The war in Ukraine has highlighted Europe’s unhealthy reliance on natural gas, and nowhere has that message rung truer than within the chemical industry. Natural gas is one of the industry’s dominant feedstocks, used in the formation of base chemicals as well as in the production of the energy powering the processing of those chemicals. With the Russian invasion of Ukraine on February 24, the price of natural gas spiked and supply chains — particularly for European companies — were disrupted.
Without warning, chemical companies became fixated on finding substitutes for a raw material vital to almost every process and product on which the industry depends. Given unpredictable supply and escalating prices, what alternatives to natural gas could the chemical industry turn to for feedstock and power needs?
Exhibit 1: Value chain of the chemical industry
- PE – Polyethelene; PS – Polystyrene; PVC – Polyvinyl chloride and PP – Polypropylene
- PC – Polycarbonate; ABS – Acrylonitrile styrene; SAN – Styrene acrylonitrile resin and PMMA – Poly (methyl methacrylate)
Source: Oliver Wyman analysis
Ironically, this is not a new question for the industry. Even before the Ukrainian conflict, climate change and the need to decarbonize were prompting chemical companies to consider how to reduce their dependence on natural gas. Geopolitical tensions are only expediting research efforts into replacement feedstocks and alternative sources of energy. Among the top candidates are biogas, hydrogen, electric heating, and steam from industrial-scale heat pumps.
Biogas, an environmentally friendly energy source, is produced by the fermentation of organic matter, such as food or animal waste. It has the same chemical composition as natural gas and therefore could be a direct replacement for both the current feedstock and energy source, without the need to retrofit production plants. However, the main limitation of biogas is the current relatively small capacity available to produce it. According to a study by the International Energy Agency (IEA)1 , the global production potential for biogas is 600 million tons of oil equivalent (Mtoe) if all sources of raw material for biogas are utilized — amounting to more than one-third of current global natural gas consumption. With the current production capacity of biogas below 14.5 Mtoe, it remains only a possibility. Hydrogen produced by electrolyzers could also replace natural gas in several parts of the production processes, particularly as a raw material to produce ammonia and methanol, or in retrofitted burners to power chemical processes. While the technology to do this exists, recent Oliver Wyman research indicates that the supply of green hydrogen — theoretically the hydrogen with the smallest carbon footprint — is very limited and not always as low-carbon as the name suggests. Blue hydrogen could instead act as bridging technology to accelerate the shift towards green technology, however, its reliance on natural gas as a feedstock means that it is no short-term solution for the current energy crisis.Like hydrogen, either electric heating or the steam from industrial scale heat pumps could replace the heat source that natural gas provides in chemical reactions. However, similar to the problem with hydrogen, these sources would need to be generated by renewable energy to be carbon neutral.
Already, chemical companies have started to investigate these technologies, with major players announcing plans to demonstrate the first electrically heated steam cracker furnace in 2023. When available on a large scale, this technology could be used to power chemical production plants in an efficient and sustainable way, replacing a large portion of today’s consumed natural gas.
That said, none of the alternatives are a viable replacement for the industry because of the limited supply of all of them and renewable energy.
Carbon capture technologies may offer yet another solution, but it’s still being tested. With this approach, chemical companies could substitute captured carbon dioxide (CO2) for natural gas as a feedstock for chemicals production. The captured CO2 would be produced as a byproduct of either the burning of fossil fuels or industrial activity or CO2 can be taken right out of the air. The technology that would allow that to happen has not reached full-scale production status yet, but it could represent a major breakthrough for decarbonization.
In the long term, we see two main scenarios playing out: The gas crisis will either accelerate decarbonization or force companies to find alternate supply sources.
Exhibit 2: Two scenarios for the long-term impact on the chemicals industry
Source: Oliver Wyman analysis
Key takeaways for the chemical industry
Still, it’s not the time for chemical companies to panic but rather it’s time to take stock and harness the opportunity to kickstart future developments. Transformation will not happen overnight, but the general awareness of the natural gas subject among the public and investors alike can act as an accelerator for the decarbonization of the chemical industry.
Chemical players should use this momentum to secure investments and public funding that can accelerate the transformation. Even if the price of natural gas returns to pre-crisis levels, the current situation should be a warning signal for chemicals companies across the globe. The supply of natural gas is not as secure as it once was, and the challenge of decarbonizing the whole industry means we must invest today for a more sustainable tomorrow.
