The push to defossilize Chemicals

The transition has already started, and it is inevitable

The transformation of the chemical industry, alongside its expected strong growth, poses a major challenge for oil and gas companies. They must understand and embrace the transformations to both net-zero carbon emissions and to circular economy principles.

The world’s biggest economies have set medium-term net-zero climate targets. The European Union and the United States have set climate-neutrality and carbon-neutrality targets for 2050, while China plans to achieve climate neutrality by 2060. Industry is responsible for nearly one third of global GHG emissions, making it a key focus for emission reductions. Chemicals and petrochemicals are the second-largest emitters in the industrial sector, responsible for 5.8% of global GHG emissions (3.6% from energy use and 2.2% from other direct uses, like by-products from chemical processes).

Although many chemicals companies (such as BASF, LyondellBasell, Lanxess, etc.) have set emission-reduction targets, they have not settled on how they can fully reach their targets yet. According to the German chemicals industry association (VCI), reaching these goals requires revision of the technology portfolio, away from fossil fuels towards mainly electricity-based processes and alternative raw materials, as well as a technology shift in downstream processes.

Hydrogen is used in the chemicals industry for high- and low-temperature heating, as well as for feedstock (notably for ammonia and methanol production), so there is significant potential for decarbonization, provided the hydrogen is low-carbon. Low-carbon hydrogen can be produced from either renewable (green) or nuclear (pink) electricity via electrolysis, or from natural gas via steam methane reformation with carbon capture and storage (blue) or pyrolysis (turquoise). Although these hydrogen production options are low carbon, their energy efficiency is low, and their maturity level is below current carbon-intensive hydrogen production technologies (gray and brown hydrogen). Nevertheless, low-carbon hydrogen is expected to reach cost parity with carbon-intensive hydrogen by 2050. As for the chemicals industry, the main lever will be the replacement of unabated hydrogen derived from fossil fuels with low-carbon hydrogen.

Along with the increasing electrification of key processes and use of low-carbon hydrogen, another trend consists of circular-economy approaches for the chemicals industry. The industry has recycled for decades, with the reuse of by-products, waste, and used materials proving economically viable. But increasing environmental concerns about waste, notably plastic waste, is driving the industry to find more sustainable and circular solutions for global plastic consumption. This implies that plastic producers must shift from a steady, homogenous, and predictable feedstock flow derived from fossil fuels to feedstock generated from mixed plastic waste, all while producing plastic goods of the same quality as before. Moreover, polymer producers should rethink their business models for operation in a circular economy. Such a business model contains a variety of activities: plastic production, collection and sorting, valuing waste feedstock, preparing materials for recycling, recycling, and reusing the recycled raw materials. The new activities required for such a circular ecosystem are surrounded and supported by numerous technology partners, notably hardware producers for sorting plastics, software companies for track and trace systems, mass-balancing software, etc. These are not among the traditional core competencies of the chemicals industry, so the capability to build, acquire, and source them must be identified, challenging current industry structure. What seems clear is that more stakeholders must work together in a circular economy within a more complex ecosystem.

Downstream value capturing starts with the customer

Sustainability is a major factor of success and not the only one at play. Thanks to digitalization for example, the chemicals industry can generate value by better incorporating customer perspective in two ways: ensuring efficient and effective customer interaction, and enabling new and value-generating business models that are fit-for-purpose. 

Although the industry needs to catch up on best practices for understanding and supporting their customers, it has taken significant steps toward digital customer interaction, collaboration, and overall optimization of customer journeys. The best practices can be classified across three dimensions: inspire customers by providing relevant content that leverages artificial intelligence, connect by leveraging a variety of digital resources and referring client queries and issues to experts (e.g., global resources, local contacts or chatbots), and collaborate throughout the customer journey via virtual platforms, opening innovation initiatives with strategic partners and clients, universities, and start-ups.

The chemicals industry needs a systematic approach to defining new business models across the entire ecosystem so that it can accelerate time-to-market for new solutions, offer value, and generate profitability. To overcome the challenges inherent in this transition, future ecosystem players will need to evaluate each component—including markets, customer behavior, and environment—to determine how best to commercialize new functional solutions. Companies used to focus mainly on what was achievable in-house, but for future success companies should seek the best possible technical and commercial development capabilities, no matter their origin.

The levers for future success

The future of the chemicals industry will be shaped by the following: carbon neutrality, sustainability, circular economy, and educated and demanding B2B customers with ever-changing requirements. To succeed, companies will need to develop competencies, capabilities, and capacities in two new areas: management of consortia and a better sensing of, and responding to, rising customer expectations.

The question is not “what” but “who” and “how”

While many companies are aware of these imminent business-model and operational impacts, the “how” and “who” associated with this transition still lack focus. Cultural change, as well as new ways of working, will be required to engage the workforce and master the speed of change induced by the race to net-zero emissions and the advent of the circular economy. In this time of transition, it is paramount to avoid skill gaps, attract sufficient talent, and bolster the industry’s image as a reliable employer, all of which requires rapid improvement of the industry’s sustainability record to be future ready. Most importantly, real change will only be accomplished through a comprehensive, holistic approach that addresses strategy, business model, operations, and the workforce. This type of approach can position chemicals businesses to not only prosper, but to become an integral and indispensable part of a sustainable economy and society—in Europe and the world.