LATIN AMERICA’S PETROCHEMICAL DILEMMA - platts.com · out throughout Latin America, where many petrochemical producers, many of them state controlled, find themselves at ... (Comperj)

www.platts.com/petrochemicalsPETROCHEMICALS

PETROCHEMICALS SPECIAL REPORT

NOVEMBER 2016Emmanuel Gallegos, EditorChris Ferrell, Managing Editor – Olefins & Polymers (Americas)Bernardo Fallas, Associate Editorial Director – Petrochemicals (Americas)

LATIN AMERICA’S PETROCHEMICAL DILEMMA

SPECIAL REPORT: PETROCHEMICALS LATIN AMERICA’S PETROCHEMICAL DILEMMA

2© 2016 S&P Global Platts, a division of S&P Global. All rights reserved.

EVEN AS MEXICO WELCOMES NEW CAPACITY AND ARGENTINA’S SHALE-FUELED AMBITIONS GROW, THE REGION GRAPPLES WITH LIMITED INVESTMENT AND AN UNCERTAIN FUTURE

Not far from the Port of Coatzacoalcos in Mexico’s Gulf Coast, a sprawling petrochemical complex has recently risen from the ground, positioned to help the country minimize its sizeable polyethylene deficit.

The $5.2 billion complex, a joint venture between Brazil’s Braskem and Mexico’s Grupo Idesa, could, some say, spark the rebirth of an industry in a country that has watched its neighbor to the north revitalize its petrochemical sector with heavy investment.

It is no secret that said revitalization in the US has been fueled by the shale gas boom and the resulting access to cheap and abundant feedstocks, the same feedstocks that can be found below ground in Mexico – with the right amount of investment.

In Argentina, a nation second only to China in shale gas reserves, encouraging initial steps in exploration and production coupled with continued – albeit still limited – investment have the country cautiously optimistic about its chances to reverse an energy deficit that ballooned in recent years.

These days, dreams of a thriving petrochemical industry in Argentina come in the form of a state-of-the-art olefins and derivative complex under study by state-controlled YPF and Dow Chemical’s Argentina subsidiary, sources have confirmed.

A reality for Mexico, Argentina and every other Latin American market with petrochemical aspirations is that these will be contingent on increased investment in upstream and midstream, as without feedstock availability any call for expansion is likely to fall on deaf ears.

Back in Mexico, the much-awaited startup of Braskem Idesa, while a milestone in its own right, was dampened by an April 20 explosion that killed 32 at Petroquimica Mexicana de Vinilo, a facility located a only few kilometers away and operated by PVC maker Mexichem in partnership with Petroleos Mexicanos, the state-controlled energy company.

The juxtaposition of the two scenarios playing out in the state of Veracruz, while extreme, might help illustrate the great paradox that is Mexico’s petrochemical industry today.

One that pits apparently enormous opportunity against equally imposing challenges, and one that seems to play out throughout Latin America, where many petrochemical producers, many of them state controlled, find themselves at their own crossroads.

Since the plunge of oil prices during the second half of 2014, state-controlled energy companies including Petrobras in Brazil, Ecopetrol in Colombia and Pemex have all hinted at or executed divestitures of their petrochemical assets as a way to cope with accumulating debt and diminished oil revenue.

This occurs even as US-based energy giants, including the likes of ExxonMobil, rekindle their appreciation for their chemical businesses amid the downturn.

Motivated sellersThe most active seller in the region has been Petrobras, which is embroiled in a graft scandal affecting Brazil. So far this year, the energy conglomerate has shed petrochemical assets in Argentina and, as of late October, negotiations to deal its stake in Petroquimica Suape and Citepe in Brazil to Mexico’s Alpek were ongoing, Petrobras said.

In Mexico, the chemical industry finds a government more willing than ever to open its doors to private investment. The country boasts the world’s sixth largest shale gas reserves, according to the US Energy Information Administration.

However, a cycle of low oil prices has left many of those major petrochemical producers it seeks hesitant to come knocking as they think twice before committing to expend capital.

To further complicate matters, development by Pemex of Mexico’s shale gas reserves in the Northeast part of the country has been minimal, and the country’s shallow-water

PERU

BOLIVIA

ARGENTINA

VENEZUEL A

On trackDelay riskO� track

Source: Platts

Owner: DowProducts: Ethylene (est. 1 million mt), PE Targeted year: 2021Status: Delay Risk

Owner: Braskem/PetroPeruProducts: Ethylene, PE (1.2 million mt) Targeted year: 2019Status: O� Track

Owner: YPFBProducts: Propylene, PP (250,000 mt) Targeted year: 2021Status: On Track

Owner: PequivenProducts: Ethylene (800,000 mt), propylene (400,000 mt), PE (600,000 mt) Targeted year: TBDStatus: O� Track

POLYMER PROJECTS IN SOUTH AMERICA



MEXICO’S PETROCHEMICAL HUB

Source: S&P Global Platts, Companies

Towards South America

PEMEXMorelos

Chemical portand new API

PMVPajaritos

PEMEXCangrejera

IDESA

BRASKEM IDESAETILENO XXI

MEXICO PE BALANCE FORECAST

0.0

0.5

1.0

1.5

2.0

2.5

2025202320212019201720152013

Source: S&P Global Platts Analytics

(million mt) ProductionDemand

oil auctions, an opening that is part of the energy reform, have so far attracted only tenuous interest from international investments.

