Too ambitious, too soon?

28 March 2005 00:01  [Source: ACN]

Iran is forging ahead with its ambitious petrochemical plans, but consistent delays have raised doubts on how quickly the plans will be achieved. Malini Hariharan, Clara Tan, and Florence Tan look at the main issues affecting projects

THE two countries most capable of upsetting all calculations on the progress of the petrochemicals cycle are China and Iran.

China’s influence is largely on the demand side, although the start-up of three new joint-venture crackers this year cannot be ignored. But a close watch is being kept on demand, with hopes running high that China’s requirement will continue to show robust growth.

In the case of Iran, its influence is on the supply side of the equation, which is not surprising when one considers that National Petrochemical Co (NPC) has planned for nine crackers with a total ethylene capacity of close to 10m tonne/year for completion by 2010.

The plan is ambitious by any standards, and more so for Iran given the many hurdles that it faces in attracting foreign investment and its track record in completing projects.

Take the case of NPC’s No 6 Olefins project, which is being implemented by Amir Kabir Petrochemical. The project was first mooted in the late 1990s, with the initial plan being to commission a 520 000 tonne/year cracker in 2001 (see below). Contractors were appointed in 1998, but the project has faced several delays since then, with the latest target date being end-March 2005.

Efforts were underway in mid-March to get the cracker started, with company officials working with Linde to resolve some technical issues that had prevented a start-up in December 2004.

NPC’s planning and development director, MH Peyvandi, says the cracker is almost ready to start, ‘but we need to modify some equipment; it is still possible for the cracker to start up this month’.

An industry analyst comments: ‘It is a matter of face to get this cracker going.’ The No 6 project is the first new-generation cracker in Iran based on foreign engineering and licensing expertise.

It will be a big achievement for NPC when the Amir Kabir cracker starts operations. An Amir Kabir source says the project is a landmark in the history of Iranian cracker construction as it is the first one to use a locally produced exchange tower, vessels, reactors, tanks, and furnaces.

While NPC has reasons to be proud about the contribution of local companies to the projects, the same companies are also held partly responsible for the delays to many of NPC’s projects.

A source close to Arya Sasol, a joint venture between NPC and Sasol, says a delay in the completion of the company’s low-density polyethylene project is because of a problem with an Iranian sub-contractor, which had to be replaced. And Arya Sasol’s medium-density PE/high-density PE project faced a different problem – a two-month delay in the opening of a letter of credit at the start of the project.

Arya Sasol is now negotiating with its contractors to set a start-up date for the two projects (ACN 21 February 2005).

It is mandatory for foreign contractors to collaborate with local contractors often for construction work or for sourcing equipment, as the policy is to have 51% local content in all projects. The policy is aimed at boosting the industrial development of Iran and solving the country’s huge unemployment problem.

Involving foreign and local contractors in engineering, procurement, and construction will help save time and improve project management, says Peyvandi.

But foreign contractors see things differently. ‘This [policy] has made it difficult for us. For instance, even though we may not be doing construction work, we still have to take responsibility for it,’ says a source from an Asian engineering company.

A second contractor points out that the delays usually take place during the construction phase, as local companies need more time to complete the work. He cites the example of the South Pars offshore gas project that has been delayed for two years, which he says is mainly because of slow work by local companies.

According to him, some of the Iranian engineering companies do not care much about the schedule once they are awarded the project. Project-management skills, he believes, are lacking, with some local companies not being too systematic in implementing a project.

Government officials regularly visit project sites, but they are more interested in knowing whether local companies are involved; they are not too bothered about the project schedule, he says.

‘NPC has so many projects on hand, probably the highest for any company in the world, but Iran has only has a few engineering companies that are capable of working on mega petrochemical projects.’

He cites another problem – the time taken to receive approval at various stages of the project. ‘Usually, a client comes back to us in one or two weeks after we submit documents. But in Iran, it can take even a month; they need much more time to review documents.’

