IRAN - Feasibility & Demand.

With parliament having checked on every project in the plan and the powerful, conservative Council of Constitutional Guardians having vetted every project approved by the assembly which now is controlled by conservatives, NPC has been extremely careful in its planning (see who's who in next week's Review). The strategic and commercial feasibility of each project has been studied by qualified quarters, including competent foreign consultants. Because all the projects were to be built either on buyback turnkey contracts (BBCs) or as joint ventures (JVs), the foreign companies involved have made sure their project was really feasible. NPC badly needed qualified foreign companies for both the BBCs and JVs, not only because it lacked expertise for projects that were expensive, but also in view of their credibility, technological advantages and financial resources.

Feasibility not only depends on low feedstock costs and strong demand - NPC in 2003 said petrochemicals demand in Iran was rising 15%/year - but also on the choice of technology to allow for economics of scale to cut costs and boost competitive advantage, choice of foreign partner, and timing for construction and commissioning based on forecasts of the next boom/bust cycles as this is a highly cyclical business. In early 2005 NPC decided that in all BBCs, local companies have to be the EPC leaders foreign firms should be the sub-contractors. As a result, in most cases, the value of the sub-contract has become much higher than that of the local EPC leader.

Middle East Emerging As Global Petrochemicals Hub: At the two-day ArabPlast 2005 Summit, the region's leading trade fair on rubber plastics and plastic processing, held last month at the Dubai International Exhibition Centre (DIEC), McKinsey & Co. presented a study pointing to a likely paradigm shift in the petrochemical business from the West to the East, with the Middle East emerging as a global hub. This is backed by the region's advantages of low-cost feedstock and labour, fast growing demand in Asia and new technologies.

McKinsey, a management consulting firm advising leading companies on issues of strategy, organisation, technology, and operations, projected a shake-up in the global petrochemical industry, wherein established Western companies will exit, shrink, or move east through partnerships, in order to defend their stakes. According to its report, the Middle East's share in the global ethylene market is expected to grow to 17% in 2010 from 9% in 2004, which means that 40% of all new ethylene capacity will be built in this region. The total world ethylene capacity is projected to increase to 148m t/y in 2010 from 114m t/y in 2004.

Mckinsey has projected a growth of 119% in net trade from the Middle East to East Asia by 2010, with China accounting for a major part of the increase. In addition to its huge population, China's chemical-intensive and export-driven industry is also driving demand for petrochemicals. The report said: "The gravity of the polyolefin world is shifting eastward, and chemical companies that want to stay in the business need to move and transform before their entire economic rationale is swept from under their feet".

The US share of global trading in ethylene derivatives has fallen to less than 10% today from 30% in the 1990s, and it will probably be less than 5% by 2010. Over the same period, the Middle East is likely to increase its share to more than half of the globally traded volume.

Western petrochemical players are under increasing pressure given disadvantages in feedstock, poor improvement in productivity, expensive work forces and subscale assets. As the gap between price and cost diminishes, they have a hard time coping. As a result of this, petrochemical plants in the US and Europe are becoming less competitive as compared to those in the Middle East, which is leading to a flat or declining production for ethylene and polyethylene.

Mckinsey has cited several reasons for the re-direction on both the supply and demand side of the scale. Primary among these is a projected boom in demand for petrochemicals in the Asia-Pacific region, which is catching up rapidly with the US and Europe. Demand is expected to achieve the same levels with the two regions combined by 2010. Demand for polyolefin is expected to grow at around 10% per annum with high density polyethylene (HDPE) growing by 9%, linear low density polyethylene (LLDPE) growing by 12% and polypropylene (PP) growing 10%.

Besides this, Middle Eastern companies have access to cheaper gas, with ethane costing $0.75 to $1/m BTU. The cost of crude oil would need to drop below $15/b for Western producers to be competitive for LLDPE in Asia.

McKinsey has spotted a trend of emerging alliances between the Middle East and China, which will combine the benefits of the Middle East's cheap feedstock costs and China's access to Asian markets. For example, Saudi Aramco has picked up a 25% equity stake in China's Fujian Refinery and Petrochemical venture.

According to the McKinsey, there are three dimensions to the growth of the petrochemical industry in the Middle East - capacity, portfolio and geography. The Middle East's heavy investments in ethane crackers and polymers will enable it to exploit the huge quantity of gas available. Its ethane supply will be able to meet around 17% of the global ethylene demand, which is expected to be 148m t/y by 2010. Some of capacity expansions include that of Iran's NPC, Saudi Arabia's SABIC and Chevron Phillips-Qatar Petroleum-Total. Companies in the Middle East could also expand by acquiring the assets of Western firms or by forming JVs with them. Examples of JV are SABIC-Chevron Phillips Chemicals, Atofina-Qatar, Basell-Saudi Polyolefins, Dow-Oman Oil, and CPC-Qatar Petroleum-Total.

A key point where Iran is concerned is NPC's good reputation abroad, as it has serviced its debts on time. In the early 1990s year-long letters of credit had to be strung end-to-end. With Dresdner Kleinwort Benson advising it on how to tap financial markets, foreign companies and their national export credit agencies, NPC is counting mainly on German, French and Italian banks to syndicate loans (see background in Vol. 56, No. 15). On the other hand, the need for NPC to secure project finance is limited due to its buyback approach to foreign contractors having to fund the projects they build. For each BBC required in projects not involving equity, the foreign sub-contractor has to include full or partial funding - depending on NPC's available cash resources.

In promoting its projects to potential foreign and local partners, contractors and financiers, NPC is holding annual conferences in Tehran. Its 7th IPF is to be held in Tehran on May 7-8, 2005.

