Analysis: Future choices for BP Amoco chems

26 February 1999 21:36  [Source: ICIS news]

LONDON (CNI)--While BP Amoco Chemicals has confirmed where it will be headquartered and also its plan for 3000 job cuts, the portfolio of projects that will characterise the merged giant has yet to be determined. As chief executive Bryan Sanderson told CNI, it will not be a matter of weaving together the chemicals strategies of BP and Amoco, but whatever way the plan is made it will have to be done fast - a statement on the whole group's strategic review is expected about July, he said.

Given BP and Amoco's speed at pulling off the merger, which was only announced last August although the serious talks began late May, it is reasonable to understand that everything is not up in the air. But the expectation that BP Amoco will have a strong focus on the potential of its merged chemicals activities comes for another reason: Sanderson said that a few years before BP and Amoco considered wedding at group level, he and his Amoco counterparts looked at the potential of some kind of pairing and realised the divisions would dovetail quite well. That divisional exploration did not lead to marriage but it is clear that the chemicals suitors are not strangers.

Being somewhat knowledgable of each others strengths and weaknesses, the BP and Amoco teams have not held back on all projects nearing decision time that could benefit the merged operation. On Thursday BP Amoco Chemicals gave the go-ahead to the 450 000 tonne/year Prairie Rose alpha olefins plant in Canada that had been in the Amoco pipeline. Recently, BP Amoco and Sterling it announced plans to invest $10m (Euro8.8m) in a 25% expansion of the latter's world-scale acetic acid plant at Texas City, Texas. The work, which is to be complete by March, is effectively debottlenecking, said Sanderson.

As well as acetic acid, the future market position in aromatic acid is also on corporate minds. Mark Noetzel, vice president for feedstocks, said BP Amoco wants to "underpin growth" in terephthalic acid (PTA) and isophthalic acid (PIA) by integrating its feedstock positions in paraxylene (PX) and metaxylene (MX), respectively. Key aspects of that strategy build on Amoco's pre-merger "pairing" of its expanded PIA plant at Joliet, Illinois with its new MX plant in Taxas City, Texas, both of which went onstream in December. Amoco also had strategic moves underway to improve its PTA economics at its 850 00 tonne/year plant at Geel, Belgium, which consumed 550 000 tonne/year of PX, all of which is being bought at present. In 2000, BP Amoco is to have a 420 000 tonne/year PX plant onstream at Geel, which Amoco approved in 1997 and should cut costs for the merged enterprise.

Noetzel said "we will continue to invest in those areas to support downstream products".

However, despite the steady progress of construction work at Geel, BP Amoco has also inherited some dramatic repair work at the complex. Last August, barely three months after it came onstream, Amoco Chemical Belgium's 500 000 tonne/year No 3 PTA plant was put out of action by advanced corrosion in a stainless steel pipe, which has called for extensive replacement of pipework. The plant should be back in action in the second quarter of this year.

BP Amoco's interest in northern Europe is also reflected in its plan to stop buying vinyl acetate monomer (VAM) from Italy's EniChem plant at Porto Marghera and start producing its own VAM at a new 250 000 tonne/year plant at Hull, England. The new plant will also replace the group's own VAM production at Baglan Bay, Wales - a complex that the sword of Damocles hangs over and threatens the future of the styrene unit, although the group has confirmed it will keep its "quite economic" isopropynol unit.

In the UK, BP Amoco is consolidating its assets. The VAM investment is part of a bigger package that involves construction of an ethylene pipeline that links Hull into another line running between the chemicals nodes of Teesside and Grangemouth, Scotland. A key feature of that enlarged network is the Wilton, Teesside cracker that BP and its majority owner have been wrangling over for ages. Sanderson confirmed that BP Amoco is looking for a "package" that ups its current 20% equity stake to about 50% and makes it the operator. Despite the ongoing restructuring in both corporate camps, disagreement on price has continued to be the main stumbling block, he indicated. If the cracker was strategically important before to BP, it is even more so to the merged enterprise, the chemicals team said.

While its relationship with ICI on the cracker may be whittled down to a price issue, according to Sanderson, other strategic pairings have possibly tougher aspects to grasp, such as BP's polypropylene (PP) venture with Elf - Appryl. The venture is currently investing in new kit in Grangemouth and has options at Lavera, France but the future of the proven team is "a real issue", said Sanderson. He added: "I don’t think either of us want to get out," as he says both parties have strategic interests in PP.

Choices further away, though, are more limited. In China, BP Amoco is resigned to a delay of a couple of years or so to its Jinshan project with Shanghai Petrochemical, and its interest in being a partner in a proposed cracker in Indonesia is also on the backburner because of the region's economic troubles.

However, another country that has been on the backburner for years is sparking renewed interest - Iran. Even though BP Amoco, as Sanderson says, may not do anything in the country without the green light from the US - except to continue to service its historical polyethylene licences - the merged operation, and other Western companies, is in talks with Iran's National Petrochemical Co of possible projects. Elsewhere, in the Middle East the group also has interests, such as Oman where feasibility studies have been underway for possible investments. However, like many other parts of the puzzle, their fate remains to be determined by the chemicals teams' portfolio review t a time when capital expenditure is expected to be down this year by more than 12% to $1.4bn.

BP Amoco may have "a bigger chemistry set to play with" but it must do so judiciously in the face of struggling markets. The chemicals industry is not quite at bottom of the cycle but is near it, said Sanderson. "It's very difficult indeed when starting a new company," he said, but adds that the "high tech parts of our business do deliver in difficult times". However, while the markets may be tough, he notes that BP Amoco's inherited tax position is favourable due to the UK, and its debt/debt plus equity ratio is about 23%, which is below the 30% that he said would be "comfortable".

While proceeding with a sound financial footing in the face of tough markets (Q4 '98 profits fell 65% to $125m) to review its future strategy and tactics, Sanderson's team already knows the key performance indicators they must meet in the coming years. While his immediate ambition is for a 7% return on average capital employed (ROACE), after tax, in the longer term the business if to deliver an average of 15% across the cycle, he said. As cycles drop off, he is aiming for the business to be fit enough to achieve at least 10% ROACE after tax at the bottom of the swing.

To help meet those numbers, the new group should be in a stronger position to grab opportunities as they come along, said Sanderson. "The 'old' BP was 'underweight' sometimes to be able to take advantage of opportunities as they came along," he said, and believes that would also have been the case for Amoco in comparison to the muscle backing the combined operation. "Now the new company should be able to take advantage of first class opportunities."

But the powerful new enterprise will not be able to sprint off unhindered from the starting blocks. While it is not bounded on any acquisition plans, BP Amoco is limited in the scale of any divestments it might consider by the US Securities Exchange Commission (SEC), the stock exchange regulator. The whole group is limited to divestment cap of about $1bn (Euro886m) in 1999, the first year of a two-year restriction. In an era of low oil prices, the chemicals division - should it seek to - would be competing against the group's upstream players for priority.

However, there is a twist; it seems that any divestment plans the original companies may have had on the cards might be the camels that sneak through the SEC needle. Given that the BP Amoco Chemicals strategy is not meant to be a simple weaving of the original companies plans, just how this possibility fits into strategic review now underway is yet another problem for the chemicals managers to grapple.

By: Patrick Reynolds
+44 208 652 3214

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