Cost is also an issue. Engineering talent is available but it is more expensive than in India or other parts of South Asia, for example. An industry source from Southeast Asia says the cost of construction in Iran is almost the same as in Japan and double that in Thailand. He also points out that project sites are often in very remote areas, making it expensive to transport equipment and mobilise labour.

Contracts usually carry a penalty clause for late delivery, and to avoid a hefty fee for the delay foreign contractors usually propose a longer project schedule.

‘A fertiliser project in Southeast Asia can usually be completed in 33 months. But in the case of Iran, the schedule is 36 months or more,’ says the first Asian contractor.

He believes that local companies do not yet have the experience to handle large petrochemical projects. ‘It is all right to involve them for small jobs, but foreign participation should be greater for the big cracker projects,’ he adds.

And while he admits that NPC is sometimes considerate when the 51% local content clause is not met, the rule is still a problem faced by most foreign contractors.

A source at an Iranian engineering firm concedes that there are problems. ‘Yes, projects take more time as we do not have enough skilled and experienced manpower. But we have started hiring overseas engineers.’

With so many projects being implemented simultaneously, material and equipment availability is sometimes a problem. Peyvandi acknowledges this: ‘We have so many projects competing for resources, such as manpower and equipment, from NPC and from local contractors. Yes, we might need to wait longer for local contractors to finish their work, but we need to help them.’

He also points out that NPC is helping local companies by providing free training courses such as for welding.

‘Local knowledge is improving. For instance, cracker furnaces are now being pre-fabricated in Bandar Imam jointly between a local and a German company. These are being used for the Olefins No 7 and Olefins No 9 projects,’ he says.

The Amir Kabir source believes Iranians have to learn to be independent and every project is a learning experience. He points out that Linde, the technology licensor for the cracker, had set high standards during inspection and led Iranian contractors, for example, in the construction of a 650-tonne tower. The tower was dismantled into seven pieces for easier transportation and Linde led the local contractor in putting it together.

Jam Petrochemical, which is implementing NPC’s Olefins No 10 project, also underwent a similar experience for the C2 and C3 splitter tower. A Jam source claims that the tower, which measures 92m in height and 6m in diameter and weighs 850 tonne, is the tallest in the world. It took 15 days to ship the tower from South Korea, where it was made, to Iran and special equipment had to be used to move the tower to the project site. ‘It was an exceptional experience,’ says the source. Jam Petrochemical aims to start commercial production at its 1.3m tonne/year cracker in July 2006.

So will the picture change soon? As Iranian companies slowly gain experience, it is likely that projects will not face the same delays. The first contractor agrees that the situation is slowly changing.

But not everyone is convinced. Project-management skills will need to improve drastically, they say, to avoid situations where plants are ready but the utilities are still not in place. And more important, as local resources are unlikely to be enough to meet the needs of so many projects, the country has to open the door to foreign competition.

The policy of promoting local industry is not one that is followed only by Iran. Many countries around the world have at one time or the other framed rules or taken steps to support local players.

‘It is good to think about what will benefit Iran. Certainly, employing local contractors and using locally made products is beneficial, but if a project is not completed in time, production gets delayed and Iran loses more money,’ states the first contractor.

Given this picture, many industry players are increasingly discounting the influence that Iran will have on shaping the demand-and-supply balance in the medium term.

‘Iran has been very disappointing. I am not as optimistic about the country as I was two years ago. There have been too many delays,’ says an industry observer.

And this is also one of the reasons cracker operators are more optimistic that the upcycle will run longer.

Returning to NPC, it clearly faces plenty of challenges in realising its dream of producing 12m tonne/year of ethylene, 10m tonne/year of polymers, 5m tonne/year of monoethylene glycol, and 4m tonne/year of aromatics by 2010.

Foreign participation would definitely help NPC in realising its targets, but recent developments have once again placed doubts in the minds of foreign investors about risking their money in Iran, not only for petrochemicals but also for oil and gas.

