Some of the largest oil and gas companies are pivoting towards petrochemicals as they reckon with the fact that a decline in transport fuel demand is imminent. Some continue to invest in oil production, expecting petrochemicals to fill the gap in oil demand; others invest in refinery upgrades, aiming to ramp up production of petrochemical feedstocks; others still expand in the chemical industry, looking for a new market. Underpinning this pivot are a series of assumptions about the market for petrochemicals and companies’ capability to regear their assets. We have analysed industry reports and market forecasts and teased out four key assumptions that we challenge in this analyst note. Our research seeks to address the following questions:

1. Can petrochemical demand feasibly replace the projected decline in oil demand for road transport?
2. Does repurposing Downstream assets make commercial sense?
3. What are the potential risks and opportunities associated with the pivot towards petrochemicals?
4. What recent examples can demonstrate the risks of investing on overly optimistic assumptions?

This note is intended for equity and fixed income analysts on both the buy and sell sides, as well as engagement teams and credit analysts at lenders and insurers. It provides a list of critical questions to ask corporates regarding the assumptions behind their petrochemical strategy, which will aid in the investment modelling stage. Furthermore, it should be read in conjunction with our recent publication, Off the Record, which explores the consequences of incorrect assumptions on the P&L, cash flow, and balance sheets of the six largest listed US refining companies. Our findings indicate that up to 50% of shareholder equity could be at risk.