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How the war in Ukraine may accelerate the technology behind ‘green’ chemicals

Market Insights

“There are decades where nothing happens; and there are weeks where decades happen.” — Lenin.

Russian sanctions will likely push consumers of oil and gas for energy to look for alternative sources of supply, including renewables. For chemical products that use oil and gas as feedstocks (e.g. fertilisers, plastics and petrochemicals), alternative feedstocks do not always exist at scale. This supply shock may speed up the innovation required to make that happen.

The Russian invasion of Ukraine has sent shock waves across the global chemical market, as the conflict has caused immediate upswings in crude oil and gas prices that directly impact downstream chemical and fertiliser production.

Russia is one of the world’s biggest oil producers, satisfying somewhere between 10–15% of global oil demand with Europe as its biggest customer for crude oil exports (Europe depends on Russia’s oil for around a quarter of its demand). Russia is also the second highest global supplier of natural gas (behind the US).

Uncertainty about the supply of oil and gas from Russia has caused prices to spike. For the first time since 2014, Brent Crude Oil has risen to over US$100/bbl, with some analyst firms like ICIS forecasting that prices may reach a high of US$135/bbl in the coming months.

Source: Trading view

It is likely that direct consumers of oil and gas from Russia (particularly those in Europe, which is heavily reliant on Russian exports) will turn to alternative feedstocks where possible, but also to alternative sources of energy more generally, potentially increasing the pace of transition to renewable energy sources. On 4 March 2022, the International Energy Agency (IEA) released a “10-Point Plan” to Reduce the European Union’s Reliance on Russian Natural Gas, which includes both short and near term actions including stepping up efforts to diversify and decarbonise sources of power system flexibility.

Less has been written about the effect on chemical products that are derived from oil (including components like naphtha) (e.g. aromatics like toluene and xylene and ethylene derivatives like ethylene glycols) and gas feedstocks (e.g. fertilisers), for which renewable alternatives do not yet exist at the same scale.

Unlike oil and gas used for energy, where there are existing substitutable technologies (e.g. wind and solar), there are not always substitutes for oil and gas used as chemical feedstocks on an industrial scale.

Gas is a critical component in the production of numerous commodity chemical products, and directly impacts the supply of ammonia — the second most-widely produced chemical globally — which is a critical input into fertiliser production. In Australia, we’ve seen how the price of gas can directly impact our local manufacture of chemical fertiliser products like urea, which is a key input not only into the agriculture market but also the automotive market.

The production of ‘Green Ammonia’, where hydrogen is created through electrolysis, is an emerging technology; but not yet at a price point or scale to fulfil global demand for ammonia. Similarly, biofuels, which use crop-based biomass feedstocks as a base, rather than oil, are emerging, but on a smaller and more niche scale.

As supply of oil and gas is disrupted, the imperative to create affordable ‘green’ chemicals at scale becomes more urgent. In the past few years, driven in part by growing consumer demand for renewable alternatives, we have seen increasing interest and investment in industrial bio-technologies in the chemical industry (for example, renewable fuels, plant-based plastics and bio- glycols).

A longer-term impact of the current sanctions and exits from Russian energy investments might just be that they act as a catalyst for further innovation in the chemical industry, and drive the broader adoption of ‘green’ and ‘renewable’ chemical alternatives.

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