The US and Iran have in the past few months exchanged harsh words on the latter’s nuclear programme. While Iran has been insisting that its nuclear activities are peaceful, the US believes it is secretly developing nuclear weapons.

The US has also been putting pressure on other countries to stop investing in Iran. During a trip to India earlier this month, US Secretary of State Condoleezza Rice indicated that the US had ‘reservations’ about India buying gas from Iran and about a proposed gas pipeline from Iran to India through Pakistan.

India, which needs to import more than two-thirds of its energy requirement, has not only been pushing for a pipeline in Iran, but Indian companies are also studying joint ventures with NPC for petrochemicals.

State-owned refining major Indian Oil Corp is doing a joint feasibility study with NPC on the Olefins No 12 project while Gail (India), also a state-owned company, is separately studying another cracker investment. Reliance Industries, India’s largest petrochemical producer, had signed an MoU last year with NPC for a likely cracker investment.

‘But investing in Iran has become dicey. After the recent statements by the US government, we do not know how the Indian government will react and whether they will change their stand vis-à-vis Iran,’ says one Indian petrochemicals industry source.

And it is not just the US that investors need to be concerned about. In last year’s elections, the reformists lost their majority to conservatives, forcing some investors to take a cautious stance.

The political risks associated with Iran are not new, but the worry is that they are showing no signs of easing. Add the project delays and competition from other relatively more politically stable Middle East countries for investment dollars, and reservations are being increasingly expressed on whether Iran will be able to realise its ambitious petrochemical plans in the planned period.

But Iran is probably looking at the bigger picture. Yes, there will be delays but eventually the objective of rebuilding the country battered by years of war will be achieved.

Olefins No 6 – the long road to completion

1998 – National Petrochemical Co (NPC) draws up plan for its Olefins No 6 project at the Petrochemical Special Economic Zone in Bandar Imam. It includes a 520 000 tonne/year cracker, 140 000 tonne/year of high-density polyethylene (hdPE), 208 000 tonne/year of linear-low density PE (lldPE), and 160 000 tonne/year of polypropylene (PP).

Linde is appointed as subcontractor to Energy Industries Engineering & Design for the design and supply of the cracker.

1999 – NPC establishes Amir Kabir Petrochemical to operate the No 6 Olefins complex.

Technip wins contract for detailed engineering and supply of a 208 000 tonne/year hdPE/linear-low density polyethylene (lldPE) plant.

September 2000 – NPC sells planned PP unit to Iranian private company, Navid Zar Chimie. The unit, which is under construction and is due onstream in 2002, is being financed by Italian banks and the contractor is Tecnimont.

October 2000 – Technip says that its contract for the PE plant has entered force. The contract was awarded in 1999, but it was not enforced because of a change in the size of the project. NPC has decided to increase the project’s capacity from 208 000 tonne/year to 300 000 tonne/year. Iran’s Enerchimi will be responsible for project management, detailed engineering, and supply of local equipment and materials. The plant, which will use BP’s Innovene technology, is due onstream in about three years. The project will be financed mainly through French export credit.

November 2000 – Amir Kabir launches its first share offer of Rial5bn to fund the US$387.4m Olefins No 6 project. The share offer is the first of three to fund 49% of the project cost. NPC will fund the rest.

August 2001 – NPC pushes back the start-up of Olefins No 6 because of a delay in the completion of a central utilities centre in Bandar Imam. Originally scheduled for completion by end-2001, the utilities centre is expected to start operation in early 2002.

The cracker is expected to start in September-November 2002 while the hdPE plant is expected to start commercial production in February 2002. Mechanical work on a 300 000 tonne/year hdPE/lldPE plant is planned for completion by August 2003.

An ldPE project is due to be mechanically completed in October 2004, and targeted to start up in April 2005. Tecnimont has started basic engineering for this project.

