The case for Kerogen Oil to chemicals
The oil industry has traditionally focused on maximizing the production of energy carriers from crude oil. For most of the previous century this made a great deal of sense as these products have been a driver, both good and bad, of the world’s economy. However, the past decade has seen a significant increase in the use of renewable energy sources, energy storage technologies and efficiency improvements. France, Germany, the United Kingdom, India, China and other countries as well as some U.S. states plan on phasing out the sale of new vehicles powered only by gasoline and diesel within the next twenty years . It can be expected that many other countries will do likewise over the next two decades.
Early recognition of these changes led us to create Dragon Shale, producing high value petrochemicals from the kerogen in oil shale. As the market for crude products evolves over the coming decades we foresee a dramatic disruption by market, economic and environmental forces. Conventional oil companies are now beginning to respond to these changes in their industry . COTC or “Crude Oil To Chemicals” is becoming a topic of broad concern within the conventional refining sector. Dragon Shales approach, KOTC or “Kerogen Oil To Chemicals” is a solution.
In the August 2018 issue of Hydrocarbon Processing  Chris Birdsall writes, as the President of ExxonMobil’s Catalysts and Licensing Business, an article titled, “The need for change – Why the industry is looking at crude-to-chemicals”. Mr. Birdsall notes that:
“As the world’s population increases and living standards continue to improve, the demand for energy and chemicals is stronger than ever before. Global demand for chemicals is expected to outpace global gross domestic product (GDP) by nearly 40% over the next ten years”.
In conclusion he states:
“As a result, the challenge for refiners is to upgrade their technology and process configurations to meet the emerging demands of the rising chemicals market.”
Dragon Shale believes the solution discussed in the article, modifying existing or constructing new billion-dollar plant for COTC is an inefficient and expensive waste of capital and resources. Conventional refineries are typically designed to maximize fuel production which in the process destroy the valuable petrochemicals in kerogen oil. It is a more productive use of capital to build small low cost, low risk facilities that directly extract petrochemicals – KOTC – from the vast reserves of kerogen available in the U.S. and around the world. Our KOTC approach is more responsive to societal demands for change than the COTC approach.
In attempts to adapt, the conventional oil industry has already announced plans or starts for several new COTC projects; China – 3, Brunei – 1, Saudi Arabia – 1  . If built and successful, these could contribute significantly to changing the global petrochemical industry. Early COTC refinery project plans call for production of large volumes of commodity petrochemicals. While there may well be scope for such projects going forward, KOTC projects can be implemented more quickly and produce a wider slate of high value petrochemicals. While COTCs still produce fuels as a part of the design KOTC projects only make fuels if required by local economics.
It is worth noting that a COTC project planned by Saudi Aramco would produce more chemicals than all eight first-wave ethane-based steam crackers in the United States. These have a combined production capacity of 11 million tons of ethylene per year.
McKinsey  in their recent article note that:
“Below the surface of the record profits petrochemical companies have been reporting over the past few years, the industry is in a period of profound transition.”
“Companies must also work on reinventing the interface with oil refining as the gas-driven era winds down.”
They go on to opine that today’s petrochemical paradigm means finding a new balance between strategy and performance and list six steps to achieve this.
1. Harness the new sources of industry profitability
McKinsey considered the period 2020 to 2030 in their study and found less opportunity for return on investment based on low feedstock cost. They forecast that by 2020 most of the world’s advantaged feedstock projects will have come onstream. For the period from 2020 to 2025 they anticipate fewer truly advantaged investments.
“To meet demand growth, the industry will rely on ethylene cracker investments based on liquids feedstocks—naphtha, gasoil, and heavier feeds. Cost-curve logic dictates that these investments will generate a return that is close to cost-of-capital returns across the cycle, and significantly below that of the earlier advantaged-feedstock projects.”
This view completely misses the opportunities posed by KOTC investment and projects. Small, low cost, high capital utilization projects offer a new source of low risk high profitability.
2.Take a more strategic approach to growth
McKinsey expects end-market growth rates for petrochemical products will slow down as high-growth emerging-market economies, including China mature and shift from manufacturing products to providing services. To offset this slowdown McKinsey state:
“The petrochemical industry needs to rediscover one of the roots of its original success—its ability to substitute for traditional materials, such as paper, wood, and metal. But in the past 15 years we have seen this substitution come to a standstill—and even reverse. The industry should double down in its innovation efforts on areas where new growth can be unlocked through substitution and not just focus on end-market growth. We also expect that petrochemical companies will start to pursue opportunities for inter-material competition between different plastics to capture additional growth.”
