APLA: Feedstock questions still to be answered

15 November 2013 13:04 Source:ICIS Chemical Business

Latin America is not short of potential when it comes to sourcing feedstocks for chemicals, but political, technical and financial issues are hindering development

Latin America has massive shale rock formations buried deep under the earth that hold vast amounts of oil and gas. Those energy resources have been there for millions of years, and without the help of foreign capital, they may be there for many more.

 Former president Calderon urges reform

Copyright: Rex Features

On a recent visit to Houston, Texas, former Mexican president Felipe Calderon implored his country to give energy reform another chance (see page 16), warning that the nation could lose the opportunity to develop its substantial reserves of shale energy. “Either Mexico jumps into the future or we will lose again a tremendous opportunity,” Calderon said. He made his comments during a speech he gave at the World Affairs Council of Houston.

Despite Mexico’s substantial energy reserves, the country has a trade deficit in every hydrocarbon except crude oil. In 2012, its natural gas trade deficit reached $2.15bn (€1.59bn), according to the Instituto Nacional de Estadistica y Geografia (INEGI), a government agency that keeps economic statistics.

Natural gas imports supply one-third of Mexico’s demand for natural gas, according to the US Energy Information Administration (EIA).

For oil products, Mexico had a trade deficit of $24.7bn in 2012, according to the INEGI. The petrochemical trade deficit was $8.15bn. For products that originated from petrochemicals, the deficit reached $5.24bn. Without Mexico’s oil exports, the nation would have an overall trade deficit in hydrocarbons.

It is unclear how long Mexico can continue exporting oil so that it can pay someone else to supply oil products, petrochemicals and natural gas. Last year, oil production was 2.60m bbl/day, down by 25% from a high of 3.48m bbl/day in 2004, according to the EIA.

As countries like Brazil and Argentina slowly develop their own shale reserves, the need for US NGL-based petrochemicals will decline. Thus, the development of shale and offshore reserves in Mexico and other Latin American countries may come at the cost of decreased US exports.

“The less successful they are in developing their own hydrocarbons for feedstock, the easier it will be for us to sell petrochemical exports,” says consultant Dan Lippe. “[The US] has a [feedstock] cost advantage against everyone else in the world, except maybe Saudi Arabia.”

The US is flush with ethane and other NGLs, including propane and butane. This abundance of supply coupled with insufficient domestic demand has created an ever-growing surplus. Much of that surplus has been making its way to Latin America and Asia, where growing GDP and a burgeoning middle class have lifted demand.

Enterprise Products Partners, an energy services company, recently expanded its propane export facility on the Houston Ship Channel to handle 7.5m bbl/month of low-ethane propane. Then it began an expansion project at that same facility that will increase capacity to 9m bbl/month.

A week later, Enterprise announced that it planned to build a second export facility with the capacity to handle up to 6.5m bbl/month of exports. The terminal will be built either in Louisiana or Texas. It is expected to be in service in the fourth quarter of 2015 and will have the capability of handling very large gas carriers (VLGC) class ships, Enterprise said.

“The development of the new terminal was driven by continued demand from our international customers for additional supply of propane and butane,” said Enterprise CEO Michael Creel. “Just as with our other liquefied petroleum gas (LPG) export projects, we expect that the terminal will be operating at or near its capacity upon start-up.”

The new LPG marine terminal will be designed with the flexibility “to expeditiously add the necessary facilities” to provide ethane export services as that market develops, Creel said.

Brazil, the eighth largest total energy consumer and 10th largest producer in the world, has experienced sustained economic growth and has increased GDP by more than one-third in the past decade. While increasing domestic oil production has been a long-term goal of the country’s government, it still lags behind in technology.

As of 2013, Brazil had 13bn bbl of proven oil reserves, second only to Venezuela in South America. Most Brazilian oil is currently produced in the southeastern region of the country in Rio de Janeiro and Espirito Santo states, according to the EIA.

According to the EIA, total Brazilian energy consumption grew to 11.7 quadrillion British thermal units (Btu) in 2011. Furthermore, nearly 50% of its total energy consumption comes from oil and other liquid fuels.

In March, Brazil launched its 10-year energy plan that aims to expand oil production to more than 5m bbl/day by 2021. This is a decrease from its previous plan of more than 6m bbl/day by 2020. Under this plan, exports from the country are set at more than 2.25m bbl/day by 2021.

