ramping up its mergers and acquisitions (M&A) strategy. In September, the company signaled an increased willingness to raise its informal offer to €60 per share, valuing German plastics and chemicals maker Covestro at $12.6 billion. This latest offer represents a nearly 30% premium over Covestro’s current share price. ADNOC had previously raised its informal offer to €57 per share in July, though a final decision on the deal has yet to be made.
ADNOC’s aggressive M&A activity extends beyond Covestro. The state-owned oil giant is also eyeing a potential merger with Austria’s OMV, an integrated energy company, which could create a combined entity valued at $30 billion.
While the Covestro deal makes sense for ADNOC, the OMV deal presents some uncertainties. Last week, OMV announced a major natural gas discovery in the Norwegian Sea. The company revealed that its drilling operation in the Haydn/Monn exploration area had uncovered an estimated 140 million barrels of oil equivalent (boe) in recoverable natural gas volumes. The discovery, located 300 km west of Norway, adds a significant new asset to OMV’s portfolio.
Meanwhile, natural gas markets are experiencing a surge, driven by rising demand for liquefied natural gas (LNG) and electricity. Morgan Stanley recently predicted a new cycle of demand growth for natural gas, with prices jumping nearly 30% in the past two weeks due to expectations of higher demand as production slows. The onset of colder weather in late November is expected to further drive heating demand, with European natural gas futures nearing a one-year high.
In stark contrast, the petrochemical sector is facing a significant downturn. Covestro, for instance, reported a 21% year-on-year decline in second-quarter revenues, falling to €3.7 billion. U.S. oil and gas giants are facing similar challenges, as sluggish consumer demand and a glut of new production capacity continue to put pressure on petrochemical margins. The situation has become so dire that German chemical company Lanxess AG referred to it as a “Lehman 2” moment for the chemicals industry.
Joseph Chang, an analyst at ICIS, told Bloomberg that the chemical industry is currently oversupplied, leading large oil companies to seek alternative investment opportunities.
Despite these challenges, major oil companies remain committed to the long-term prospects of the petrochemical sector. As fossil fuel demand faces an uncertain future, petrochemicals—used in products like plastics and polyester—offer a hedge for oil companies looking to remain profitable beyond the peak demand for transportation fuels. A recent review of major oil and chemical companies revealed that ExxonMobil plans to invest over $20 billion in expanding plastic production over the next three years. Other companies, including CPChem and Dow, are also investing billions in the petrochemical sector.
Much of this investment is directed at China, the world’s largest consumer of petrochemical products. According to the International Energy Agency (IEA), approximately 6.7 million barrels per day (bpd) of oil—representing 6.5% of global oil use—goes to China’s petrochemical industry. The IEA also notes that China’s production capacity for key petrochemicals, such as ethylene and propylene, will soon exceed that of Europe, Japan, and South Korea combined. Between 2018 and 2023, China’s output of synthetic fibers grew by 21 million metric tons, enough to produce over 100 billion T-shirts annually.
In a sign of shifting priorities, Chinese private refiners like Hengli Petrochemical and Rongsheng Petrochemical are investing heavily in chemical plants rather than traditional gasoline and diesel refineries.
Ironically, petrochemicals also play a crucial role in the green energy transition. Electric vehicles (EVs), for example, use more thermoplastics, foams, fibers, and rubber components than internal combustion engine (ICE) vehicles. According to David Yankovitz, a chemical industry leader at Deloitte, around three-quarters of all emissions-reduction technologies rely on chemicals, most of which are derived from oil. As a result, China has relied on domestic processing of imported crude to meet its growing demand for petrochemicals.
The U.S. shale oil boom has also contributed to this mutually reinforcing relationship between oil production and petrochemical demand in China. Between 2019 and 2023, the U.S. was the only major oil producer to increase its polymer exports to China, according to ICIS data.
ExxonMobil is among the companies investing heavily in petrochemical production in China. The company is currently building a $10 billion petrochemical complex in Guangdong province, which will produce performance polymers used in packaging, automotive, and consumer products. “Demand for performance polymers will continue to increase in China, and we’re well positioned to meet the needs of that growing market,” said Karen McKee, president of ExxonMobil Chemical Company, during the project’s unveiling in 2021.
Meanwhile, Saudi Aramco has also been expanding its petrochemical footprint. Last year, the company acquired a 10% stake in Rongsheng Petrochemical for $3.6 billion and entered talks to buy a stake in Hengli Petrochemical. Aramco’s subsidiary, S-Oil, also broke ground on a $7 billion petrochemical facility in South Korea in 2023.
As oil companies invest heavily in the petrochemical sector, they are positioning themselves for long-term growth even as the demand for traditional fossil fuels faces increased uncertainty.
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