Again, this view misses the opportunity that Dragon Shale and KOTC brings. The industry is focused on huge projects producing massive quantities of commodity products. Innovation begins with small substitute quantities of product entry into new markets. KOTC produces a much wider range of chemicals and offers entirely new product substitution opportunities and indeed, entirely new product opportunities.
3. Attack rising capex costs
McKinsey notes that:
“Since 2000, we have seen a rush to build new facilities to capture the benefits of advantaged feedstock and strong market growth. However, investment costs measured in terms of capital expenditures per ton of chemicals output are creeping up. This has resulted from higher input costs, tighter construction-market conditions, higher costs related to the locations where plants have been built, and the fact the industry is reaching the limits of the cost reductions that can be gained from building on an ever-larger scale.”
Dragon Shale notes that KOTC offers a reset of the trap whereby industry considers “bigger is always better”. Low cost high margin projects suited to local and regional rather than global conditions provide the basis for a clear and advantageous alternative investment opportunity.
4. Embed digital and advanced analytics
As the advantaged-feedstock window of opportunity is closing, petrochemical companies need to redouble their efforts and search elsewhere for ways to boost profitability and improve returns. The industry’s complex and integrated operations, where variable costs make up a high share of total costs, are well suited to benefit from the improvements digital and advanced analytics have to offer.
However, it should be noted that industry has a problem with the legacy of high capital cost, complex and integrated operations. These cannot be adapted to be competitive to newly designed facilities with no legacy compatibility constraints to consider. Whereas new KOTC facilities designed from the outset to include advancements in digital systems, advanced analytics and machine learning will offer a new generation of chemical process plant performance.
5. Identify new opportunities for upstream value creation
McKinsey notes that:
“Oil companies are frantically interested in the higher demand-growth promise that petrochemicals hold compared with fuel markets for heating and transportation. These fuel markets are expected to grow below 1 percent a year; petrochemicals, in contrast, are expected to grow at between 2 and 3 percent through 2030. Based on these projections, petrochemicals could be responsible for 70 percent of new oil-demand growth.”
Our KOTC approach provides the alternative investment strategy that these oil companies need.
6. Build the business case for embracing a more circular economy
“The petrochemical industry is inextricably caught up in the circular-economy debate. Eighty percent of petrochemical building blocks are used to produce plastics, in what today is essentially a once-through value chain where the products are thrown away after use. The push across society for a more circular approach is real, in particular with respect to managing the waste streams.”
While we fully support the circular-economy debate we would note the conventional refining industry is highly energy intensive and produces large quantities of greenhouse gases. The end products ultimately produce more emissions and the fuels portion of emissions is what is leading to conventional refining’s demise. By contrast the KOTC approach is to focus on non-fuels and to maximize use of renewable energy.
McKinsey conclude by stating that:
“Future winners will also need significant strategic moves to capture the new round of value-creating opportunities coming into view.
Dragon Shale believes that KOTC is the answer to the industry and societal need for a new round of responsible value creating opportunities.
 A. Petroff, “These countries want to ban gas and diesel cars,” CNN Money, 11 September 2017. [Online]. Available: https://money.cnn.com/2017/09/11/autos/countries-banning-diesel-gas-cars/index.html.
 ExxonMobil, “Explore the Outlook for Energy: A View to 2040,” ExxonMobil, [Online]. Available: https://corporate.exxonmobil.com/en/energy/energy-outlook. [Accessed August 2018].
 C. Birdsall, “Viewpoint: The need for change—Why the industry is looking at crude-to-chemicals,” Hydrocarbon Processing, August 2018.
 KBR, “KBR Wins Contract to Develop World’s Largest Fully Integrated Crude Oil to Chemicals Project in Saudi Arabia,” KBR, 30 April 2018. [Online]. Available: https://kbr.com/about/newsroom/press-releases/2018/04/30/kbr-wins-contract-to-develop-worlds-largest-fully-integrated-crude-oil-to-chemicals-project-in-saudi-arabia.
 “Crude Oil-To-Chemicals Projects Presage A New Era In Global Petrochemical Industry,” Seeking Alpha, 7 August 2018. [Online]. Available: https://seekingalpha.com/article/4195645-crude-oil-chemicals-projects-presage-new-era-global-petrochemical-industry?page=4.
 N. L. T. J. S. J. W. Eren Cetinkaya, “Petrochemicals 2030: Reinventing the way to win in a changing industry,” McKinsey, [Online]. Available: https://www.mckinsey.com/industries/chemicals/our-insights/petrochemicals-2030-reinventing-the-way-to-win-in-a-changing-industry. [Accessed August 2018].