Commentary: Latin America must act now in shale gas and petrochemicals

22 November 2013 14:34  [Source: ICB]

At the Latin American Petrochemical Association (APLA) meeting, the buzz was around the US competitive threat. But development of the region’s own shale gas could come to the rescue

The entire global landscape has shifted in just a few years as the advent of US shale gas has rippled through petrochemical value chains. For Latin America, which has historically moved at a glacial pace, it is even more critical to quickly to exploit its own gas reserves to boost its competitiveness.

 

 Players must not let the ship sail

Copyright: Joseph Chang

That was a key message coming out of the 33rd Latin American Petrochemical Association (APLA) meeting in Cartagena, Colombia from 16-19 November. Shale gas does not stop south of the US border. The Eagle Ford formation in Texas stretches far down into Mexico. It has the fourth largest shale gas reserves in the world but has yet to drill its first producing shale gas well.

“It’s not rocket science,” said one delegate. “Energy companies just need an incentive. Why would I move my rig 10 feet south of the border?” But positive forces are converging in Mexico, led by proposed energy reforms. This will allow private companies to develop reserves with state oil company Pemex (although only via contracts), and also introduce unfettered direct investment downstream in refineries and petrochemicals.

Drastic change is needed as hydrocarbon-rich Mexico imports half of its gasoline needs and two-thirds of petrochemicals and polymers consumption. “Pemex is not ready to extract shale gas by itself as it has become technologically outdated and has the burden of paying one-third of the taxes in Mexico,” said Roberto Guzman, general manager of Mexico-based Pipa Consulting.

“One of the objectives of the reforms is for Pemex to operate with a high degree of autonomy. This implies a lot of changes for a monopoly to learn to live in a competitive environment,” said Carlos Pani, senior vice president for petrochemicals sales and marketing for Pemex. One sign of the coming shift is Pemex’s first joint venture in history – its vinyl chloride monomer (VCM) partnership with Mexichem completed in September 2013 which will double capacity to 400,000 tonnes/year by 2015. The landmark deal is a sign of things to come. Already Pemex is looking for local partners to build new ethylene oxide/ethylene glycol (EO/EG) and aromatics plants.

But the key project in Latin America under way is Braskem Idesa’s gas-based Ethylene XXI project in Mexico, headed for start-up by July 2015. This gas-based project will go a long way in alleviating the country’s over 1m tonne/year deficit in polyethylene (PE).

Meanwhile, the Brazil Comperj petrochemical project seems mired in perpetual uncertainty. Braskem is still negotiating with state oil company Petrobras on the scope and terms of gas feedstock for the proposed project in Rio de Janeiro – the same was said a year ago at APLA. Argentina has a wealth of gas in its Vaca Muerta formation. Now it is a matter of bringing in investment – no easy task after the seizure of Spain-based Repsol’s majority stake in today’s state-owned oil company YPF, although it has agreements with Chevron and Dow to explore the potential.

For Latin America, the hydrocarbon riches are there. They are just not being developed fast enough to meet the pace of growing demand. Meanwhile, the bull’s-eye on Latin America as an import market only grows larger with the massive build-out of US capacity.

If Mexico’s energy sector were fully open to private investment, oil production would triple and gas production rise 11 times, estimates Guzman of Pipa Consulting. Yet he calls the proposed reforms “insufficient” to spur such growth.

The lost potential in Latin America can be illustrated in the extreme with Venezuela. The country has the same hydrocarbon reserves as Saudi Arabia, noted former Colombian president and current economist Cesar Gaviria Trujillo, at APLA. Yet its policies have discouraged investment to the point where it is a major importer of polymers and now gasoline.

The glacial pace in making investments must pick up. The Ethylene XXI project in Mexico is happening now, but it was conceived as the Phoenix project – almost 15 years ago in the late 1990s! And Mexichem’s VCM joint venture with Pemex has been discussed over the course of the past eight years. Brazil’s Comperj was supposed to be complete by 2011 but has yet to get off the ground. It’s inconceivable that the Americas shale gas boom and unconventional energy development has been confined to the US and Canada at this point, said one delegate at APLA. The US has moved first and fast. It is time Latin America makes its mark.


By: Joseph Chang
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