Iran's first petrochemical plant, 70,000 t/y of fertilisers, was built in 1964 for the Commerce Ministry. Through the years, this became part of NPC which grew as a subsidiary of the Oil Ministry's NIOC. In 1990 the petrochemical industry began a period of rapid growth (see Iran's petrochemical plants in the April 1999 survey, Vol. 52, No. 14).

NPC is tendering two HDPE/LDPE swing plants to be built at the Lurestan Petrochemical Co. (LPC) and Mahabad Petrochemical Co. (MPC) complexes along the route of a western pipeline being built to supply ethylene to downstream ventures. These will be the first of several plants to be built along the pipeline. Technical proposals for the two plants were submitted on March 26. Prospective bidders for the EPC contract include the local Chagalesh Consulting Engineers with the UK's Sembcorp Simon-Carves, the local Nargan with Italy's Tecnimont, the local Sazeh Consult with South Korea's Samsung Engineering, and three other local companies - Namvaran Consulting Engineers Managers, Bina and Enerchemi which in late March were to name foreign partners for the project. Representatives from South Korea's Daelim Industrial Company and China's Sinopec have attended a pre-bid meeting. Each project is estimated to cost about $200m and will involve construction of a plant with capacity of 300,000 t/y.

Gharb Petrochemical Co. (GPC) was set up last year to carry out the western pipeline project. GPC is also planning polyethylene derivative plants at Kermanshah, Sanandaj and Gachsaran as well as a urea and ammonia facility at the latter plant. The pipeline will have a capacity of 1.5m t/y and stretch 1,500 km from the planned Olefins-11 ethane cracker at Bandar Imam. It will also extend down to Asaluyeh where more feedstock can be channelled from the Olefins-12 cracker.

Bandar Imam Projects: The Special Petrochemical Economic Zone (SPEZ), in an area of 1,700 hectares, was set up in mid-1998 as Iran's first specialised industrial park with a free zone status. It was developed around NPC's Bandar Imam Petrochemical Complex in a northern Persian Gulf port originally known as Bandar Shahpour, a complex on which work began in the early 1970s as an Iranian-Japanese JV (IJPC) and was completed in the 1990s. Among new projects at the SPEZ is a third natural gas fractionation (NF3) unit at to be built at Bandar Imam to produce LPG (see Gas Market Trends of this week).

Pre-SPEZ industries in the area also include the Razi Petrochemical Complex, the Mahshahr gas refinery and the privatised Farabi Petrochemical Complex. The SPEZ, site of four major olefins complexes, as a total capacity of 3m t/y of ethylene, the last of which was completed in 2004 (see Vol. 60, DT No. 15).

The ParsEE Projects: The following are the main ventures sited at Bandar Asaluyeh's Pars Special Economic/Energy Zone (ParsEE), which was set up in September 1998:

Olefins-9's ethane cracker on stream since 2003 produces 1m t/y of ethylene, and has units producing 300,000 t/y LDPE and 300,000 t/y LLDPE. It is a JV of NPC's Pars Petrochemical Co. (PPC) and Sasol of South Africa. Linde and Nargan have built a 3 MCM/h gas separation plant for Olefins-9. On its own, PPC is having plants built to produce a 600,000 t/y of styrene monomer and 400,000 t/y of monoethylene glycol (MEG) in 2005.

Olefins-10 for NPC's Zagross Petrochemical Co. and its downstream unit Jam Petrochemical Co has a 1.345m t/y steam cracker, able to use ethane and/or naphtha, being built by Technip and Nargan under a euro 300m ($280m) BBC awarded in March 2001. The complex is to be on stream in 2005. Naphtha is to be supplied by the Aromatics-4 complex being built nearby. Jam in Jan. 2001 had awarded BBCs worth euro 350m ($330m) to Tecnimont to build a 400,000 t/y MEG unit, a 300,000 t/y PP unit and 300,000 t/y LLDPE unit. The DM250m ($120m) BBC for a 300,000 t/y HDPE units was awarded to Krupp Uhde and Sazeh, with the latter being a partner and subcontractor in several other BBCs.

Olefins-11, with a 1.2m t/y ethane cracker first proposed to be a JV of NPC and SABIC, is to have units to produce 300,000 t/y of HDPE, 300,000 t/y of LLDPE, 600,000 t/y of styrene monomer and 700,000 t/y of MEG. The bidder for this complex are Sazeh with Linde, Nargan with Technip, Namvaran with Shaw Int'l, and PIDEC with ABB Lummus Global.

Olefins-12 will run in parallel, with a 1.9m t/y ethane cracker and a 300,000 t/y HDPE/ LLDPE swing unit, and plants for 660,000 t/y of MEG, 300,000 t/y of PP and 380,000 t/y of benzene. Indian Oil Corp. (IOC) at end-2004 withdrew from this venture.

Olefins-13 will have a 480,000 t/y capacity and will cost about $400m.

Aromatics-4 for NPC's Borzoyeh Petrochemical Co., started up 2004, built by a group of Toyo Engineering, Shinwha of South Korea and Sazeh under a Yen43,000m ($403m) BBC signed in June 2000. It produces 750,000 t/y of paraxylene, 430,000 t/y of benzene, 100,000 t/y of orthoxylene. By-products: 720,000 t/y of light cuts, 2m t/y of heavy cuts, 80,000 t/y of LPG, 375,000 t/y of raffinate and 64,000 t/y of heavy aromatics. The feedstocks are 536,000 t/y of NGL, 4.5m t/y of condensates and 270,000 t/y of pyrolysis gasoline from Olefins 9&10. Mitsui & Co. helped in the financing. The complex is the biggest of its kind in the world.