The value of innovation in energy and petrochemicals

Stephen D. Pryor
President, ExxonMobil Chemical Company
2011 International Petrochemical Conference
March 27, 2011

It’s a pleasure to be here at NPRA’s 2011 International Petrochemical Conference. I’d like to start out by congratulating Raj Gupta on receiving the Chemical Heritage Award. Raj is the embodiment of innovation and entrepreneurship in our field, and this recognition is well-deserved. I am also pleased to be here with my colleague Dave Weidman, another strong industry leader and, like Raj, a former chairman of the American Chemistry Council. It’s an honor to join both of them on this panel.

The technology and innovation theme of this conference is very fitting.  The contributions of the energy and petrochemical industries are so engrained in the fabric of today’s modern society that they are often taken for granted.  And it is our responsibility to change that.

The United Nations has designated 2011 as the International Year of Chemistry. This affords the chemical industry the opportunity to communicate through many venues and to many audiences how our industry and our products are enabling a safer, healthier and more rewarding future for people around the world.

This afternoon, I would like to talk about how innovation in energy and petrochemicals is helping to drive economic growth and improve living standards around the world. I’ll also discuss how we can achieve these goals while delivering value to shareholders.

To frame this discussion, consider two sobering statistics offered in ExxonMobil’s recent Energy Outlook:

• Twenty percent of the world’s population, or 1.4 billion people, currently lack access to electricity.
• And nearly 40 percent lack access to modern cooking fuels.

Moreover, consider the significant changes projected to take place by 2030:

• The world’s population will grow by 14 percent to nearly 8 billion people;
• The world’s light-duty vehicle fleet will increase by 50 percent to 1.2 billion;
• And global GDP will effectively double, led by developing countries.

Economic growth will improve living standards around the world.  Of course powering this economic growth will require substantially more energy. By 2030, ExxonMobil projects global energy demand will be about 35 percent higher than it was in 2005, even taking into account substantial gains in energy efficiency. 

Adding to this challenge, higher energy use will contribute to an estimated 25 percent increase in global CO₂ emissions by 2030, driven by increases in non-OECD nations.

The products of modern chemistry will be indispensible in meeting these future economic, energy, and environmental challenges.

As I said earlier this month at CERAWeek, chemicals touch more than 95 percent of manufactured goods and virtually every sector of the modern economy, from basic human needs such as food, water, clothing, housing and transportation all the way to the latest advances in health care, communications and information technology. 

And every facet of the energy industry – including alternative energy – depends on the products of modern chemistry.

That’s why petrochemicals is a growth business, particularly in non-OECD nations where rising income levels are accompanied by even faster growth in the consumption of chemical products.  

Satisfying this growing demand for energy and petrochemicals in an environmentally responsible manner will require an integrated set of solutions that increases supply, improves efficiency, and mitigates emissions.

At the heart of these solutions must be innovation and entrepreneurship in energy and petrochemicals. This requires a market-driven environment in which businesses and entrepreneurs take calculated risks, innovate, and build—delivering economic, social, and environmental benefits. That’s how you achieve sustainable growth. 

Certainly government has a role to play in setting realistic standards based on sound science, balanced consideration of risk, and economic impact.

But government should not pick winners and losers or distort markets with mandates and subsidies. All businesses and technologies should be allowed to succeed or fail based on the verdict of the marketplace.

When given the opportunity, the energy and petrochemical industries have demonstrated again and again they are capable of delivering the innovation that promotes economic growth.

A great example of innovation in the energy industry is the development of unconventional natural gas in the United States. Not long ago, the U.S. was facing declining natural gas production and some of the highest-cost gas in the world.

Moreover, the common belief was that U.S. petrochemical production, which relies on the natural gas industry for fuel and feedstock, would decline and that the U.S. would become a net importer of petrochemicals.

In the past five years, however, innovation in producing gas from shale and other unconventional sources has enabled a 20-percent rise in U.S. natural gas production and restored U.S. gas output to levels not seen since their peak in the 1970s.

This increased natural gas supply is good news for U.S. energy security, employment, the economy and the environment.

It has also been good news for the U.S. petrochemical industry. U.S. ethane production has risen by 25 percent over the last five years, providing a feedstock cost advantage and reinvigorating the U.S. petrochemical industry. This has led to a rise in U.S. exports as well as incremental investment in ethane cracking.

The story of U.S. unconventional gas and its attendant benefits for the petrochemical industry was foreseen by virtually no one.

Policymakers would be wise to keep in mind this example of the power of free-market innovation and the positive flow-through effects it can have across the economy.

There are also countless examples of game-changing innovations in the petrochemical industry that transform everyday life and deliver sustainability benefits:

• In the automotive sector, innovations by the chemical industry have reduced average light-duty vehicle weight by 500 pounds—or more than 10 percent—enhancing performance and improving fuel economy.
• In alternative energy, ongoing advances in silicon, polymer, and adhesive technology have combined to increase the durability and efficiency of solar cells, promoting the growth of this emerging energy source.
• And in electronics, the ultra-thin battery separator film used in rechargeable lithium-ion batteries has revolutionized handheld communications devices and personal computers, changing how we work, play, connect with each other, and get the news.

