APLA: US exports to head south?

09 November 2012 11:35  [Source: ICB]

After a sluggish year in 2012, growth is expected to recover in major Latin American countries in 2013, bringing the spectre of increased petrochemical imports from the US.

During the past year, some of Latin America's largest economies have struggled with slowing growth, dragging down demand for petrochemicals. While economic growth should improve in 2013, the subsequent increase in demand could be met by imports from the US, which is already enjoying a cost advantage from low-priced feedstock derived from shale gas. Those imports could expand as US producers increase capacity to take advantage of their cost position.


Peru's economy is growing, with several chemical projects on the horizon

Copyright: RexFeatures

"This is a structural change in the Americas," explains Robert Bauman, president of US-based consultancy Polymer Consulting International. "It is not something that is going away."

The advent of shale gas, which has already given US producers a cost advantage for energy, will also provide an advantage for feedstock. The result has been a flood of new cracker projects in the US, which will rely on low-cost ethane as a feedstock.

Several companies have plans in various stages of development. ChevronPhillips Chemical, Dow Chemical and Formosa Plastics, for example, have already identified sites for their new crackers, which could increase ethylene capacity by a total of 3.8m tonnes/year in the US. Downstream projects will soon follow the crackers, and Latin America will be the most likely market for those derivatives.

For future Latin American projects, their feasibility will depend on whether the plants can secure enough ethane at US Gulf prices, Bauman said. Any proposed naphtha-based projects dependent on exports will be unlikely to go ahead, he added.

"Shale gas is going to be killing some of the projects that were solely export projects," says Jorge Buehler-Vidal, director of Polyolefins Consulting. Bauman adds, "It's pretty simple economics. You have to be able to export and defend your home market against imports."

Those products from the US could find a ready market in Latin America - if the region overcomes its slump of the first half of 2012 and grows as expected in 2013.

Brazil's economy began to slow last year and economists now expect that it will grow by less than 1.6% this year, according to a market report from the Brazilian central bank. That compares with growth of 7.5% in 2010, according to the International Monetary Fund (IMF).

The government has responded to the slowdown by lowering interest rates from 12.50% in July 2011 to a record low of 7.25%. In addition, Brazil will lower electricity taxes by up to 28% for industrial users. And a logistics programme worth reais (R) 133bn ($65bn) should boost the economy and improve the country's highways and railroads.

These infrastructure projects − as well as the nation's growing middle class − should jolt the economy, Buehler-Vidal notes.

Altogether, the IMF expects Brazil's economy to grow by 4% in 2013.

For Brazil's petrochemical industry, the bigger challenge is not demand recovery, Bauman says. It is feedstock. He estimates that 75-80% of Brazil's petrochemical industry is based on naphtha, giving its producers a disadvantage against those in the US, who have access to low-cost natural-gas-based feedstocks.

In fact, polyethylene (PE) imports have made up 25-30% of the country's demand, Bauman notes. The increase in PE imports could threaten the Brazilian industry by lowering domestic demand for ethylene. In response, Brazilian crackers would reduce operating rates, which would lower production of ethylene as well as other naphtha-based derivatives, such as propylene and crude C4.

That would tighten feedstock supplies for downstream consumers of those derivatives.

The Brazilian government has reacted by raising PE import tariffs to 20% from 14%. Ethylene glycol (EG) tariffs rose to 20% from 2%. "It is a strategic industry and I think that it is a fair thing for them to do," Bauman says.

"Brazil is putting strong emphasis on the internal market, as the removal of fiscal incentives to imports and the increase of some import tariffs show," says Raul Arias, senior consultant and manager for Latin America, energy and chemicals consulting, at Nexant.

In the short term, this should provide a boost to Brazil's petrochemical industry, offsetting some of the effects of slower global growth, Arias says. "The medium-term impact will depend on internal and external factors, such as the further development of internal consumption and of the local cost structure; reactions by Brazil's trade partners; and the global economic scenario," Arias adds.

Ultimately, Brazil could rely on lighter feeds for its planned Complexo Petroquimico do Rio de Janeiro (Comperj) project, being developed by Petrobras. The petrochemical portion of the complex will likely rely on associated gas produced from Brazil's pre-salt oil wells.

Although some media reports say Comperj could end up as only a refining project, both Bauman and Buehler-Vidal believe the petrochemical portion will likely go through.

"My overall sense is that they are proceeding along and something will happen," Buehler-Vidal says. "It has had support from several administrations." Plus, Braskem, which is involved with the petrochemical part of the project, is still working with Petrobras on the planning, Buehler-Vidal adds. "It may take different forms and may be delayed, but I think Comperj will take place."

In time, Brazil's industry will need to open up, and cost competitiveness will become a key factor, Arias notes. "Consequently, this question goes all the way along the value chain, back to feedstock and energy pricing. These are structural issues that will require lots of will and creativity at top levels to be solved," he says.

Looking further north, Mexico has already found a way to benefit from low-cost feedstock. The Ethylene XXI project being developed by Grupo Idesa and Braskem will receive ethane feedstock from Pemex-Gas through a 20-year long-term contract, based on Mont Belvieu reference prices. A $2.7bn (€2.1bn) engineering, procurement and construction (EPC) contract has already been awarded, and the project is on track to start operations in June 2015.

When finished, Ethylene XXI will produce 750,000 tonnes/year of high-density polyethylene (HDPE) and 300,000 tonnes/year of low-density polyethylene (LDPE), which will reduce some of Mexico's imports of the resin.

In addition, vinyls producer Mexichem is considering a joint venture with Occidental Chemical (OxyChem), under which the US-based company would build an ethane cracker in Texas and use the ethylene to produce vinyl chloride monomer (VCM). Oxychem would then ship the VCM to Mexichem.

