APLA: Mexico's reforms will boost petrochemicals

15 November 2013 13:04  [Source: ICB]

Carlos Pani of Pemex Petroquimica talks about reform of the Mexico’s energy sector, its implications for its petrochemical industry and the restructuring required for Pemex

Government proposals to overhaul Mexico’s energy sector are currently being reviewed by the nation’s congress. If they are passed, Pemex would be able to form profit-sharing ventures with private and foreign companies in several strategic areas, including exploration and production, transportation and refining. According to Carlos Pani, commercial subdirector at Pemex Petroquimica and an APLA board member, reform could give Pemex’s petrochemical operations a welcome shot in the arm.

“If that reform comes through, and the opening up (to private investment) becomes a reality, we will expect to have important investments in those areas in the next few years. We see the future as very promising, because reform will increase the production of the basic building blocks for the petrochemical industry,” says Pani.

The executive echoed recent estimates by Pemex Petroquimica’s director general, Manuel Sanchez Guzman, that successful reform and subsequent investment could boost the company’s petrochemical production from 8m tonnes/year to 10m tonnes/year.

However, the benefits of successful reform would not be immediate, Pani says. The proposed energy reforms would necessitate controversial changes to the Mexico’s constitution, after which the nation’s legislature would draft new regulations that would determine who can develop the country’s energy resources.

“We still have four, five, six months of discussing those regulations,” Pani says. “Then we will have to wait a little bit to see what the results of the reform are, and if the availability of those building blocks – ethane, natural gas and other feedstocks – becomes a reality. We feel that once that happens, important investments in the derived industry will be triggered. We can perhaps start to feel that in 2015.”

The executive warned that reform of the energy sector must include broader considerations of the way Pemex is managed. According to Pani, the government has a responsibility to restructure the company and ensure it can survive in what would be a much more competitive environment.

“The government has to give Pemex more autonomy and more freedom in order to manage itself as a company – we cannot be subject to governmental decisions in terms of budget and price settings. Pemex is currently managed in a very bureaucratic way. The executive branch of the government has a lot to do with the way that Pemex does things, trying to direct Pemex. Those things have to change so that Pemex can compete with companies that are managed that same way,” says Pani.

According to the executive, a review of the company’s current fiscal obligations is paramount. Around 60% of Pemex’s revenue is paid in taxes to the federal government, a set-up that makes the company very difficult to operate, Pani says.

“The changes in the fiscal treatment of Pemex will have to bring taxes into the same range and under the same rules as any other private company competing with Pemex. We have to be able to compete under the same terms and the same conditions. That’s a major issue of course. It’s about creating a fair and level playing field on which Pemex can compete.”

The future of the nation’s petrochemical industry also depends on a healthier economy. Government projections at the beginning of the year suggested GDP growth of close to 4%, figures that have since been revised to around 1.8%. The result has been sluggish demand for petrochemicals, particularly in the polyolefins and styrene businesses, Pani says.

Despite the economic situation, Pemex Petroquimica can boast a number of recent advances. Chief among these is an integrated joint venture for vinyl chloride monomer (VCM) production between Pemex and Mexican petrochemical major Mexichem. The project, at the Pajaritos petrochemical complex, will increase VCM production capacity from current levels of 200,000 tonnes/year to 405,000 tonnes/year.

“It’s a breakthrough given the character of a state-owned company like Pemex,” Pani says. “By creating this joint venture, we have come up with an integrated operation that becomes much more competitive.”

Pemex has also revamped and started up a 500,000 tonne/year ammonia plant, increasing the company’s total ammonia capacity to 1.5m tonnes/year. According to Pani, this will cover Mexico’s entire domestic demand for the immediate future, as well as leaving a surplus of around 200,000 tonnes/year for exporting.

Looking at the wider picture in Latin America, Pani says the prospects for the region’s petrochemical industry is dependent on its ability to secure reliable feedstock sources. Shale gas has given the US a feedstock advantage, and Mexico, being so close to the US, is an obvious target market for oil product exports. Rather than a threat, Pani sees this as a challenge for local producers to increase their competitiveness.

“We will have the same advantage in raw material costs. It’s a matter of being competitive in our operations,” he says. “Five years ago, we were almost forgetting about the petrochemical industry in this side of the world. Then shale gas appeared, along with new opportunities, and now we have become the most competitive part of the world in energy terms.”

By: Simon West

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