Mexico’s gas production has been in decline for years, and while the country has resorted to imports, both LNG and increasingly via pipeline from the gas-rich US, the decrease does not bode well for the country’s petrochemical industry, much of it which runs on ethane, a natural gas liquid abundant in wet shale plays.

The ethane conundrumAs things stand, multiple market sources have indicated Braskem Idesa has struggled to secure the ethane required to run its 1 million mt/year steam cracker at optimal rates from its long-term supplier, Pemex Transformacion Industrial (formerly Pemex Gas).

Talk of ethane imports in Mexico was heard long before Braskem Idesa’s startup, but it began to gain traction earlier this year. In September, a tender for a gas carrier capable of loading 10,000 mt of ethane and serve as floating storage off Mexico’s East Coast was circulated in the market.

A source with a major shipping gas company with knowledge of the tender said an ethylene-capable vessel could easily meet said requirements.

Despite the setbacks, Mexico’s potential is unquestioned, and many connected to the industry believe it is a matter of time before all the pieces come together.

Less than six months since startup, the impact of Braskem Idesa’s new production has been felt in Mexico and beyond, sources said.

The 75-25 joint venture – which operates the first new steam cracker built in North America in more than a decade, a plant that can consume approximately 66,000 b/d of ethane – has been actively pursuing domestic market share growth through competitive pricing, polymer sources in Mexico said.

In recent years, Mexico has imported nearly 1 million mt/year of PE from the US, market share Braskem Idesa is aiming for, all the while conscious that local producer Pemex and US distributors are well entrenched.

Braskem Idesa’s head startThe company expects exports to remain a key part of the business for the next 3-5 years, decreasing as more resin is placed domestically. To that end, Braskem Idesa material has made its way to Europe, China and Southeast Asia at competitive levels, sources have said.

One advantage Braskem Idesa has is timing, as its startup, however delayed, came well ahead of world-scale olefins/polyethylene projects along the US Gulf Coast, the first of which are scheduled to be online in 2017.

-200

0

200

400

600

800

202620252024202320222021202020192018201720162015

ARGENTINA PE BALANCE FORECAST(’000 mt)


Production De�citDemand

-2

0

2

4

6

8

202620252024202320222021202020192018201720162015

CENTRAL�SOUTH AMERICA PE BALANCE FORECAST(million mt)


Production De�citDemand



Braskem Idesa is also years ahead of its Latin American counterparts. Beyond Mexico, proposed petrochemical expansions in Latin America have lagged or fallen by the wayside altogether in recent years.

World-scale olefins/polymer projects in Brazil (Comperj) and Venezuela (Olefinas III) have been effectively paralyzed, although the latter remains under consideration, sources close to Pequiven, the petrochemical subsidiary of state-owned PDVSA, recently told Platts.

Others in Peru (olefins/PE) and Bolivia (propylene/PP) remain questionable, although the latter got an important boost earlier this year, with state-owned YPFB announcing $1.8 billion in financing from Bolivia’s central bank for the project, which has an ambitious target startup of 2021 and would be located in gas-rich Tarija.

Vaca Muerta’s promiseIn Argentina, talk of a world-scale ethylene/PE expansion by Dow Argentina fueled by ethane from the Vaca Muerta shale play surfaced as far back as 2014. Fast-forward to 2016, and said talk has turned into concrete plans by Dow and YPF currently under review, sources with knowledge of the studies have confirmed.

Dow Argentina is Argentina’s sole PE producer. It operates two ethane-fed steam crackers at its Bahia Blanca complex, which also boasts resin production capacity of around 650,000 mt/year.

How quickly such a project might be realized will depend on Argentina’s ability to tap into its shale reserves.

To that end, YPF in October signed an agreement with gas-rich Neuquen province worth $452 million to develop two new production pilots at Vaca Muerta, while also launching exploration on nine blocks with partners including ExxonMobil and Total.

This past summer, ExxonMobil CEO Rex Tillerson said his company could invest $10 billion over 20 years in the play – it has already invested $200 million, with $250 million more on the way – should pilot projects prove successful.

Last year, Dow and YPF announced they would together invest $500 million in shale gas development in addition to the $350 million previously spent. Total investment at El Orejano project could top $2.5 billion, Dow executives have said.

YPF has also entered into agreements with the likes of Chevron, Malaysia’s Petronas and Russia’s OAO Gazprom for the development of shale reserves.

That is music to the ears of a country trying to revive gas production after a 20% decline between 2004 and 2014 brought shortages and a surge in imports.

President Mauricio Macri, who took office last December, has wasted little time courting international investment, attempting to open Argentina to the world by pursuing major economic reforms, slashing subsidies and ending currency controls.

However, challenges remain.

Macri’s missionPlans to substantially raise natural gas prices – as much as 1,000% in some cases — in an effort to both curb consumption and attract foreign investment were shut down by the country’s supreme court in August. The government has since settled for more gradual increases that were to take effect in October.