Additionally, Brazil is consuming increasing amounts of biomass in both the residential and industrial sectors.

In comparison to the US, Brazil’s energy composition is quite different. The US gets about 40% of its energy from petroleum, 23% from coal and 22% from gas, totalling 85% of its entire energy makeup, according to Jose Goldemberg, former Secretary of the Environment for Brazil and Professor Emeritus at the University of Sao Paulo. Nuclear energy and renewables represent the remaining 15%.

For Brazil, fossil fuels represent 54% of its total energy framework, while renewables, such as sugarcane products, hydroelectricity and firewood, comprise 45%. Nuclear energy makes up the remaining 2%.

“The fraction of energy consumption from oil is not very different in the two countries but there the similarity ends,” said Goldemberg in his white paper on Brazil’s energy policy. “Coal and gas are less important in Brazil, and hydro and biomass (sugarcane products and firewood) account for the balance.”

He added that the US is much more dependant on oil and imports approximately 8m bbl/day, while Brazil is self-sufficient, producing all the oil it consumes.

Until 1952, when the state-owned company Petrobras was established, Brazil did not allow foreign companies to operate within the country. Therefore, all of its petroleum was imported.

Several years later, successful offshore drilling led to the expansion of Petrobras and limited the amount of foreign companies in the country. The discovery of the large Pre-Sal oil fields led to further drilling and offers new challenges and opportunities for the country, Goldemberg said.

“If successful, the Pre-Sal activities could convert Brazil into a major oil exporter in 5-10 years,” he said. “Present production is approximately 2m bbl/day and could grow to 5m bbl/day.”

Now, international companies play a role in Brazilian oil production, including the Shell-operated Parque de Conchas project and the Chevron-operated Frade projects, which produce 75,000 bbl/day and 85,000 bbl/day, respectively.

 Brazil’s offshore oil and gas potential is huge, but needs investment to be realised

Copyright: Rex Features

According to the Brazilian oil regulation agency, the Agencia Nacional do Petroleo (ANP), Brazil exported nearly 550,000 bbl/day of crude oil in 2012.

The US imported 187,000 bbl/day of Brazilian oil in 2012 and has been Brazil’s largest crude oil export destination for the past decade.

In comparison, Brazil imported nearly 470,000 bbl/day of refined product in 2012, of which 166,000 bbl/day came from the US, according to the ANP.

In 2011, Brazil’s liquid fuels consumption surpassed its liquid fuels production for the first time since 2007 as fuel demand increased on an expanding economy.

At the same time, reduced ethanol production and rising ethanol prices caused Brazil to import additional supplies of refined products from the US. EIA said it projects Brazilian consumption will continue to be greater than production up through 2014.

According to customs data, Argentina was the number one exporter of products to Brazil in 2012, followed by the US and Algeria.

In order to keep up with its expanding economy and growing domestic demand, Petrobras has plans to increase its refining capacity to more than 3.2m bbl/day by 2020. Furthermore, the company has plans to build five additional refineries, according to its 2013-2017 business plan.

The facilities will include the Abreu e Lima refinery, a 230,000-bbl/day joint-venture with Petroleos de Venezuela (PdVSA) set to come on line in 2014.

The facility will be designed to process heavy Venezuelan and Brazilian crude oil.

Petrobras operates 11 of Brazil’s 13 refineries, which have a total processing capacity of 1.9m bbl/day. The largest is Petrobras’ Paulina refinery in Sao Paulo, which has a capacity of 360,000 bbl/day.

In comparison, the largest US refinery is the Motiva Port Arthur refinery in Texas, which has a refining capacity of approximately 600,000 bbl/day.

The Complexo Petroquimico do Rio de Janeiro (Comperj) is a massive project, with Petrobras planning to build two refineries and Braskem developing several chemical units, including a world-scale ethane cracker, along with downstream polyethylene (PE), polypropylene (PP) and polyvinyl chloride (PVC) units.

Braskem plans to use ethane as a feedstock for its units and is currently negotiating prices with Petrobras.

Petrobras has not commented on what prices it would set for the ethane, but Braskem defends the use of US Mont Belvieu prices. Reports were that Petrobras was to supply Comperj with cheap ethane.

If the ethane is priced low enough, Comperj’s shift toward natural-gas-based feedstock should help the complex compete against US producers, who are increasingly using lighter feedstock.

