Chemical Mismatch: Value Chain Under Strain

Introduction

Many credible commentators, such as the International Energy Agency (IEA), BloombergNEF, DNV, McKinsey, and bp, expect demand for crude and natural gas liquids to peak before 2030.¹ And yet, Carbon Tracker’s most recent holistic assessment of oil and gas companies, outlined in Paris Maligned III, found that the industry by and large is planning to grow output in the coming years. The hope is that the growth in petrochemical demand will help offset most of the oil demand that will be lost to electric vehicles and renewables. Indeed, some oil and gas companies are even planning to expand their downstream operations to produce petrochemicals themselves.

Meanwhile, leading chemical producers have pledged commitment to Paris-aligned decarbonisation pathways, aiming to meet regulatory requirements, technological needs, and investor expectations. Key to that will be replacing fossil-derived feedstocks with alternative materials, electrifying operations, achieving energy efficiencies, and transitioning to renewable energy sources.

These differing interests create a structural tension in the petrochemical value chain, with energy suppliers seeking to sell more of their products to an industry that seeks to wean itself off them. This note draws on recent research from Carbon Tracker and Planet Tracker to highlight this structural tension and the associated risks for each of the two industries.

Chemicals

The chemical industry stands at a critical inflection point. While companies are increasingly signalling their intention to align with climate goals, progress remains uneven and, in many cases, insufficient to meet Paris-aligned decarbonisation pathways. Planet Tracker’s recent benchmark of eight chemical companies², Lessons in Chemistry, found significant gaps in ambitions around emissions performance, capital allocation, and governance strategies.

Structural challenges exacerbate the problem. The chemical industry is among the most emissions-intensive sectors due to its reliance on fossil feedstocks, high-temperature production processes, and complex, long-lived assets. At the same time, pressure from policy-makers, including carbon pricing, stronger disclosure requirements, and taxonomy-based investment rules, is likely to intensify over the coming years.

In this note, we categorise the core challenges of the chemical sector’s transition under three interrelated themes: Emissions, Governance, and Resilience.

Emissions targets and performance remain weak, with disclosure concerns

On the emissions front, Planet Tracker’s analysis reveals that for seven of the eight companies assessed³, Scope 3 accounts for 70% to 83% of their total GHG footprint, underscoring the sector’s deep ties with upstream fossil inputs and downstream product use. Four of the eight companies analysed⁴ have upstream-heavy Scope 3 profiles, driven by fossil feedstock procurement, while the rest⁵ exhibit downstream-heavy emissions, associated with product use and end-of-life disposal.

These emissions structures have important implications for chemicals decarbonisation pathways. For instance, electrification and clean energy are critical for the company with a high Scope 1 and 2 dependence⁶. Meanwhile, feedstock substitution is key for the four upstream-heavy companies, and circularity, and sustainable product innovation are essential for the other three with a dominant downstream footprint. However, emissions performance and ambition do not currently match these relations.

Notably, only three companies⁷ have achieved material emissions reductions in recent years while others are on track to increase emissions by 2030 in line with business-as-usual trends.

Crucially, long-term targets remain insufficient. Despite the dominance of Scope 3 emissions, only one firm⁸ has set an absolute, quantified target covering its full value chain; two⁹ include partial upstream Scope 3 targets; and the rest either lack Scope 3 targets altogether or offer only vague references. Without full value chain targets, including absolute Scope 3 mitigation ambitions, chemical company transition plans to net-zero are simply not credible.

Even where supplier or customer engagement exists, disclosures are inconsistent and lack transparency on emissions coverage, investment scale, or expected mitigation timelines. This is particularly concerning given the sector’s growing reliance on emerging technologies to deliver on their decarbonisation goals. For context, when asked how these targets will be achieved, companies often cite breakthrough technologies, yet provide little concrete evidence to support their credibility. If emerging tech is the core delivery mechanism, then companies must substantiate it: outline the emissions reduction expected, current versus required capacity, investment needs, and deployment timelines. Instead, many disclosures are vague, reflecting a lack of seriousness which makes these initiatives unlikely to deliver on the chemical’s transition by 2030.

