Repositioning time

26 February 2001 00:00  [Source: ICB]

After a hectic year of restructuring, BP's chemicals chief executive Byron Grote talks about future plans and priorities for the division in 2001 and beyond. John Baker reports

With BP storming to record earnings of over $14.2bn last year, before special items, chemicals chief executive Byron Grote is presumably not short of a bob or two to spend. But the newly installed successor to Bryan Sanderson has indicated this year will see a pause in acquisitional activity, as BP settles in all the purchases made in 2000, and sees off several not inconsequential disposals.

Grote refers to this as a 'repositioning' of the chemicals business, a process he believes will give better returns on capital in the future. In 2000, not an easy year for petrochemicals, chemicals returned an operating profit of $1.04bn on sales of $11.25bn (up from $9.39bn in 1999), achieving a return on capital employed (ROCE) of 8.5%. BP took $276m in special charges on chemicals in the year, the bulk relating to the write down of assets at PT Peni, its Indonesian PE joint venture.

'By 2002 we will be the company we want', he says, adding that the key priority at present is to 'weave the acquisition people into the organisation'. In the meantime, it will eschew the many opportunities on the market for M&A activity. Says Grote: 'We are not looking at absorbing anything else at the moment - we have to be careful not to lose the plot.'

Amoco integration

The last 12 months or so have been busy ones for BP's chemicals operations, following in the wake of the major expansion through the integration of Amoco's chemicals businesses in the previous year. It has dissolved its polypropylene joint venture with Atofina and signed a deal with Solvay to buy its PP business and joint venture their EU and US hdPE activities. It has decided to buy out Bayer's 50% stake in their Erdölchemie petrochemicals jv in Germany, with completion expected in April this year. This move alone will add 4.2m tonne/year of petrochemicals production to BP, and a turnover of some DM2.5bn ($1.17bn).

On the disposals side, it is selling its high performance thermoplastics business to Solvay, and is in the process of finding buyers for the chemicals activities of Burmah Castrol, which BP bought last year, and for its own plastics fabrications businesses, which make polyolefin fibres and sheet products, deemed to be too far from BP's core petrochemicals competencies. Both the latter businesses boast sales of $1bn each, so are by no means minor, nor are the disposals simple, as both are being split into parts for sale to various buyers.

Going forward, says Grote, BP's chemicals activities will be based around three main pillars: aromatics, intermediates, and olefins & polymers. Strategy is tailored to each division.

In aromatics, notably PX and PTA, the aim is to extend BP's leading global position through new capacity build and increased technology leadership. BP already boasts a 35% market share in PTA, including its jvs (25% market share directly), and has new PTA technology on the blocks which it claims substantially reduces the capital cost of new capacity. It is, for instance, debottlenecking PTA capacity at Cooper River in the US, Geel in Belgium and at Kuantan in Malaysia. In addition it has new build plans in China and Taiwan and is actively considering new plants in the EU and US, as well as a second in China.

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BP anticipates the PTA market will grow by some 8-10%/year over the next five years, and says it will match this rapid growth in demand with 'an aggressive investment programme.' It may also, hints Grote, look at some growth through acquisition in the future. There are certainly opportunities: ICI is looking to offload its Pakistan PTA unit, and Dow is said to be seeking an solution to its understrength PTA/PET position, acquired from EniChem some years ago. However, BP is adamant that it does not want to get into the PET business, preferring to feed the polyester chain with PX and PTA.

Intermediates

In intermediates, where it claims a distinctive portfolio with lead technologies, the goal is to invest in growth markets and manage the portfolio actively and continuously. Typical product areas here are the acetyls and nitriles chains and alpha-olefins. Recent investments currently under construction include linear alpha-olefins capacity in Alberta, Canada, ethanol in Grangemouth, UK, ethyl acetate and vinyl acetate monomer at Hull, UK, and acetic acid in Kerteh, Malaysia. Further down the road are a trimellitic anhydride plant in Kuantan, Malaysia and an esters unit in Chongqing, China.

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In olefins & polymers, which it is repositioning into the global top tier, it proposes to extend market reach, shift the product portfolio to higher growth products and move to next generation technology. Grote says BP realised it needed critical mass in this area, and has moved to strengthen its hand in the area through the Atofina, Solvay and Erdölchemie deals. It is also building new PE and PP capacity at Grangemouth and expanding the cracker there and at Erdölchemie.

It now ranks a 'solid' No 2 in PP globally, and No 2 in PE, while at No 3 in PE overall. Grote admits that BP is still light on the olefins side, where it ranks only fifth globally (see diagram). But, he says, there are no immediate plans to expand this with new cracker capacity or acquisitions. 'We are comfortable with the situation at this time'. BP points to its access to advantaged feedstocks and cost leadership through integration and balance, with the polymers portfolio 'matched to market needs'.

In addition to PE, BP has a strong regional position in Europe with polystyrene, backed by integration into styrene. But it does not see it as necessary to expand this position into a global one, although it may well include PS in its proposed Chinese joint venture complex with Shanghai Petrochemical.

Growth

With the current organic growth and as a result of the recent announcements, BP is expecting its chemicals business to grow by 20% this year in volume terms, and to add a further 20% of output by 2003 (see diagram). Production volume was 22.1m tonne in 2000, only slightly ahead of 1999's 21.9m tonne, depressed in part by production difficulties in Grangemouth.

This year, organic volume growth will be 2m tonne/year alone. To achieve this, capital expenditure will reach $4bn over the period 2001-03, not including any M&A deals. This time period does not include BP's planned ethylene and derivatives complex in Caojing, China, due onstream in 2005, for which a feasibility study is close to completion, based around a 900 000 tonne/year cracker. In 2000, BP spent $1.59bn on capital expenditure and acquisitions.

At the same time as growing capacity, BP has been driving down its cost of operations. Grote claims that over the period 1998-2000, BP has reduced its cash cost/tonne of production by 16%, due in part to synergies thrown up by the Amoco integration. Now, BP is looking to drive costs down by a further 8%/year to 2003, with half coming from portfolio shifts and half from underlying cost actions. This year, for instance, focus will be on the introduction of advanced plant controls, efficiency and better procurement, leveraging the increased scale of the new operations.

In addition, Grote points to three technologies - PTA, Innovene gas-phase PE technology with metallocenes, and the Cativa acetic acid technology - which will enable 'a generation of new facilities operating at 20-30% less costs than previous generation plants'. Grote comments that the new metallocene technology, acquired from Dow Chemical as part of FTC provisions for its merger with Union Carbide, could well be used commercially in the Erdölchemie and Grangemouth PE units in the near future. It has already been trialled at BP's jv PE plant in Indonesia, operated as PT Peni, and at Chevron Phillips Chemical, which has a licence for the Innovene/Insite gas-phase technology package.

'Our priorities for 2001, 'says Grote, 'include 'implementing the repositioning and getting our new capacity onstream, while managing costs in a tough business environment.' On the question of how 2001 will progress, he says it is difficult to say. 'If hydrocarbon prices stay high and the US economy declines, it will be bad for business; if hydrocarbons come back to normal and the economy turns around, then we might find 2001 brighter than 2000 even.' We are, he says, at an inflection point, and need to deal with the downturn and at the same time reap the benefits of any upturn. An upturn is expected, however, in 2003, after a period of market weakness caused by new capacity coming onstream globally.

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