Fajr Petrochemical, which will supply utilities to Amir Kabir, says its first central utilities centre will be completed in early December while the second centre will be completed in early 2004. Fajr will bring onstream up to 50% of the capacity of its water-treatment and effluent plants in early December. The remaining capacity will start in April 2002 when demand is greater.

October 2001 – Amir Kabir pushes back the start-up of its cracker to end-2002 or early 2003. Company sources say the delay is due to problems faced by local contractors with the Iranian customs authority while clearing equipment. But according to the company, the hdPE project is on track for start-up in February 2002. Detailed engineering is underway for its hdPE/lldPE project, which is expected to start up in 2003. Its ldPE project is due to start in 2005.

November 2001 – NPC says the Amir Kabir ethylene complex is 70% built. Mechanical completion of the hdPE unit is scheduled for end-November and the cracker is likely to be completed by September 2002.

January 2002 – Amir Kabir starts pre-commissioning work at its hdPE plant and expects to bring the facility onstream in March 2002. Bandar Imam Petrochemical will supply ethylene to the hdPE unit until Amir Kabir’s cracker starts operations.

March 2002 – Amir Kabir is likely to push back the start-up of its hdPE plant from March to end-April as the company needs more time to resolve problems encountered during pre-commissioning.

Furthermore, Amir Kabir is waiting to receive nitrogen and cooling water from Fajr. Fajr has promised to deliver the utilities at end-April.

May 2002 – The start-up of Amir Kabir’s hdPE project looks unclear owing to delays in securing utilities. According to a company source, Amir Kabir is waiting to receive electricity, nitrogen, and instrumental air from Fajr. The remaining utilities, such as water and hydrogen, will be sourced from the nearby Bandar Imam Petrochemical until Fajr is ready to supply them. ?An NPC source was unable to provide an exact schedule for commissioning of the project because a lot of piping work is required for transportation of utilities.

July 2002 – Amir Kabir is expected to select a turnkey contractor for its ldPE project in October. The project is scheduled for start-up in 2005. Amir Kabir’s hdPE plant could start in August-September.

August 2002 – Amir Kabir is in the final stages of starting production at its hdPE plant. A company source says start-up is ‘imminent’ and on-spec production is expected by September.

September 2002 – Fajr completes 92% of the construction of its utility complex. It has mechanically completed the entire offsite underground utility piping network, while the gas-separation unit is in an advanced stage of mechanical completion.

November 2002 – Trial runs at Amir Kabir’s hdPE plant are expected to start in December. The commissioning of the plant is now slated for Q1 2003

January 2003 – The Amir Kabir cracker is expected to start up in late 2003 while the hdPE plant is due to start in February.

February 2004 – Amir Kabir pushes back the start of commercial production at its hdPE/lldPE plant by a year to September 2004.

The company is in talks with Basell on its ldPE project. The talks began in 2000. Technimont has completed basic engineering work on the project, which would use Basell’s technology. The cracker is scheduled to start in April 2005 but this timeframe looks unlikely.

July 2004 – The start-up of the No 6 cracker is delayed to the fourth quarter from mid-2004 as a result of extended testing. The hdPE/lldPE plant is likely to be commissioned in Q4 2004 or early 2005.

September 2004 – Amir Kabir will soon select a turnkey contractor for its ldPE project. The start-up of the project would depend on how soon funding can be obtained.

December 2004 – SembCorp Simon Carves, Daelim Industrial, and Namvaran Consulting Engineers are awarded the design-and-construct contract for Amir Kabir’s ldPE plant. The project is scheduled for completion in 2007.

Amir Kabir is in the final stage of commissioning its No 6 Olefins project and it will start the cracker soon.

The company aims to start up the plant by end-2004 and hopes to achieve 100% operating rate by end-January or early February 2005. According to a company source, the hdPE/lldPE project is now in the pre-commissioning stage and the plant will come onstream in March 2005.

February 2005 – Amir Kabir once again delays the start-up of its cracker to end-March from end-2004 owing to feeding problems. The company is in discussions with Linde, the technology licensor, on design and equipment issues.

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