With Russia’s invasion of Ukraine reigniting international debate about the pace of the global energy transition and the risks of relying on oil and gas imports from countries with opposing agendas, discussion in the Gulf is largely framed around how to extract maximum benefit from the remaining hydrocarbons wealth while also playing a responsible role in global efforts to both mitigate climate change and maintain stability in international energy supply.
The UAE has pledged to meet net-zero carbon emissions by 2050, while Saudi Arabia and Bahrain are aiming to achieve the same goal by 2060. Although it has yet to commit itself to a net-zero target, Qatar’s 2021 national climate change action plan seeks to achieve a 25% reduction in greenhouse gas emissions and decrease the carbon intensity of its liquefied natural gas (LNG) facilities by 2030.
Qatar has also joined Saudi Arabia as a founding member of the Net-Zero Producers’ Forum – a cooperative body representing 40% of global oil and gas production that seeks ways to harness technology to accelerate the energy transition and reduce greenhouse gas emissions from fossil fuels.
Downstream Opportunity
One of the key ways Gulf countries plan to extract maximum benefit from their hydrocarbons wealth is by catalysing investment in downstream production and export capacity for petrochemicals and chemicals. By doing so effectively, countries in the region can diversify their export revenue, enhance the resilience of public finances, and create high-value employment for the growing cohort of young and well-educated citizens.
The chemicals and petrochemicals industry’s importance to regional economic diversification was growing significantly in the years leading up to the pandemic. Prior to the global outbreak of Covid-19, petrochemicals and chemicals contributed around one-third of the region’s manufacturing GDP, with more than 80% of local production exported beyond the region. It also directly supported some 613,000 jobs in 2018, equivalent to 2.4% of the GCC’s combined workforce. That same year, the industry in the Gulf invested an estimated $438m in research and development (R&D), supporting 7100 jobs and approximately $71m in economic activity. Between 2010 and 2019 R&D spending almost doubled, from $293m to $480m – outpacing the 42.5% rise in the global industry over the same period.
Looking ahead, with the global energy transition well under way and Gulf governments firmly committed to reducing national carbon emissions, innovation efforts will be increasingly focused on sustainable products and processes.
Evolution of Innovation
The sizeable increase in R&D spending in the regional chemicals and petrochemicals industry, particularly in the decade leading up to the pandemic, was powered by a focus on chemical synthesis, which accounted for 1629 of the 2461 chemical patents granted by the GCC Patent Office between 2009 and 2019. This was largely driven by rising demand for new synthetic methods for developing commercially important compounds used in corporate laboratories.
The second-highest number of patents filed during this period was in the category related to catalysts, which are key to the development and application of petrochemicals and chemicals. Cracking – or the process by which complex hydrocarbons are broken into lighter molecules by means of hydro, catalytic, steam and thermal processes – accounted for the third-most patents filed during this period. As with the other top categories, this is a mature area of research which presents opportunities to enhance competitiveness along the value chain.
In the future, it is widely expected that R&D efforts will focus on processes to reduce the carbon footprint and environmental impact of production, as well as innovation in product applications, company services and business models. One of the biggest challenges facing petrochemicals and chemicals companies in the region relates to environmental sustainability. Producers are under scrutiny for their water usage, waste-disposal practices, and the climate impact of their operations and products.
In addition, consumers and investors alike are increasingly cognisant of the environmental toll of certain products derived from petrochemicals and chemicals. For instance, single-use plastic products are becoming the target of regulatory efforts to discourage their usage around the world. Consumers are also abandoning single-use plastics in significant numbers: a 2022 survey by polling firm IPSOS found that 75% of people around the world would like to see single-use plastics banned as soon as possible, while 82% said they favoured products with less packaging.
In response to this global sustainability shift, producers in the GCC are increasingly embracing circular-economy principles. For example, the adoption of closed-loop value chains for plastics can help retain used plastics within value chains by redeploying them for use in feedstock, monomers and polymers. Policymakers across the region have also begun to adopt circular-economy policies and strategies at the highest levels. For example, Saudi Arabia is targeting a zero-waste circular economy by 2035.
Progress can be seen in practice in the chemicals and petrochemicals segment, where SABIC – the chemicals conglomerate ranked by Boston Consulting Group as the third-most-innovative firm in the MENA region – has joined forces with Saudi Investment Recycling to develop a chemical recycling plant in the Kingdom that will convert mixed plastic waste into feedstock for pyrolysis oil, a synthetic fuel that could be used as a replacement for petroleum.
In Bahrain, plastics manufacturer BASF has launched a circular-economy programme that aims to process 250,000 tonnes of recycled and wastebased raw materials per year by 2025, and double sales generated from circular-economy innovations to €17bn. Its strategy focuses on circular feedstock, new material cycles and new business models.
Meanwhile, in Qatar – which aims to host a plastic-neutral 2022 FIFA World Cup – Mesaieed Petrochemical released its first annual sustainability report in 2020, detailing progress on reducing carbon emissions, energy intensity and water usage from operations across its four companies through innovative policies and investment in technology.
Across the region, government and corporate stakeholders are increasingly aware that long-term value creation in the vital chemicals and petrochemicals industry cannot be achieved without innovation-led sustainable products and practices.
Supply Chain Opportunities
Beyond the production process itself, emissions along the industrial supply chain – including the distribution of final products – are among the most significant contributors to greenhouse gas emissions in the broader chemicals and petrochemicals industry globally. However, accurately measuring and calculating these so-called scope-3 emissions – those that are neither direct corporate emissions, nor indirect emissions associated with the purchase of electricity, steam, heat or cooling from third-party suppliers – presents an ongoing challenge for the segment.
With the bulk of the chemicals and petrochemicals produced in the GCC currently exported beyond the region, companies involved in such trade are considering how best to optimise shipping routes and fleets to minimise the environmental impact of supply chains. Freight costs are already at elevated levels due to pandemic-related bottlenecks, and questions surrounding how to replace ageing fleets due to regulatory uncertainty over fuels could drive prices up further – particularly following Russia’s invasion of Ukraine in early 2022.
However, the strategic position of the GCC offers some advantages for firms looking to reduce scope-3 emissions globally. For companies based in North America, Europe and the Far East, adding Middle Eastern producers to supply chains could help to reduce emissions from long-distance shipping.
For their part, producers in the region are adopting big data solutions to predict changing market conditions. These technologies not only improve time and cost efficiency in bringing a new product to market, but also facilitate business model innovation and increase competitiveness. In particular, big data and analytics enable the integration of information from suppliers, factories, internal departments and third-party logistics firms. Analytics tools, meanwhile, can accelerate innovation, improve quality, strengthen supply chain resilience and enhance customer service. Increased investment in research and innovation will be pivotal for product differentiation, process efficiency, cost advantages and sustainability – ultimately helping producers in the GCC to become more competitive in the international arena.
