LatAm needs more competitive feedstocks as EU-Mercosur trade deal approaches

Author: Joseph Chang

2019/11/14

BUENOS AIRES (ICIS)--Latin America must capitalise on its potential competitive advantage in energy and petrochemical feedstocks, especially as the Mercosur countries open up their economies with an EU trade deal.

“The effort from Mercosur in opening up the economy and lowering or eliminating import duties in a period of falling prices is a threat to established industries in South America,” said Antonio Lacerda, senior vice president of chemicals and performance products for BASF in South America, in an interview with ICIS.

“This will be a major topic in 2020 - on how to balance this while respecting that economies have to be open,” he added.

The two key Mercosur countries - Brazil and Argentina - both have huge hydrocarbon resources in the offshore pre-salt fields for Brazil and the Vaca Muerta shale gas formation for Argentina. Yet both are far off from meaningfully exploiting these to their full advantage.

For Brazil and Argentina’s chemical sector, feedstock and energy competitiveness is critical be able to compete in the world economy. And this becomes more urgent in light of the signing of the EU-Mercosur trade deal.

In June 2019, the Mercosur countries - Argentina, Brazil, Paraguay and Uruguay - and the EU reached a trade agreement to remove trade barriers between the regions. The EU estimates this will eliminate around €4bn in duties annually for EU exporters.

Mercosur will eliminate duties on 91% of its imports from the EU, including chemicals, over a transition period of up to 10 years for most products with 15 years for some of Mercosur most sensitive products, according to the agreement.

And the EU will eliminate duties on 92% of its imports from Mercosur over a transition period of up to 10 years.

“The Mercosur-EU trade agreement doesn’t mean you have to be the cheapest in the world, but it helps to be on the cheap side,” said Jorge Buhler-Vidal, director of Polyolefins Consulting.

“When you look at the Vaca Muerta and potential petrochemical projects, it may not be as cheap as the Middle East or the US Gulf Coast, but it would still be on the lower left side of the cost curve. If South Korea can compete in Latin America, a plant in Argentina can compete,” he added.

ARGENTINA’S VACA MUERTA CASH COW
With a new Argentina government led by President Alberto Fernandez starting on 10 December, many players are awaiting a clear energy policy.

The new president will also have to deal with an economy deep in crisis with unsustainable debt levels and a plunging currency. Martin Redrado, chairman of Fundacion Capital, told delegates at APLA in Buenos Aires, Argentina, that a consensus among factions of the incoming government has emerged around energy policy. Overall, they want to adopt policies that will support the development of the oil and gas reserves in the Vaca Muerta.

Argentina already has the largest production of shale gas outside of the US. Further development could support expansion of Argentina’s petrochemical industry centered in Bahia Blanca and bolster the economy, especially if the country can become a net exporter of natural gas.

Potential energy policies include looser foreign-exchange controls for oil and gas producers, and tax rates comparable to those paid by producers in the Permian basin in western Texas in the US, said Redrado.

Shale gas in Argentina could provide the feedstock for a variety of petrochemicals projects, ranging from on-purpose propylene to methanol, said Federico Veller, commercial executive manager for YPF Quimica, in an interview with ICIS.

One potential project is a doubling of urea capacity at Bahia Blanca to 2.5m tonnes/year by 2024. Other possibilities include a world-scale methanol plant, and a propane dehydrogenation (PDH) plant feeding a downstream polypropylene (PP) unit.

In the meantime, Brazil’s petrochemical industry continues to await more competitive feedstock supply to operate at its full potential and displace imports.

 

“For the chemical industry, there is a frustration with growth. It’s a challenge in Brazil especially with low utilisation rates because of the lack of competitiveness of logistics and energy,” said Fernando Musa, CEO of Braskem, at an APLA panel discussion.

“There are still imports coming into Brazil. There’s a scenario where demand continues growing a bit higher than GDP but the industry doesn’t have the growth rate it should have. We need more competitive plants operating at higher utilisation rates,” he added.

And it’s not just about more production needed from Brazil’s pre-salt offshore fields and infrastructure to bring that onshore.

Part of the problem of uncompetitive feedstocks lies in state-owned Petrobras’ control of the midstream natural gas pipeline and processing sector, which is now changing, Musa noted.

“Petrobras’ control of the midstream sector is changing but has not fully changed yet. So we pay more and this translates to less competitive product,” said Musa.

Brazil is undergoing the most significant transformation of its energy sector in its history featuring greater competition, the head of its national energy agency told delegates at APLA.

“Brazil is going through the biggest transformation in its history. We are finally replacing a monopoly with an industry,” said Decio Oddone, director general of the Brazilian National Agency for Petroleum, Natural Gas and Biofuels (ANP).

COMPETITION
ANP has pushed for the opening of competition and transparency in Brazil’s gas pipelines network which was dominated by Petrobras, the sale of unutilised oil and gas fields, and the sale of Petrobras refineries to foster competition - all of which are progressing, said Oddone.

Petrobras has already committed to selling eight refineries representing around 50% of refining capacity, and selling gas pipelines which would provide greater access to natural gas treatment plants, he added.

“Additional ethane and propane will allow for more expansions. In Sao Paulo and Rio [de Janeiro] we probably will be able to build one or more crackers to consume the feedstocks,” said Oddone.”

Ultimately, opening up the gas distribution market to increased competition could cut the price of natural gas in Brazil from $11-12/MMBtu to around $6-7/MMBtu, said BASF’s Lacerda.

In addition, short-sea freight, which is limited to a handful of companies, will be opened up 
to foreign competition, making freight rates more competitive, he said.

With Brazil’s recent energy reforms, ANP projects the country’s crude oil production to more than double in 10 years from about 3m bbl/day today to around 7m bbl/day, plus associated natural gas. Of Brazil’s 4m bbl/day in crude oil and equivalents production today, around 1m bbl/day is gas.

“ANP is making changes and this will create the necessary conditions with the sale of refineries and changing the regulatory framework for natural gas. And this will create opportunities to extract more ethane and propane from natural gas,” said Braskem’s Musa.

For Brazil’s natural gas liquids (NGL) supply, the petrochemical industry “will need to be patient and wait for production to grow”, said Musa.

Braskem is still evaluating an expansion of its 540,000 tonne/year ethane cracker in Duque 
de Caxias, something that has been in planning stage since at least 2015.

“We need competitive feedstock and are working with potential partners. It is still in the study phase,” said Edison Terra, vice president of Braskem’s business unit for polyolefins, renewables and Europe, in an interview with ICIS.

FASTER DECISION-MAKING
Ultimately, Latin America’s petrochemical and energy sectors need to speed up decision-making to keep up with the world.

“A game changer for Latin America would be how we make decisions. In other parts of the world, decisions are made quickly. Here it takes a long time, especially when it comes to investments,” said Pedro Manrique, vice president, commercial and marketing for Colombia-based Ecopetrol, at an APLA panel discussion.

“In North China, it took 21 months to build a refinery and petrochemical complex, including roads and railways. This 
is how they make decisions,” 
he added.

However, in any petrochemical investment decision, sufficient and competitive feedstock supply is a prerequisite. Parts of Latin America are moving in the right direction.

Additional reporting by Al Greenwood