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Ethylene XXI: "Large petrochemical projects like this are very economically beneficial wherever they're built"

John Stekla

Director ethylene studies/CMAI

Published  Monday, September 28, 2009

Brazilian petrochemical company Braskem's emergence as a potential partner in Mexico's Ethylene XXI project has breathed new life into plans to construct a US$1bn, 1Mt/y ethylene plant and downstream production units including polyethylene and polypropylene in Coatzacoalcos in Veracruz state.

Braskem would join a consortium of Mexican chemical producers made up of Mexichem, Idesa and Alpek.

BNamericas spoke with CMAI's North American ethylene consultant, John Stekla, to learn more about the project and what it would take to come to fruition.

BNamericas: Braskem has emerged as a potential partner in the Ethylene XXI project, with Mexican companies Mexichem, Idesa and Alpek, to construct a 1Mt/y ethylene plant. Is Braskem's potential involvement likely to provide the necessary impetus to get the project off the ground?

Stekla: I think it will certainly help. Certainly Braskem brings experience, visibility, and tremendous market presence to the project. Clearly Braskem are actively looking to expand throughout Latin America.

Ethylene XXI could be an effective project for the Mexican market. Mexico is relatively hydrocarbon rich, and they're also a very large importer of ethylene derivatives. A project of this magnitude would go a long way to making them more self-sufficient in ethylene derivatives and I think that would be a very preferred position to be in.

BNamericas: Given the projected investment in Ethylene XXI of US$1bn, how much of a concern is the long-term supply of feedstock?

Stekla: Clearly, they have to look into how secure is their feedstock supply because the commercial life of a project like this can be 40 years although investors ideally want to see a total return on their investment inside of 15 years. That is the typical time horizon that companies use when evaluating a capital investment. So there has to be a reasonable level of confidence that the feedstock will be there and I imagine at the same time they're asking for advantaged costs as well.

BNamericas: The other issue is securing competitively priced ethane. What are the problems associated with achieving this?

Stekla: I don't know the in-country pricing mechanisms such as how natural gas prices are set, but that will have an impact on your ethane value because there are only two uses for ethane: either you leave it in the natural gas stream and burn it as natural gas or you extract it for chemicals production. So if the natural gas price is high relative to crude oil and naphtha, then that would be the basis for an uneconomical project. There is a tremendous amount of ethylene and derivative capacity being built, especially in the Middle East, based upon very competitive feedstock prices, which are set by government mandate. If you don't have an aggressive feedstock cost position, your domestic market may be opened up to imports from this very low-cost production which could then make your project uncompetitive even in-country, and so this is what they want to prevent. The project owners want to have a feedstock position such that they can sell the production into the domestic market and then also perhaps to be in a position where they could export incremental production as the market dictates.

BNamericas: How much of a threat is the new capacity due to come online in the Middle East to the Ethylene XXI project?

Stekla: It would be a definite threat both directly and indirectly. Mexico is a large net importer of ethylene derivatives so it would be a natural destination either for direct sales from these new projects or from product - for example, from western Canada or the US - that is displaced from current importing markets by this new low cost production. However, the new Middle East production will first preferentially flow to markets with higher netbacks, like Asia or Europe, as the logistical costs to ship to North America are higher.

Large petrochemical projects like this are very economically beneficial wherever they're built because you not only get the immediate stimulus from the construction, but they also provide ongoing employment and additionally upgrade your hydrocarbons. A big part of the Chinese stimulus package is investment in their petrochemical sector for those very reasons. There are very positive sociological factors.

BNamericas: Also the potential to export products with more added value.

Stekla: And it helps your balance of trade. If you're importing a million tons of polyethylene, which is what Mexico did last year, that's a tremendous outflow of hard currency. If you can keep that capital within the country, it will obviously help your balance of trade.

For me, that's one of the main reasons for this project, there's an established market for the output within the country, but they have to be sure they will be positioned cost-wise in the future to defend their position in the market once they make this investment.

BNamericas: There hasn't been any investment in the country's petrochemical industry for years. Why?

Stekla: This is the commonly held view but that statement is not entirely accurate. In 2006 [Mexico's state oil company] Pemex restarted idled ethylene capacity at Pajaritos [petrochemicals complex in Veracruz state] and subsequently commissioned the first LLDPE plant in Mexico at the Morelos [complex, also in Veracruz]. Additionally, [Mexican polypropylene resins company] Indelpro expanded their polymer grade propylene production at Altamira in 2008 and likewise commissioned a new 400,000t/y polypropylene production unit. However, it is true that there has not been any investment in a grassroots ethylene steam cracker project in many years. If you go back to 2001 when this project first surfaced and you read the articles written at that time, the partners all said about the same things they are saying today which is that they need a secure supply of feedstock at competitive prices, however you define competitive. Evidently this has been a challenge to achieve and so has limited investment.

There is experience elsewhere in the world where governments have provided beneficial feedstock positions and investment incentives that go beyond just assuring below market feedstock prices such as in western Canada and the Middle East. Mexico can look to these regions to develop a comfort level that the long-term benefits of encouraging project development by providing advantaged feedstocks and investment incentives outweigh the short-term loss of revenue.

BNamericas: How detrimental would the failure of Ethylene XXI be to Mexico's petrochemical industry?

Stekla: Companies are pragmatic and they want to invest where they have confidence that they will be able to make a return on their investment. Therefore it's important for governments to recognize that and in fact do what they can to encourage the investment. Since the market demand for the derivatives will still be there as will presumably the hydrocarbon feedstocks, the failure of Ethylene XXI to gain traction would not necessarily rule out future attempts to develop such a project.

BNamericas: Do you think the project will come to fruition?

Stekla: If you look at the partners, they all bring something to the table, they all have a physical need for the output of the plant, and no one is strictly a passive investor so they all have a vested interest. A project with four parents can be a challenge to manage, but since they all have slightly different interests I think it can be an effective and pretty strong consortium to move the project forward. The market need is there, and you have the combined will and interest of the private investors, but it does hinge upon the assurance of ongoing economical feedstock supply.

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