In September, a federal judge in Cordoba province suspended hikes for small- and medium-sized businesses until the end of the year.

The rulings were described as hard blows to Macri’s government and its energy strategy, just as the president’s approval rating is tested because of the unpopular utilities hikes and unemployment.

Argentina imports gas to meet a third of its consumption, half of the imports being LNG. Macri’s stated goal is to eliminate LNG imports by 2021-22.

ON THE SELLING BLOCK? Pressured by weak oil prices and mounting debt, major state-owned energy companies in Latin America are mulling divestitures in the petrochemical sphere:Company Asset Share % Production StatusEcopetrol Propilco 100.0 Polypropylene Likely as part of divestment planPetrobras Braskem 36.1 Aromatics, olefins, Possible as part of divestment plan; PE, PP, PVC companies decline to commentPemex Pemex TRI, 100.0 Aromatics, olefins, Seeking private investment Etileno PE, acrylonitrile

Source: S&P Global Platts, company announcements

PE CAPACITIES: LATIN AMERICAProducer Country Capacity (mt) GradesBraskem Brazil 3,200,000 HD, LD, LLDBraskem-Idesa Mexico 1,050,000 HD, LDEcopetrol Colombia 60,000 LDDow Argentina 650,000 HD, LD, LLDPemex TRI Mexico 815,000 HD, LD, LLDPequiven Venezuela 430,000 HD, LD, LLD

Source: S&P Global Platts, Companies

CHANGING HANDSYear Company Location Seller Buyer Production Sale2016 PQS/Citepe* Brazil Petrobras Alpek PTA/PET $700 million1

2016 Solvay Argentina/ Solvay Unipar PVC $202 million Indupa* Brazil Carbocloro2016 Petrobas Argentina Petrobas Pampa Aromatics, PS $894 million2016 Petroken Argentina LyondellBasell GIP Polypropylene $184 million2014 Innova Brazil Petrobas Videolar Styrene, PS $370 million

* Sale/approval pending 1 Market estimate

Source: S&P Global Platts, company announcements



An expansion of Argentina’s PE production could help the Central and South American region curb is growing deficit, which is expected to grow from 1.5 million mt/year to 2 million mt/year by 2025, according to S&P Global Platts Analytics.

But until that happens, the lack of investment highlights why Latin America stands to be a hot market – and a battlefield – for North American resin producers in the coming years.

Representatives of global petrochemical companies have noted that Latin America has the natural resources to replicate the petrochemical growth seen in the US, but that key decision makers in the region must work to make sure they are creating environments where the industry can thrive.

The key for these countries will be ensuring stable fiscal and investment climates, balanced contract terms, and clear regulatory requirements, sources have said.

Except these days, the future of several petrochemical assets in the region is as uncertain as it has ever been.

In Mexico, Pemex’s long-term role in the petrochemicals space – which includes production of aromatics, olefins and

polyethylene under two subsidiaries (Transformacion Industrial and Etileno) that emerged from last year’s restructuring – is now in question.

Pemex CEO Jose Antonio Gonzalez Anaya earlier this year said the company would slash its 2016 budget by Pesos 100 billion ($5.5 billion) to deal with challenges arising from low crude prices. Meanwhile, Pemex Transformacion Industrial leadership said Pemex is open to investment by third parties in its petrochemical assets.

A similar situation can be found in Brazil, where Petrobras has sold operations in Argentina and Chile that kicked off a divestment plan by the cash-strapped company that aims to sell $14.4 billion worth of assets in 2016.

Petrobras is exploring the sale of its Petroquimica Suape and Citepe stakes to Mexico’s Alpek, and its 36.1% stake in Braskem could be next, multiple market sources have said. The companies have repeatedly declined to comment on said discussions.

Braskem’s stake might be attractive to Asia- or Middle East-based players seeking to expand in Latin America, market sources have said.

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In Colombia, Ecopetrol said earlier this year it remains committed to an asset divestment program for 2016-17 that includes selling off polypropylene producer Propilco. Ecopetrol said it aimed to bring in $400 million-$900 million through such sales.

Whether other producers in Latin America decide to follow in the steps of Braskem Idesa and attempt to carve out their own piece of the regional market remains to be seen.

One thing is certain: It will take time.

“The Braskem Idesa project was a 10-year project that is just now coming to fruition,” said Eduardo de la Tijera, a Mexico City-based consultant with Grupo TEXNE.

In Argentina, leaders hope YPF partnerships with Dow, ExxonMobil, Total and others might lead to more investment and further development of the country’s vast shale resources.

“And so it is set in motion an ambitious exploration and production plan that will help the country supply its own gas,” Neuquen province governor Omar Gutierrez tweeted in Spanish following the agreement with YPF in October.

He concluded his message with a hashtag that loosely translated as: “The future has begun.”

Meanwhile, the petrochemical sector awaits its turn.

— With reporting by Ingrid Furtado and Charles Newbery



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LATIN AMERICA’S PETROCHEMICAL DILEMMA - platts.com · out throughout Latin America, where many petrochemical producers, many of them state controlled, find themselves at ... (Comperj)