02 September 2009 13:39 [Source: ICB]
Gareth JJ Burgess
Mexico is resurrecting plans to build a chemical complex. And Brazilian company Braskem might just help the project, originally named Phoenix, rise from the ashes
PLANS TO build a major petrochemical complex in Mexico have been given a new impetus, thanks to the emergence of Brazilian polymers giant Braskem as a potential partner in the project.
Mexico drastically needs new petrochemical production capacity, but attempts to build a large-scale project have failed because of difficulties in securing competitively priced feedstock from state-owned PEMEX. Subsidiary PEMEX Petroquimica abandoned plans to implement its proposed Phoenix project in 2007, despite securing Canada-based NOVA Chemicals as an investor, after the venture failed to agree on the ethane pricing mechanism with PEMEX and the government.
The latest project has a new name and a new concept. Ethylene XXI will be implemented by the private sector, with no investment by PEMEX Petroquimica. This time, PEMEX will only supply the ethane feedstock, and its gas division, PEMEX Gas, has invited interested parties to bid for a supply contract.
Mexico's three main chemical producers, Mexichem, IDESA and Alpek, revealed last year that they were forming a consortium to bid for the ethane supply contract and build a joint-venture (JV) production complex. Now, Braskem has joined the consortium, says Enrique Ortega, director of investor relations at Mexichem.
The four companies - Mexichem, IDESA, Alpek and Braskem - intend to build an ethylene plant and downstream units in Coatzacoalcos, Veracruz, if they can secure the ethane feedstock from PEMEX at the right price, he says.
Braskem has declined to comment on its involvement in the project. The company, which is approximately 25%-owned by Brazilian state-owned energy group Petrobras, is already expanding outside Brazil by implementing polyolefins projects in Venezuela. It is also considering investments in Peru and Bolivia, and CEO Bernardo Gradin has revealed plans to establish a resins production platform in the US.
Braskem would be able to contribute its technological expertise and experience in operating ethylene and polyolefins plants to the Mexican consortium, says Raul Arias, a consultant with US-based Nexant. None of the Mexican partners has any ethylene production, and only Alpek has any polyolefins experience - via its Indelpro polypropylene (PP) JV with Netherlands-based chemical group LyondellBasell Industries.
"For Braskem, it would mean placing a foot on a strategic location, close to the biggest market of the Western hemisphere. It would allow the company to continue its expansion outside of Brazil," says Arias.
Combining Braskem with the three Mexican companies would create a "win-win alliance," he continues. "In my opinion, it is one of the best offtakers that PEMEX may be able to find under the current circumstances. It is a consortium that brings strong regional commercial - and some global - experience, as well as a strong commitment tothe country."
The consortium will also benefit from the vast petrochemical experience of Braskem shareholder Petrobras, notes Ortega. Petrobras has successfully driven a major restructuring of Brazil's chemical industry, and owns stakes in the country's main petrochemical producers.
Not having PEMEX as a shareholder should also contribute to the success of the project, commentators suggest. Investors' reluctance to partner with PEMEX in the project has been cited as another factor in the failure of the previous Phoenix project and its various incarnations.
Companies were concerned that having PEMEX as a partner would diminish the control they would have over the project, explains Arias: "It's a lot of money, and companies want to make sure they have control over their business."
Ethylene XXI will center on an ethylene plant with a capacity of approximately 1m tonnes/year and requiring a $1bn (€703m) investment, says Ortega. Downstream production would include polyethylene (PE) and PP units, and some of the ethylene output would also supply an existing vinyl chloride monomer (VCM) plant, which is owned by PEMEX Petroquimica, and which supplies Mexichem's polyvinyl chloride (PVC) production. The VCM plant, located at PEMEX Petroquimica's Pajaritos complex, in Coatzacoalcos, will be debottlenecked over the next three years, says Ortega.
Mexichem is interested in the Ethylene XXI project because the additional ethylene feedstock will help the company drive down costs throughout its PVC production chain, he explains.
"Companies want to make sure they have control"
Raul Arias, consultant, Nexant
IDESA and Braskem are interested in the PE part of the project, according to Ortega, while Alpek is interested in PP, and possibly also PE.
IDESA, which has been involved in the various incarnationsof the Phoenix project, as well as Ethylene XXI, needs this project to succeed to secure its future growth,says Arias.
Alpek, which is the petrochemicals arm of industrial group Alfa, expanded its Indelpro PP JV last year with the start-up of a new plant in Altamira. It also manufactures expandable polystyrene (EPS), purified terephthalic acid (PTA) and polyethylene terephthalate (PET).
The consortium expects to submit a bid for the ethane supply contract to PEMEX at the end of September and, if successful, the complex could start up in 2013 or 2014, Ortega says. "It could take three and a half years once a decision is made."
The deadline for the submission of bids has been pushed back several times, mainly as a result of the global economic downturn. The current deadline is understood to be the fourth quarter of this year.