This additional capacity will exceed US demand, and producers will likely target Latin America for any excess production.

Most recently, Petrobras said it expects that the total cost to develop the Comperj project will reach reais (R) 26.6bn, up from the earlier estimate of R8.4bn in 2009. The company did not give a reason behind the higher costs.

The completion date for the Comperj project has been delayed until August 2016, according to Petrobras.

Accounting for about 25% of the world’s sugar production, the consumption of Brazilian ethanol derived from sugarcane fluctuated over the years, despite government mandates issued to increase demand.

The main issue was to make sure that the ethanol produced was consumed, Goldemberg said. Accordingly, the government increased the mixture of ethanol mixed into gasoline to 10% in the late 1970s and set the price of ethanol paid to producers at 59% of the selling price of gasoline.

Today, Brazil is the second largest producer and consumer of ethanol in the world after the US.

After more rounds of increased standards and shortages of appropriate fuel, present-day Brazil uses flexible-fuel engines that can run with any combination of ethanol and gasoline. According to Goldemberg, they represent about 95% of all new cars sold because they allow drivers to choose the cheapest blend on any given day.

According to the ANP, in 2012, Brazil produced 405,000 bbl/day of ethanol, matching the declined 2011 levels. A combination of high world sugar prices, a poor sugar cane harvest, and underinvestment resulted in a precipitous decline in ethanol production in 2011. This shortage forced Brazil to import corn ethanol from the US.

Following the shortage, the Brazilian government in May raised the blend requirement in gasoline back to 25%. It also brought regulation of the ethanol sector under the jurisdiction of the ANP and announced plans to expand Petrobras’ presence in the ethanol market.

In the medium term, Brazil plans to export ethanol to the US, which recently removed tariffs on Brazilian sugar cane ethanol.

The majority of proven natural gas reserves, which was at 14 trillion cubic feet (tcf) in January 2013, are at the Campos, Espirito Santo and Santos Basins, according to the EIA. Again, Petrobras plays a dominant role in Brazil’s entire natural gas supply chain. In addition to controlling the vast majority of the country’s natural gas reserves, the company is responsible for most domestic Brazilian gas production and for gas imports from Bolivia.

Furthermore, Petrobras controls the national transmission network, and it has a stake in 21 of Brazil’s 27 state-owned natural gas distribution companies. However, Brazil passed a new Gas Law in 2009 that created a separate regulatory framework for natural gas. This law is expected to facilitate private investment in the sector.

Brazil has two liquefied natural gas (LNG) regasification terminals, both installed in the past three years: the Pecem terminal in the northeast, and the Guanabara Bay terminal in the southeast.

Both facilities are floating regasification and storage units (FRSU), with a combined sendout capacity of 740m cubic feet per day (MMcf/day).

Petrobras plans to bring two additional terminals on line in the states of Bahia and Rio Grande do Sul in late 2013, the EIA said.

Petrobras, Repsol-YPF, BG Group and Galp Energia have teamed together to build an LNG vessel that would develop pre-salt natural gas that would be sent to be processed at existing terminals in Brazil by 2015.

In Argentina, South America’s largest natural gas producer and a significant producer of oil, heavily regulated energy policies limit the industry attractiveness to privatize while protecting consumers from rising prices.

However, the rapidly growing economy in Argentina is causing more dependence on foreign imports.

Argentina is largely self-sufficient in crude oil, but imports oil products, according to the EIA. Furthermore, labour unrest in the country has led to oil production shut-ins, which impact local supply.

In order to ensure that domestic demand is met, Argentine oil is subject to export taxes and restrictions on export volumes, which limit the profits that companies are able to generate from selling their production abroad.

Argentine fuel prices are not routinely set by the government, but some subsidies exist and the government occasionally intervenes to control inflation, the EIA said.

EIA estimates that Argentina’s total oil supply in 2011 was just below 750,000 bbl/day, of which roughly 588,000 bbl/day was crude oil and lease condensate, with the remainder comprised of NGLs, biofuels, and other liquids.

Argentina exported just over 60,000 bbl/day of crude oil in 2011, almost a 40% decline from the previous year due to increased domestic consumption and decreased production. The US and Chile accounted for 75% of exports, followed by China and Brazil.

Argentina’s exports to the US in 2011 included 28,000 bbl/day of crude oil and 4,000 bbl/day of petroleum products, according to EIA data. ■

By Anna Matherne Bobbie Clarke