These are but a few examples of how the products of modern chemistry play an important role in conserving resources, improving energy efficiency, and mitigating greenhouse gas emissions. In fact, according to a recent industry-commissioned, independently validated study, the world’s CO₂ emissions are at least 8 percent lower today than they would be without the products of modern chemistry.

Having addressed the extraordinary value the chemical industry creates for society, let me now shift gears and discuss how we can concurrently create value for shareholders. Each of our companies has a different approach to creating shareholder value. At ExxonMobil, we see integration of petrochemicals with upstream and downstream operations, supported by leading-edge technology, as fundamental to generating superior returns.

Effective integration requires more than simply co-locating petrochemical and refining operations. It entails site-wide optimization of feedstocks, products, costs, capital, and people. This integrated business model allows all product lines—fuels, lubes, and petrochemical commodities and specialties—to benefit from lower costs.

That’s why at ExxonMobil, 90 percent of our operated petrochemical capacity is integrated with refining or upstream gas processing. 

Supporting this approach is a steadfast commitment to leading edge technology. Year in and year out, we focus our technology efforts on the three strategic drivers of our success: advantaged feedstocks, low-cost processes, and innovative products that deliver superior performance and help our customers reduce energy use and emissions.

Innovation in product technologies, such as those I mentioned a moment ago, is certainly of great importance. However, innovation in feedstocks can generate tremendous value since they can represent 70-plus percent of the production cost of petrochemicals.

That’s why at ExxonMobil we work relentlessly to improve our ability to maximize value from every molecule we process.

We leverage our expertise in process technology, molecular composition, and modeling to adapt our plants to handle a wide variety of feedstocks. Over the past seven years we have used this capability to qualify more than 400 new steamcracking feeds, giving us the flexibility to choose the lowest-cost feedstock at any point in time. And we continue to enhance our proprietary molecule management technology.  This allows us to integrate feed selection for refining and chemicals and to adjust process conditions and product slates in real time to optimize profitability and energy efficiency.

This business model has paid off for our shareholders. ExxonMobil’s combined Downstream and Chemical operations have generated an average 20 percent return on capital employed since 2000.

The integration model I’ve described is not for optimizing legacy assets, such as our large manufacturing complexes here on the U.S. Gulf Coast. It’s also a platform for advantaged growth. Let me describe briefly how we are using it to expand our manufacturing and technology footprint to serve the growing markets in Asia.

Less than two years ago, China’s first fully integrated refining, chemical, and fuels marketing complex with foreign participation started up in Fujian Province, made possible by an innovative partnership of ExxonMobil, Saudi Aramco, Sinopec, and the provincial government.

This world-scale facility was completed on-time, under budget, and it’s running smoothly and at full capacity. In fact, options to expand the facility are being evaluated.

Fujian is a prominent example of how integration, together with innovative partnerships, can create a platform for advantaged growth.

­Another example of advantaged growth is our petrochemical complex in Singapore. We are completing a major expansion that will add 2.5 million tonnes of new capacity, more than doubling its size and making Singapore our largest integrated refining and petrochemical complex.

This project will not only leverage the power of integration, it will also feature an array of new technologies. These will provide unmatched feedstock flexibility, exceptional energy efficiency, industry-leading scale, and premium products, such as our proprietary metallocene polyethylenes and our new-to-the-world metallocene-based elastomer, Vistamaxx.

And to support premium product growth in Asia, this week we will officially open a new, state-of-the-art Technology Center in Shanghai, signifying our commitment to bring leading-edge technology and innovation to our customers in China and throughout the region.

ExxonMobil’s commitment to technology and innovation is informed by our history. Our chemical business dates back some 90 years, when we developed the first commercial petrochemical, isopropyl alcohol, from refinery gases. In the 1940s we developed naphtha steam cracking, the very backbone of today’s petrochemical industry. Our invention of butyl rubber supported the Allied war effort, and afterward helped fuel the post-War automobile boom. Today, our advanced metallocene-based polymers impart strength and durability to countless products while conserving resources and reducing energy use and emissions.

Our quest for new products, more efficient processes and low-cost feedstocks continues. This constancy of purpose and steadfast commitment to leading-edge technology benefits our employees, customers, shareholders, and the communities we serve.

In closing, I think the late Ted Levitt of Harvard Business School captured it well when he referred to innovation as "the vital spark of all human change, improvement and progress."

The transformative power of innovation has been harnessed for decades by the men and women of the energy and petrochemical industries. So now in 2011, the International Year of Chemistry, is an appropriate time to celebrate the life-changing contributions of the chemical industry, and to stimulate that “vital spark”—the spark of ingenuity contained in the talented minds of our scientists and engineers, seeking new ways to deliver value to shareholders, customers, and the world.

Thank you.