For the project to succeed, Mexico needs to sell the petrochemical feedstocks at a price which allows the investors to be competitive. Therefore, the country needs to find ways to compensate for lower oil and gas revenues, says Arias.
The problem is that Mexico depends heavily on revenues from its oil and gas production. Oil and gas revenues represented about 32% of Mexico's federal budget in 2007 and in 2008 the share rose to 44%, lifted by higher oil prices, Arias says.
Industry and government bodies recognize that Mexico needs to build new chemical capacity and that this will bring socioeconomic benefits, he says. The country is a net importer of many petrochemical products, including polyolefins, and the situation will only get worse unless new capacity is built.
Last year, Mexico's national chemical association ANIQ said Mexico would require investment of some $34bn over the next 15 years to reactivate the country's petrochemical and chemical sector. Jose Luis Zepeda, ANIQ's president, warned that petrochemical and chemical imports could widen to $25bn in the period if problems in the sector are not tackled.
There has been practically no investment in petrochemicals in Mexico in the past few years. If the Ethylene XXI project does not proceed, "next time PEMEX or the government proposes anything, they might not find anyone interested in taking it seriously," cautions Arias.
Output from the Cantarell offshore oil field, Mexico's most important reserve, has been declining in recent years, which means there is also a risk that a time will come when PEMEX cannot guarantee a long-term supply of petrochemical feedstocks to potential investors, he says: "If the project does not go ahead, Mexico might lose its window of opportunity."
Failure of Ethylene XXI could also force Mexico's petrochemical producers to pursue opportunities abroad. According to reports, Mexichem, IDESA and Alfa have studied options in Peru.
Public opposition to opening up Mexico's energy and related sectors to private investment could prove to be a further obstacle to the development of the country's chemical sector. Construction of a privately-owned petrochemical plant in Mexico is politically sensitive, according to Arias.
"Oil is a very critical topic in Mexico," the consultant says. "It is regarded as a national treasure." This means that making any changes regarding feedstocks requires huge political will. Decisions on feedstocks involve not just PEMEX but also the Treasury and Energy Ministry, explains Arias.
"Things are very complicated in Mexico. It takes a lot of political negotiation to change anything," he says.
PEMEX Petroquimica has production complexes in Cangrejera, Cosoleacaque, Escolin, Morelos, Coatzacoalcos (Pajaritos), San Martin Texmelucan and Tula, in addition to a plant in Camargo.
Although PEMEX is not planning any major petrochemical investments, it is implementing a new refinery project located in Tula, Hidalgo state.
This project demonstrates that PEMEX intends to start investing again, and is a positive sign, in terms of the development of Mexico's petrochemical industry, suggests Arias.
"The project has no direct impact on petrochemicals, but it's the first relatively big investment by PEMEX in areas other than exploration and production," says the consultant.
Felipe Calderon, Mexico's president, has signaled his support for developing the countries petrochemical sector, so the political will is there. The solution will involve the country cutting its dependence on oil and gas revenues. "Mexico has to develop more industry to be less dependent on oil," states Arias.
Mexico also needs to reduce its dependence on the US, which is the destination for some 80% of Mexico's exports, he says. A large proportion is destined for the electronics, appliances and automotive markets, which have suffered during the global economic downturn.
"PEMEX will need to balance a loss of revenues against the socioeconomic benefits," concludes Arias. "Hopefully, the right entities will be able to see the big picture, and be willing to risk the sociopolitical implications that pricing feedstocks right may bring. There has to be the political will and the vision to see beyond the lost revenues."
PROJECTS IN VENEZUELA AND PERU SUFFER DELAYS
Brazilian state-owned energy group Braskem is moving ahead quickly with plans to move outside Brazil, into Latin America and beyond. But its first foreign investments - in Venezuela, and a proposed project in Peru - are suffering further delays, it emerged last month.
In Venezuela, the company is planning two joint-venture (JV) complexes, for polypropylene (PP) and polyethylene (PE), with Venezuela's state-owned petrochemical company Pequiven. Under the new schedule, the PP JV, named Propilsur, would come on stream in 2013, instead of late 2012 as previously expected. The Polimerica PE JV would start up in 2014, instead of late 2013.
Braskem said the new schedule should enable it to secure better prices for equipment for the plants. The delay would also push back initial operations until the next upward cycle of the petrochemical industry, expected by analysts to begin during the middle of the next decade.
A new Venezuelan law - requiring the country's chemical producers to become minority partners in JVs with the state - also contributed to the project delays. Braskem CEO Bernardo Gradin said the new law could make it more difficult for the company to finance projects in Venezuela because "financial institutions dislike the insecurity arising from changes in scenario."
Braskem also warned that it could push back its proposed ethylene and PE project in Peru by one to two years, because of delays in the availability of feedstock. The company is studying the project, based on natural gas feedstock from Peru's Camisea gas fields, in partnership with Brazilian state-owned energy group Petrobras and Peru's state-owned Petroperu. This project is now expected to be completed in 2016 at the earliest.
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