Incentive structures and misaligned associations put climate on the back burner

On the governance front, where effective structures and incentive frameworks are essential for translating climate ambition into action, only a few firms¹⁰ have integrated climate into executive remuneration with incentives linked to climate KPIs. Others still treat climate as an auxiliary issue.

At the same time, many companies remain affiliated with industry groups that advocate against climate policies (e.g. AFPM, US Chamber of Commerce), despite internal climate commitments. Failure to address such misalignments exposes companies, and their investors, to regulatory backlash, litigation, and reputational harm.

Resilience is hard to measure given little clarity on capital allocation and physical risks

Transition will require significant capex from chemical companies and transition plans are only credible if the investment is costed and sourced properly. However, there is material variation across the companies in the amount of capital they invest to deliver their transition goals, ranging from 2% to 30%¹¹ of their total capex. Moreover, disclosure is often inadequate and inconsistent as few companies clearly distinguish between capex for decarbonisation and capex for “sustainable” capacity expansion. This lack of transparency is particularly concerning given that climate-aligned capex is among the least disclosed¹², yet most material, indicators of credible transition planning.

Despite near-universal acknowledgement of physical climate risks, meaningful integration into planning remains limited. Only two companies¹³ provide a somewhat quantitative assessment. For the rest, disclosures lack granularity, leaving critical blind spots around asset resilience, potential supply chain disruptions, and future cost exposure under more extreme climate scenarios.

The chemical sector may be locking itself into fossil-feedstock infrastructure

With insufficient long-term emissions targets, reliance on emerging technologies, as well as a lack of alignment between governance structures, financial incentives, capex plans, and strategic decarbonisation plans, chemical companies have a high risk of failing on their commitments to transition.

As a result, the chemical sector may be signalling an implicit willingness to absorb additional fossil input, locking in emissions and infrastructure that are fundamentally misaligned with global climate goals. In other words, if chemical companies continue to expand production capacity without proportionate mitigation efforts, a more abrupt and costly transition will be required post-2030, likely triggered by stricter policy action and investors’ needs.

Oil and Gas

Whatever the pace of transition and alignment in the chemical industry, oil and gas is still facing a significant technological risk that petrochemicals are unlikely to mitigate. Carbon Tracker’s Petrochemical Imbalance has identified three additional challenges that oil and gas companies may face in their attempt to pivot towards what has historically been a secondary market.

Refiners have yet to prove they can increase chemical yields economically

We start with refiners, which face two distinct risks. Firstly, with electric vehicles eating into the market share of internal combustion engine powertrains, refineries will have to find ways to change up their product mix. They will need to reduce the share of gasoline extracted from the barrel and increase the yield of petrochemical feedstock – a feat that will be challenging both technologically and economically.

A typical barrel of oil yields 8-12% of petrochemical feedstocks, against 24% of gasoline, 34% of diesel, 10% of kerosene, and 16% of residual fuels and products. Increasing the proportion of chemicals extracted from a barrel of oil requires dipping deeper into that barrel and breaking down long-chain hydrocarbon molecules into short-chain molecules. The technology that does this sort of molecular breaking – called cracking – has existed for decades, but it has been optimised to convert heavy distillates (asphaltenes) into middle distillates (fuels); light distillates (petrochemicals) have always been a byproduct of the process. This technology could theoretically be tweaked, but that requires increasing the units’ temperature regime or changing the catalyst – in either case, a more energy-intensive process.

Technology is only part of the problem. Historically, the profit margins of light distillates have been negative, i.e. they were sold at lower prices than the crude from which they are extracted. As the share of profit-making fuels is set to dwindle, refineries may find themselves producing more of a product that tends to drag profit margins down. Stood side by side with identical compounds obtained from the much simpler process of natural gas liquids (NGL) fractionation,^* which is a mandatory step in natural gas production, light distillates coming out of refineries look an even less attractive prospect.

