It may be the turn of plastic to become the next stranded asset says the MSCI ESG research team in a note issued this week.
The researchers suggest that oil and gas producers are pivoting towards petrochemicals but given environmental concerns, it may only represent a temporary fix given expected plastic regulation and a consumer backlash.
The team suggest that amid a shift toward electric vehicles and global efforts to rein in fossil-fuel emissions, oil demand for road transport may peak in 2025 citing the view of consultants McKinsey.
MSCI says that, in response, oil and gas (O&G) companies are expected to pivot toward petrochemicals — mainly inputs for plastics.
However the team asks: “Could tighter global anti-plastics regulations and shifting consumer preferences limit the upside of these investments? When valuing oil and gas companies, could a rise in recycling technologies and non-fossil-based alternatives make conventional virgin plastic the next stranded asset?”
MSCI notes that oil and gas companies such as PTT, Total, Formosa and IRPC derive more than 25% of their revenue from petrochemical sales while chemical companies such as Dow, Mexichem, Westlake Chemical, Braskem, Lotte Chemical and Mitsui Chemicals currently derive more than 80% of their revenues from plastics-related products.
“While 80% of these petrochemicals are used as the building blocks of plastic materials, a growing legal and consumer backlash against plastics pollution may threaten the economics of further petrochemical and O&G developments.
“The number of regulations to reduce plastic pollution has skyrocketed over the past few years, mostly targeting single-use packaging. These products account for as much as 40% of all plastic use and, just like other plastic products with a longer useful life, may take more than 500 years to biodegrade.”
The European Parliament passed a directive in late 2018 enforcing restrictions on single-use plastics by 2021, including a requirement to move toward the goal of recycling more than 90% of beverage bottles by 2025.
In fact, restrictions on single-use plastics were implemented in 60 countries and approximately 350 U.S. municipalities as of the end of last year.
Regulations aimed at restricting plastics
MSCI says that if this trend continues, petroleum assets envisioned as plastic inputs could end up as stranded as those intended for combustion.
MSCI identifies three headwinds for the oil and gas industry and its embrace of plastics.
1. Increased demand for recycled materials
Companies such as BASF, Indorama, Eastman Chemical and LyondellBasell have developed, partnered with or acquired plastics-recycling businesses. Some of these businesses aim to convert or decompose waste plastics back down to their basic monomer or intermediate building blocks. These recycled materials could be used as alternative raw materials to those supplied by O&G.
Recycling can conserve both energy and materials, and demand for postconsumer recycled materials is expected to grow. Firms such as Colgate-Palmolive, Danone, Diageo, L’Oréal, PepsiCo, Tupperware, Unilever and numerous other packaged-good companies have committed to use at least 25% postconsumer recycled materials in their packaging by 2025, up from a currently miniscule amount. Plastic-packaging companies such as Amcor and Sealed Air have pledged that all their packaging products will be either fully recyclable or reusable by that same year.
2. Development of alternative solutions, such as truly biodegradable plastics
Another potential roadblock for O&G companies is the move toward bioplastics, which are developed from raw materials such as corn, rather than oil and gas. While not without negative environmental aspects, such as deforestation risks due to higher dependence on land resources and their potential to contaminate conventional plastic recycling streams, bioplastics may help reduce plastic pollution — especially if their biodegradability features improve.
3. Shifting demand from plastics to alternatives, such as paper-based packaging
Finally, plastics could lose market share to alternatives. Mondi and DS Smith, for example, have both developed paper-based packaging products aimed at competing with the traditional plastics markets.
MSCI says that significant growth in recycled-plastic materials or other alternative packaging could pull a large portion of that economic value away from O&G producers.
It adds: “Support from the investment community may hasten the development of new technologies that compete with O&G, and many financial firms have pledged to reduce plastic waste. Morgan Stanley, for example, committed to the “prevention, reduction and removal of 50 million metric tons of plastic waste” from landfills and the environment by 2030.
“Additionally, 26 financial institutions with a combined USD 4.2 trillion of assets under management — including BMO Global, BNP Paribas, Hermes EOS and Sarasin & Partners — have so far endorsed the Ellen MacArthur Foundation’s New Plastics Economy initiative.”
“In short, many O&G producers have looked to plastics as a means of continued expansion. But our analysis suggests this shift may provide these companies only a temporary reprieve.”