CEO Panel Theme 2: Access to Feedstock

Moderator: Marcos de Marchi, CEO, Elekeiroz / Chairman of the Board, ABIQUIM

In general, the highest cost of the chemical industry is the raw material, followed by energy costs. How do you see the costs of naphtha, natural gas and electricity in your country, and how do you think costs will continue to evolve in 2020 and 2021?

In petrochemicals, to maintain existing production and plan future growth, there are necessary and sufficient conditions that must be in place. First, there is a need for naphtha, propane, ethane, butane or whichever raw material is being used. Thus, it is necessary that the reserves of gas or oil associated with these raw materials are present. Without that, we cannot even start talking. On the other hand, it is necessary that these raw materials be competitive for the industry, so that they have a reasonable cost to the consumer. The good news from what we see in the pre-salt and in Vaca Muerta is that there is a large volume of reserves in the ground and that production costs are falling substantially.

Now, all these conditions are necessary, but not sufficient. We have seen examples in South America and around the world of countries that have vast reserves of oil and gas and are exporting their production but that have not developed their petrochemical industry. For example, Australia is going to become the major LNG exporter along with the United States and Qatar, and its petrochemical industry does not exist.

Diego Ordóñez, President, DOW Argentina and Latin America South Region

In South America, we have the case of Venezuela, which has vast reserves of oil and gas that cannot reach their potential, or enormously successful cases such as Peru with the export of LNG, which has not been able to develop its petrochemicals industry. Another extreme case is that of Canada, with a price of gas below US$2 per million BTU for many years and is just building its first LNG train now.

All this shows that having the raw material is necessary but not enough – you need to go further. We have a very good starting point with the pre-salt and Vaca Muerta, but we need the collaboration of private companies in upstream, midstream and downstream; the support of governments to develop the competitiveness of these industries; and the collaboration between associated markets for countries to reach an export profile, in a context of regional and global competitiveness.

Natural gas in Colombia is a very mature and developed industry, which already reaches 90% of the population in terms of residential use and covers a good part of the industrial sector, and that has also largely converted from coal to natural gas. We are self-sufficient, and between 2007 and 2015 we exported gas to Venezuela.

Now, our gas reserves are running out and prices have increased, which represents a significant challenge. We have to develop some important marine discoveries that we have made, but these are bigger investments that also require more time. Perhaps the deposit that is closer to production is Orca, a marine project in shallow waters that Petrobras is operating. There is also the possibility of further development in the Piedemonte mountain range. Today, this area is the main gas supplier, but it presents security problems, so we have to work with the government to ensure access. Finally, there is the possibility of developing shale gas, but there is no regulation in the country and we do not yet have permits. The courts have allowed us to start the pilots, but this will take time. We have worked with YPF to see how we can take the example of Vaca Muerta, because there is a very large potential of unconventional gas in Colombia that would allow the petrochemical industry to develop further.

Pedro Manrique, Commercial and Marketing Vice President, Ecopetrol

In our two refineries that produce petrochemicals, the main costs are gas and electricity. In electricity, our matrix is quite clean in Colombia, since it is 70% hydropower. However, there are cyclical challenges due to the El Niño phenomenon, and we are forced to produce the remainder of electricity with gas, significantly increasing costs.

With regard to raw material, we also have some challenges. We are currently importing ethylene and there is a need for more. The location of some fields containing ethane-rich gas presents a challenge because transportation in Colombia is difficult and very expensive due to the topography. Sometimes it is easier and cheaper to import from the Gulf of Mexico. We have to solve these challenges in 2020 and 2021.

Fernando Musa, CEO, Braskem

Brazil is an importer of petrochemical naphtha and ethane, and we are far from the main sources of these raw materials, which creates many challenges in the short term from the point of view of costs and logistics management of those products when they reach Brazil. There have been discussions about changes in the midstream segment by Petrobras, but this has not yet occurred, so in the short term we will continue to have expensive raw materials and therefore less competitive chemicals.

The changes being made by the government, ANP and CADE will create the conditions for this to change. The sale of refineries by Petrobras can generate a greater supply of petrochemical naphtha, and changes in the regulatory framework of natural gas should allow for more ethane and propane to be extracted from natural gas, which is not happening today. In the medium term, with the increase in pre-salt production and changes in logistics infrastructure, Brazil must have more volumes of raw material at more competitive prices, be it petrochemical naphtha or ethane from natural gas.

From the point of view of electricity, power is still expensive, partly because of the high cost of natural gas in Brazil. The good news is that the wind and solar energy projects being built in Brazil are very competitive, with sale prices even below some hydroelectric contracts. That said, in the energy transition we will need more natural gas-powered generation, and for this to be competitive, the production of the pre-salt fields must increase, and also we need a connection with Argentina so the Vaca Muerta gas can reach the south of Brazil. Unfortunately, this will not happen before 2021, so we will have to wait a little longer.

Daniel González, CEO, YPF

Unlike other countries that did not have the vision or did not take the opportunity to develop their petrochemicals industry, Argentina, as a producer of oil and gas for more than 100 years, has seen the development of its petrochemicals as a natural extension of hydrocarbons extraction. It is true that, as oil and gas production began to decline, we have not seen new petrochemical projects in recent years. This has changed with the advent of the shale resources, and in fact we are the main producer of unconventional hydrocarbons outside the United States.

The development of Vaca Muerta has shown that Argentina is again an efficient producer of oil and gas. Today there is excess capacity of oil and gas production in the world, so we must ensure that production is done at competitive prices. In Vaca Muerta, we produce oil with a development cost below US$10 per barrel. This was a dream a few years ago, and today it is a reality.

The same goes for natural gas, which is very rich in ethane and is also being developed. We have entered a situation where, after many years of importing liquefied gas both in winter and outside the winter period, Argentina now has a surplus of natural gas, which in the short term can become a problem. Having gas that is too cheap is not good, because then there will be no further investment. We are in a transition towards a balance situation, where the cost of gas development is competitive by global standards, which will also allow for investment in interesting petrochemical projects. However, for this to happen we need to solve the issue of what will be done with the methane from the gas – that is, where can we place the C1 so that we can have the C2 and C2+ for the petrochemical business.

Vaca Muerta offers an export opportunity, but no country wants to be just a commodity exporter. There is political consensus to develop Vaca Muerta and also to industrialize those hydrocarbons, and that is where petrochemicals come in. Therefore, we are very optimistic to be able to bring very cheap raw material options for our own petrochemical business, including existing business and potential new ventures that we want to undertake with different partners.

In electricity, YPF is also an important producer in Argentina, and in this sector the cost has also dropped substantially. Today, we are one of the five largest producers of electricity in the country, and much of this energy comes from natural gas. We have a goal to reach 20% of the energy generated to be renewable.