The OxyChem joint venture would be in addition to the pending VCM joint venture that Mexichem and Pemex are discussing. Meanwhile, to facilitate natural-gas imports from the US, Mexico plans to increase pipeline capacity by 38%. The country plans to build eight new pipelines, which would add 4,260km (2,650 miles). The project is valued at $7.8bn.

Mexico could rely on US gas imports for years, even though it has substantial shale-gas reserves, estimated at 681 trillion cubic feet (tcf), according to comments made earlier this year by Guillermo Garcia Alcocer, general director of exploration and production of hydrocarbons for the Secretaria de Energia, Mexico's energy department.

But the state-energy producer Pemex is limited as to how many projects it can take on. The scale of work required to develop Mexico's shale gas reserves is huge, Garcia Alcocer said.

Mexico would likely need to develop 27,000 wells. That is nearly as many as all of the wells developed during the entire existence of Pemex. For such an undertaking, third parties will be crucial.

However, Mexican law limits energy production by companies other than Pemex. Equity stakes and joint ventures are prohibited, Garcia Alcocer said. President-elect Enrique Peña Nieto had discussed changing Mexico's energy regulations during his campaign. However, previous presidents had made similar proposals during their campaigns, but nothing significantly changed once they took office.

For now, Pemex is concentrating on its deepwater oil production, so shale gas will have to wait, dimming the prospects for more ethane-based ethylene projects. Propylene, though, is another matter.

Pemex is building the new Tula refinery in Hidalgo, Texas, which could provide feedstock propylene for future derivatives projects. Otherwise, Mexico will likely rely on imports to meet demand, especially given its outlook for growth. The IMF predicts that the Mexican economy will grow by 3.9% in 2012 and 3.5% in 2013.

In Argentina, natural gas supplies have become so stretched, petrochemical producers face annual cuts in supplies each winter. These shortages persist even though Argentina has large reserves of both conventional and non-conventional natural gas. Argentina has an estimated 774tcf of technically recoverable reserves of shale gas, the third-largest, behind China and the US, according to the US Energy Information Administration (EIA). However, government policies are discouraging shale-gas development, Buehler-Vidal says.

Shale gas requires equipment that is not locally available. Customs regulations make it difficult for foreign companies to bring equipment in and out of the country. Argentine currency controls make it difficult to exchange pesos for dollars. In addition to regulations, Argentina has nationalised YPF, which was once majority-owned by Spain's Repsol. The move will likely discourage foreign investors.

Although Argentina has conventional gas reserves, they are in the southern part of the country, far from the demand centres in the north, Bauman says. With limited prospects for increasing energy production, Argentina will lack the feedstock to increase petrochemical production.

Already, shortages of natural gas in Argentina have led one company, Methanex, to make plans to move a methanol plant from southern Chile to Geismar, Louisiana, US. By the second quarter of 2013, Methanex should decide if it will move a second methanol plant from Chile. The Chilean plants had relied on natural gas from Argentina.

Like the outlook for natural gas, that for Argentina's economy is also lacklustre. After growing by 8.9% in 2011, the IMF estimates that the Argentine economy will grow by just 2.6% in 2012 and 3.1% in 2013.

Arias says such a slowdown, combined with limitations on imports, should create demand constraints, affecting utilisation rates and margins.

Compared with Argentina, Peru's economy is relatively small - at $176bn, it was 40% the size of Argentina's in 2011, according to the World Bank. However, the IMF expects Peru's economy to grow by 6% in 2012 and 5.8% in 2013.

Crucially for petrochemicals, Peru has ethane and it is developing an integrated polyethylene project. In November 2011, Petroperu and Braskem signed a memorandum of understanding to analyse the technical and economic viability of a 1.2m tonne/year PE plant, which would rely on ethane from Las Malvinas.

If Petroperu and Braskem go through with the project, it would be the first PE plant in Peru and the largest PE plant on the west coast of the Americas. Moreover, being on the coast would give the plant easy access to export markets. In fact, Petroperu estimates that the project could generate $1bn/year of exports.

Like Peru, Bolivia is in the early stages of its first PE project, which would also rely on an ethane cracker for feedstock.

The country is already moving forward with two liquids separation plants in Rio Grande and Yacuiba.

The Yacuiba project will process 32m cubic metres/day of natural gas and produce 2,247 tonnes/day of liquefied petroleum gas and 3,144 tonnes/day of ethane. The Yacuiba project will feed ethane to an integrated PE project being built in the Tarija department in the southern part of the country.

The project would have a PE capacity of 600,000 tonnes/year and consume 756,000 tonnes/year of ethane, said the company developing the project, state energy producer Yacimientos Petroliferos Fiscales Bolivianos (YPFB).

So far, YPFB has qualified Tecnimont to carry out the conceptual engineering, Buehler-Vidal says. "These things seem to be moving along," he adds. However, the project is big, and if YPFB pursues it, it will be a first for the country.

Another complication is logistics, both in shipping natural gas and finished products, according to Buehler-Vidal. Bolivia's economy is relatively small, so a good portion of the PE would be exported, Buehler-Vidal says. While the Yacuiba project is close to Argentina, the region itself is relatively isolated.

More possible projects were revealed in September by Empresa Boliviana de Industrializacion de Hidrocarburos (EBIH). Among the projects discussed were a 500,000 tonne/year methanol plant, valued at $450m; a 200,000 tonne/year polyvinyl chloride (PVC)plant worth $550m; a 260,640 tonne/year monoethylene glycol (MEG) plant worth $577m; and an aromatics plant that would rely on 1.3m tonnes/year liquefied petroleum gas (LPG) as a feedstock.

By: Al Greenwood
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