FocusLow US ethane boosts likelihood of Mexichem/OxyChem cracker

24 August 2012 21:11  [Source: ICIS news]

Low US ethane boosts likelihood of Mexichem/OxyChem crackerBy Al Greenwood

HOUSTON (ICIS)--If Mexichem and Occidental Chemical (OxyChem) go through with their proposed joint venture, their new ethane cracker in the US will likely be among the few projects to reach fruition, a consultant said.

The proposed cracker has access to low-cost ethane. In Mexichem, it has a ready market for ethylene-based intermediates, said Jorge Buhler-Vidal, director of Polyolefins Consulting.

However, another consultant, Raul Arias, said it was still too early to gauge the likelihood of the cracker's actual construction – especially given that Mexichem is trying to create another joint venture with Pemex.

"I think we have to wait a little bit and see how it develops," said Arias, senior consultant and manager for Latin America, energy and chemicals consulting, at Nexant.

Mexichem and OxyChem have signed a memorandum of understanding, under which they would evaluate forming a 50:50 joint venture for a 500,000 tonne/year cracker at OxyChem's complex in Ingleside, Texas.

Substantially all the ethylene would be used by OxyChem at Ingleside to produce around 1m tonnes/year of vinyl chloride monomer (VCM), to be sold to Mexichem under a long-term supply agreement.

The VCM produced by OxyChem at Ingleside would be shipped to Mexichem’s polyvinyl chloride (PVC) facilities in Mexico and Colombia.

OxyChem and Mexichem aim to make a final decision on the cracker in the second quarter of 2013 following the completion of a feasibility study and basic engineering. If they proceed, the cracker is expected to begin operations in 2016.

Several companies are considering plans to build crackers in the US to take advantage of the nation's feedstock advantage.

The advent of shale gas has increased US supplies of feedstock ethane. As a result, US producers have gained a cost advantage against much of the world, which relies on more expensive naphtha as a feedstock.

Although many companies are considering new crackers, not all of them will follow through and build the plants.

In June, Dow Chemical chief financial officer Bill Weideman said up to six crackers will likely come to fruition, including Dow's project in Freeport, Texas.

If Mexichem and OxyChem pursue the project, their cracker could be added to that list, Buhler-Vidal said. "Everything falls into place very easily."

The US has a lot of low-cost ethane, and OxyChem already has a complex where it can build a cracker and produce VCM, Buhler-Vidal said.

Moreover, with Mexichem, OxyChem has a ready customer for the VCM, he said.

The two companies have a relationship that dates back to at least 2008, when they signed a five-year VCM supply deal.

"You have a supplier and a buyer, and both of them agree you just build the plant wherever it makes the most sense," Buhler-Vidal said. "This looks like a good one."

If they proceed with the project, the cracker is expected to begin operations in 2016.

The proposed OxyChem joint venture is the second one that Mexichem is exploring as it attempts to secure feedstock VCM for its PVC plants.

In 2011, Mexichem and Pemex proposed creating a joint venture to increase the VCM capacity at the Pajaritos plant in Mexico to 400,000 tonnes/year by 2015. The current capacity is roughly 200,000 tonnes/year.

If both joint ventures go through, then Mexichem would have two different sources for the same feedstock.

"It's two products at the same time," Arias said. "I think we will have to wait and see what happens."

Nonetheless, the joint venture with OxyChem would help Mexichem overcome the challenge of securing low-cost ethylene, a feedstock for VCM, Arias said.

Like the US, Mexico has shale gas, and that could provide ethane at a low enough cost to produce ethylene at a competitive price.

However, a lack of resources and technology are the main obstacles in developing those shale-gas reserves in Mexico, Arias said. Plus, the country is focussed on crude-oil production.

State energy producer Pemex will ultimately develop its shale gas reserves, he said. However, it will unlikely happen anytime soon.

The Pemex and OxyChem joint venture comes as Mexico has struggled to increase VCM production.

More than 10 years ago, Pemex announced a $1bn (€800m) investment programme that included plans to increase VCM capacity at Pajaritos to 405,000 tonnes/year.

That initial Pajaritos project languished before being revived by the Pemex and Mexichem joint venture.

That project, too, is facing delays. The joint venture was initially scheduled to be formed by the first quarter of 2012. It still has not been created.

($1 = €0.80)

Additional reporting by Joseph Chang

By: Al Greenwood
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