By Joseph Chang
CARTAGENA, Colombia (ICIS)--The 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 exploit its own gas reserves, to boost the competitiveness of its petrochemical sector.
That was the key message coming out of the 33rd Latin American Petrochemical Association (APLA) meeting in Cartagena, Colombia.
It’s important to remember for the US and everyone in the Americas – shale does not stop south of the border. Mexico has the fourth largest shale gas reserves in the world.
The prolific Eagle Ford shale formation in Texas stretches far down into Mexico. Yet while the US is pumping massive amounts of hydrocarbons, Mexico has yet to drill its first producing shale gas well.
“It’s not rocket science,” said one delegate referring to shale gas drilling technology at the 2013 Polyolefins Consulting Seminar organised by the PetroChemical Consulting Alliance in Cartagena 15 November ahead of APLA which took place from 16-19 November.
“Energy companies just need an incentive. Why would I move my rig 10 feet south of the border when there’s plenty in the US?” he added.
But positive forces are converging in Mexico, led by the government’s proposed energy reforms. This is likely to give incentive for private energy companies to explore and develop reserves with state oil company Pemex (though only via contracts), and also open up the country for unfettered direct investment in downstream assets such as refineries, petrochemical plants, pipelines, and storage and transportation assets.
Drastic change is needed as hydrocarbon-rich Mexico imports half of its gasoline needs and two-thirds of petrochemicals and polymers consumption.
Pemex has been used as a piggy bank for decades, now contributing one-third of Mexico’s entire budget. That doesn’t make for a competitive player. And indeed the result has been outdated petrochemical plants in dire need of investment, as well as a plunge in oil and gas production since the early 2000s from 4m bbl/day to around 2.5m bbl/day though this appears to be stabilising now.
“Pemex is not ready to extract shale gas by itself as it has become technologically outdated and has the burden of paying one-third of the taxes in Mexico,” said Roberto Guzman, general manager of Mexico-based Pipa Consulting.
But as part of the energy reforms, Pemex would operate as more of an independent company, competing with others – somewhat in energy and definitely in petrochemicals.
“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. We have to learn,” said Carlos Pani, senior vice president for petrochemicals sales and marketing for Pemex, on the sidelines of APLA.
One sign of the coming shift is Pemex’s first joint venture in history – its JV with Mexichem completed in September 2013. This involves investment by Mexichem to expand Pemex’s old vinyl chloride monomer (VCM) facilities, which is expected to double capacity to 400,000 tonnes/year by September 2015. This will help Mexichem secure supply for its polyvinyl chloride (PVC) production in Mexico and Colombia.
The VCM project also involves an upgrade of the Pajaritos ethane cracker at the site in Coatzocoalcos to reach its full capacity of 190,000 tonnes/year. This will be achieved much earlier in 12 months. Right now, the old cracker is operating at about 70%.
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, and expand its 600,000 tonne/year ethane crackers in Cargrejera and Morelos for additional feedstock.
Mexichem is also taking advantage of US shale gas with a joint venture with US-based Occidental Chemical to build an ethane cracker in Ingleside, Texas by 2017, with all the ethylene feeding into VCM supply for Mexichem.
The company plans to raise PVC capacity by 300,000 tonnes/year to a total of 1.5m tonnes/year by 2016, the CEO of its VCM joint venture Petroquimica Mexicana de Vinilo (PMV) Rafael Davalos Sandoval told ICIS at APLA.
Here you can see a company moving quickly to take full advantage of its options to secure raw material supply.
But the key project right now in Latin America is Braskem Idesa’s gas-based Ethylene XXI project in Mexico in full swing and 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).
Braskem is still negotiating with state oil company Petrobras on the scope and terms of natural gas liquids (NGL) feedstock for the proposed project in Rio de Janeiro – the same was said a year ago at APLA.
While Braskem said the Comperj petrochemical project is “a priority” and progress is being made, the issue is likely to be the gas price. In addition, there is uncertainty as the source for the gas – the offshore pre-salt fields - has yet to be developed.
“[Comperj] will not be as good as the Mexico project,” said Calo Carvalhal, senior analyst for Latin America petrochemicals at JPMorgan. “Brazil has a very expensive natural gas price and the question is: What will be the gas price for Comperj? If it is $8, $9, $10/MMBtu, it will be better than naphtha, but not competitive with other projects in the US and Mexico.”
It is interesting that Brazil industrial conglomerate Odebrecht, which has a significant stake in Braskem, has announced it is exploring a worldscale cracker in West Virginia, US. Clearly the feedstock regime in the US is more favourable.
Argentina has a wealth of gas in its Vaca Muerta formation within both conventional and shale formations. Now it is a matter of bringing in the technology and investment to extracting that gas – no easy task after the seizure of Spain-based Repsol’s majority stake in today’s state-owned oil company YPF.
US-based companies Chevron and Dow Chemical are partnering with YPF to explore the potential. But development is likely to be years away.
Argentina is a natural place to build an ethane cracker. But for now, the country is dealing with gas shortages that have forced Dow’s cracker and PE plants in Bahia Blanca to operate at reduced rates.
Next door in Chile, Methanex is dismantling and moving two of its four methanol plants to Lousiana, US, on lack of gas feedstock.
For Latin America, the hydrocarbon riches are there. They are just not being developed fast enough to meet the pace of growing local demand. Meanwhile, imports are making inroads – from the US, Asia and the Middle East.
The target on Latin America as an import market only grows larger with the massive build-out of US cracker capacity and PE downstream backed by cheap shale gas through 2017.
Where it makes economic sense to build petrochemical assets locally, it can and should be done. Today this means ethane crackers if enough gas can be produced and low prices provided.
Building a naphtha cracker in Latin America is “impossible”, at least in the next 10 years, given the competition with low cost gas crackers in the US and Mexico, said Pedro Capella, vice president of special projects at Colombia-based polypropylene (PP) producer Propilco.
Ecopetrol, Colombia’s state oil company and owner of Propilco, has put its naphtha cracker project in Cartagena on hold indefinitely.
Yet perhaps Latin America could see another gas cracker in the near future.
US-based ExxonMobil is “looking very intently at” a cracker in South America, said Dwight Tozer, vice president, adhesion industry business.
The US will export resin to South America, but there is enormous potential for projects in the region “from the wellhead all the way through to final product,” Tozer said.
He sees “tremendous potential” in Latin America and in Colombia “in terms of working some of these integrated value chain principles”.
If Mexico’s energy sector were fully open to private investment, oil production would triple and gas production rise 11 times over the coming years, estimated Guzman of Pipa Consulting. Yet he calls the proposed reforms “insufficient” to spur such growth.
The lost potential in Latin America petrochemicals 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.
It’s hard to make investments when the government sets gasoline prices at 8.5 cents/gal, and the state oil company contributes $25bn to social activities. “That’s a blow to [state oil firm] PDVSA’s finances, said Gaviria.
And the glacial pace in making petrochemical investments must pick up if Latin America is to progress to its full potential.
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, noted the venture’s CEO Rafael Davalos Sandoval.
Brazil’s Comperj petrochemical project 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.