Refining infrastructure’s fit for chemical purposes may depend on location

Another problem for refiners is geography. Many operators claim that they can repurpose existing refining infrastructure and supply chains to secure uptake of petrochemicals. However, the global petrochemical value chain has been shifting steadily towards China and North America, which have been building out their ethylene and propylene production capacities, away from historical centres in Europe.

While refineries with easy access to Asian and North American markets may be better positioned to create integrated petrochemical plants, geographically disadvantaged facilities may struggle to offload their products. Some players have already been met with setbacks in their downstream segments. For example, bp has had to shut down 1/3^rd of the capacity at the Gelsenkirchen refinery in Germany; ExxonMobil has been divesting its assets across Europe and has shut down its chemical units at the Gravenchon facility in France; Shell has scrapped plans for a chemical complex in Iraq; and LyondellBasell has closed its chemical plants in the Netherlands.

Problems downstream may translate into demand substitution risks upstream

Any setbacks in the downstream segments of the oil and gas industry are bound to reverberate all the way up the value chain and impact upstream producers. If transport electrification and renewable deployment continue at pace, translating into a faster transition than currently expected, upstream producers will face a significant demand substitution risk. Oil producers will be particularly exposed, facing competition from NGLs. However, gas suppliers themselves are not immune, as renewable deployment continues at record pace.

Conclusion

Put together, Carbon Tracker’s Petrochemical Imbalance and Planet Tracker’s Lessons in Chemistry highlight the tension between an oil and gas sector seeking to offload more fossil fuels into the petrochemical value chain, even as the chemical sector has pledged to reduce the use of petrochemicals in order to meet its transition commitments.

These two goals are mutually exclusive, and investors should be interrogating the risks presented by that inconsistency. Even though chemical companies are not yet doing enough to fully align with their commitments, the silver lining for oil and gas companies will be rather dim. Demand for fossil hydrocarbons is bound to buckle under the pressure of transport electrification and renewable deployment.

Most chemical companies should raise their ambitions or risk a costly transition

Despite claiming commitment to alignment with climate goals, the chemical industry has yet to line up with the most ambitious Paris-aligned decarbonisation pathway. Given the lack of progress, comprehensive emissions targets, capital allocation, and governance strategies, the chemical companies are exposing themselves to a more abrupt and costly transition post-2030. This would be caused by stricter policy action in the form of higher carbon prices, among others, especially, if chemical companies continue to expand production capacity without proportionate mitigation efforts. Moreover, slower transition and higher temperatures will have increasingly negative effects on global GDP – as a GDP-correlated sector, transition is critical to protecting the long-term demand for chemical products.

Investors focusing on the chemical industry’s climate transition and wishing to assess the credibility of these companies’ plans to transition should ask the following questions:

1. Does the company disclose its full GHG footprint and have absolute, time-bound, and science-based targets for its full Scope 1, 2 and 3 emissions?
2. Is climate oversight embedded at board level and is the management materially incentivised to deliver on a net-zero strategy?
3. Are investments (i.e., capex) clearly linked to emissions reduction outcomes and related risk management and mitigation?

Oil and gas companies should not rely on petrochemicals as a safe harbour from transition

Regardless of the pace of transition in the chemical industry, most oil and gas players are exposed to demand substitution risks and a pivot to petrochemicals is not a safe bet. Investing in production growth upstream risks locking in long-lead, long-cycle projects at a time when demand is set to dwindle. Meanwhile, investing in downstream assets, including chemical units, may result in lower offtake, reduced utilisation rates, and weaker margins. Financial impacts would likely include significant impairments and an early onset of decommissioning liabilities on the balance sheet.

Investors with a stake or interest in oil and gas companies should ask the following questions:

1. What are the company’s assumptions for long-term petrochemical demand growth?
2. What are the company’s assumptions for oil demand and commodity prices?
3. What margins does the company expect to achieve from a refinery being converted into a chemical plant?