Comperj petrochemical complex faces big hurdles in Brazil

Hanging in the balance

07 November 2008 00:00  [Source: ICB]

Brazil's $8bn Comperj petrochemical complex faces significant hurdles. Can it overcome the global financial crisis?

Jasmina Kelemen/Caracas

Most experts agree that the plan was a good one. Flush with cash and flowing with heavy oil, Brazil's oil and refining giant, Petrobras, would invest in a technologically advanced refinery that could process its hard-to-refine crude and spur local plastics industries with a worldscale petrochemical complex.

The kickoff to construction for the Rio de Janeiro Petrochemical Complex (Comperj) in late March was largely hailed as the oil company's grand return to the petrochemical sector.

At a cost of over $8bn (€6bn), the 150,000 bbl/day refinery was slated to start up in 2012, using naphtha as feedstock to produce petrochemicals and plastic resins.

A stable source of resins would promote a wave of plastic transformer development, creating thousands of jobs up and down the length of the petrochemical value chain.

But what a difference just a few months can make. The global financial crisis roiling capital markets isn't going away soon, forcing executives at Brazil's national oil company back to the drawing board.

"There are four other refinery projects in the pipeline," says Paula Kovarsky, vice president of equity research at Itau Securities in Brazil. "When fighting for capex [capital expenditures], Comperj may end up losing a bit of punch internally. To say the least, it's not going to happen in the original time frame."

The plastics pipeline

Comperj was initially conceived as a project to add value to Brazil's reserves of heavy Marlim crude oil. The nation's existing refineries were built to process easier-to-refine light crude oil, forcing Petrobras to sell Marlim at steep discounts in the international market.

The plant would have both first and second-generation petrochemical production units. Basic petrochemical units are expected to have the capacity to produce 1.3m tonnes/year of ethane, 880,000 tonnes/year of propane, 600,000 tonnes/year of benzene, 700,000 tonnes/year of paraxylene (PX) and 157,000 tonnes/year of butadiene (BD).

A set of second-generation units will have the capacity to produce 500,000 tonnes/year of styrene, 600,000 tonnes/year of glycol, 800,000 tonnes/year of polyethylene (PE), 850,000 tonnes/year of polypropylene (PP), 500,000 tonnes/year of purified terephthalic acid (PTA) and 600,000 tonnes/year of polyethylene terephthalate (PET).

The project would result in an estimated $2bn in savings in foreign cash reserves by reducing imports of oil-derived and petrochemical products, according to initial estimates by Petrobras.

Indeed, according to statistics from the national association of plastic industries, Abiplast, imports of plastic resins reached $1.2bn in the first eight months of 2008, up by 65% year on year.

In theory, local production would replace resin imports and contribute to the local economy by attracting plastics converters to produce consumer goods such as cups and bags, and components for the local auto industry.

"Similar facilities are being built in the Middle East and Asia," says Howard Rappaport, global business director for plastics at CMAI Global, a petrochemical consultancy. "They're looking at going from petchems to resins to finished goods and trying to capture all the economies of scale by having it all on one site."

Often, such comprehensive projects make sense, even as a growing number of world economies slip into recession because plastics have become so intertwined with modern life.

"We're putting some reductions on short-term demand [forecasts] on the products we cover," says Esteban Sagel, director of polyolefins at CMAI Global. "But we don't see the long-term demand for plastics decreasing on a global basis. For commodity plastics, we do see long-term growth because they're being used in applications such as food packaging, throwing out the trash - things that we do in everyday life that are independent of ups and downs."

A white elephant?

For the time being, experts agree that it is too early for processors to plan any investments linked to Comperj. In October, contradictory reports from Petrobras brought into question whether the company would even move forward with its ambitious chemical plan.

Citing Petrobras executives, local media reported that Comperj could be the first big project to feel the impact of the global financial crisis.

Sources close to the project said Petrobras was having difficulties getting partners to invest in such an expensive project. The original financial model for Comperj included Brazilian GDP growth of around 5% and very strong demand - a scenario that is now in doubt due to the falling price of commodities, on which the Brazilian economy is heavily dependent.

Kovarsky, who follows Petrobras for Itau Securities, is blunt in her assessment of the project's niche within the company's strategic plans. "This project is a white elephant," she says.

Beyond the global macro picture, even the original premise of Comperj as an outlet for Brazil's heavy oil has been greatly altered since Petrobras announced a potential treasure trove of light oil in the Tupi field.

Hailed as one of the greatest oil discoveries in the last 30 years, Tupi could contain anywhere from 5bn to 8bn bbl of oil, and would make the nation into one of the ­largest oil producers in the world.

"The country has such extreme potential that I don't think petrochemicals are the right way to spend money," says Kovarsky.

But just days after reports questioning the project's feasibility, Petrobras officials and even Brazilian President Luiz Inacio Lula da Silva publicly said Comperj would move forward.

"It's hard to imagine that the world will still be in turmoil in 2014," Paulo Roberto Costa, director of supply for Petrobras, told local media. "Per capita petrochemical consumption in Brazil is very low, less even than other Latin American countries. The room for growth is very large."

The refinery should begin operations by the start of 2012, with all of the petrochemical units online by the end of 2012, says Costa. The project should be fully operational by 2014.

Even if the project gets the green light, experts are uncertain whether this type of integrated petrochemical project will benefit the transformer sector.

SURPLUS transformerS

To begin with, Brazil already has a surplus of transformers and many of them are using imported resins - not because of a lack of local supply but because the weakening dollar against the local currency makes it cheaper to import product from abroad.

There are about 11,000 transformers in Brazil - roughly 5,000 in Sao Paulo state and just over 600 in Rio de Janeiro.

"Processors aren't doing very well," says Jorge Buhler-Vidal, director of US-based Polyolefins Consulting. "The problem they had even before this crisis is that resin prices are too high, particularly when ­compared with resin prices in other parts of the world."

Brazil depends on mostly imported naphtha to feed petrochemical production, whereas Middle Eastern producers enjoy a fixed gas price. While locally refinedfeedstock could reduce the prices of resins, it is still not as economical as natural gas-fed production.

Nonetheless, CMAI points out that even if resins from the Middle East are produced more cost-effectively, they would be subjected to tariffs and oceangoing costs, raising the price for local transformers.

"If you're a downstream transformer, it's probably advantageous to be linked into an integrated complex, so that adds a degree of comfort in investing in uncertain economic times," says Rappaport.

Even so, Buhler-Vidal points out that transformers would be wise not to set up shop depending on a single supply stream.

"If you're near the [resin] supplier, that's great. But, anyway, you probably want to have another supplier and not just depend on one supplier and be at their mercy. For the processors, it's just too soon to decide."

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By: Jasmina Kelemen
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