Iran's best foot forward
The petrochemicals sector seeks to overcome financing and previous mismanagement problems to prepare for its expansion
A strip of coast in southern Iran, hemmed in between mountains and the sea, is shrouded in dust in the day and lit up by gas flares at night. Around the Pars Special Economic Zone and the town of Assaluyeh, a massive petrochemical hub is taking shape. This is one facet of Iran's push into the sector, held up for many years and still facing numerous challenges. But it is set to grow steadily over the next few years.
Iran's petrochemical sector is already the second-largest in the Middle East, after Saudi Arabia's. It has many potential strengths: massive gas resources that also yield ethane and liquid hydrocarbons; a strong geographic position; a large domestic population with a well-educated workforce; and a growing roster of domestic engineering firms. The country can also gain from improving operating rates at its existing plants, with better gas availability, and improved management, maintenance and access to spare parts.
Assaluyeh, where gas from the giant South Pars field reaches shore for processing, is the most important, but not the only, petrochemical hub. Projects are also underway at the longer-established site of Bandar Mahshahr at the northern end of the Gulf, in the western provinces and in the strategic port of Chabahar in the southeastern Mokran region. The greenfield site in Mokran alone is planned to have a capacity of 25m tonnes a year, equivalent to almost half the country's existing total.
The industry is led by the National Petrochemical Company (NPC), but it's far more fragmented than the petrochemical sector in the GCC countries. Several companies listed on the Tehran Stock Exchange, such as Tamin Petroleum & Petrochemical Investment Company, Persian Gulf Petrochemical Industries Company, Parsian Oil & Gas, Jam Petrochemical, Kharg Petrochemical and Ghadir Investment Company have important petrochemical holdings. But they also have small free floats, a web of cross-shareholdings, and ownership by state and military pension funds, provincial authorities, NPC and companies linked to supreme leader Ali Khamenei. Other private industrial firms are also developing large projects.
180m t/y - Iran's 2025 petrochemical production target
The drive to develop the Iranian petrochemical sector derives from the wish to use Iran's giant gas resources to diversify its economy and export mix, feed downstream industries and create domestic jobs, in a way that simple gas exports wouldn't. Under former President Mahmoud Ahmadinejad, it became a way to funnel resources to favoured supporters, and, by a process of quasi-privatisation, to transfer valuable assets to entities linked to the Revolutionary Guards.
This resulted in a long roster of projects of doubtful economic merit, or promoted by companies without the managerial or financial strength to see them to completion. For some products, successful completion of all planned plants would have led to massive global oversupply. In the event, sanctions, shortages of gas and of capital, and difficulties in procuring equipment, have held them up.
Many of the plants that were barely begun will probably never see the light of day, or will be redesigned into something more realistic. For instance, realising that it was overbuilding methanol, Iran announced that new licenses for methanol plants won't be issued, even in the priority Mokran area, unless they're converted to methanol-to-olefins.
Nevertheless, the petrochemical industry is set for a wave of expansion as the better-conceived projects reach completion. Output is officially intended to reach 117.1m t/y by 2020 and 180m t/y by 2025, from 51m t/y in 2016 (out of 60m-t/y capacity). These official targets appear well out of reach, particularly by the 2020-22 timeframe, but Iran will still narrow the gap with Saudi Arabia.
Amongst key projects are the Kaveh methanol plant, some way north of Assaluyeh, which should start early in 2018 and will be the world's largest; the second phase of the Kavian Petrochemical Complex; and phase two of the Morvarid Petrochemical Company. Polyethylene plants are located at various points in Khuzestan, Ilam and Kordestan provinces, along the West Ethylene pipeline.
But the country's petrochemical industry also faces major challenges, particularly a lack of finance, where international investors continue to be deterred by US sanctions and the risk of dealing with entities linked to the Revolutionary Guards. Access to technology and genuine high-quality equipment was severely limited until the Joint Comprehensive Plan of Action came into force at the start of last year, and the sector still lags on modern management.
The gas industry suffers from the same lack of prioritisation, as was evident in the lengthy debates of the early 2000s. It has to replace oil products in domestic use (power and road transport), keeping its share of the energy mix over 70%; supply industry and petrochemicals; inject gas for enhanced oil recovery; and export to neighbouring Arab countries, the Indian subcontinent and Europe. In addition, it has to continue supplying existing customer Turkey, its freshly initiated market in Iraq, and possibly liquefied natural gas as well.
In principle, Iran has the gas resources to meet all these demands. Sales gas production, excluding reinjection and natural gas liquids extraction, more than doubled from 2004 to 2016, mainly due to the development of the South Pars field, which it shares with Qatar. But after South Pars Phase 11, for which Total and China National Petroleum Corporation signed in July, there'll be a significant slowdown until further projects can be negotiated. New fields slated for development, such as Kish, North Pars, Farzad-A and Farzad-B, contain significantly drier gas than South Pars, and will yield less ethane and NGLs for petrochemicals.
Gas should thus be readily available for a few years; but when demand catches up again, more shortages can be expected, especially in winter. The government has generally prioritised supplies to households in the cold season over industries. This will collide with the completion of many of the under-construction petrochemical projects, leaving them to run at reduced rates.
Europeans at the door
Following the end of sanctions, China and Japan have issued lines of credit for completing projects. Total and Shell have signed preliminary agreements for ethane crackers and other projects, while BASF held discussions last year for an ethylene and polyethylene complex, which seems to have gone quiet. Otherwise, European companies such as Linde, Haldor Topsøe and Air Liquide are mostly seeking to be involved in engineering and equipment supply.
Gas prices are reasonably competitive by global standards. Though higher than current Saudi levels, prices in the kingdom are set to rise as subsidies are reduced, and anyway allocations of new gas to plants other than Aramco's are generally not available. However, Iran faces competition from the US, given its cheap shale gas, particularly for ethylene and polyethylene.
One of oil minister Bijan Zanganeh's eight targets for his current term is to extend the petrochemical value chain. In Saudi Arabia, the UAE and Kuwait, available gas feedstock was largely allocated some years ago, and so new projects are either turning to mixed feeds (NGLs, naphtha and even crude oil), or focussing on downstream and speciality chemicals. In Sabic, Saudi Arabia has a world-class, international petrochemicals firm, which is an acceptable partner for foreign players, and becoming increasingly sophisticated. Saudi Aramco is also expanding its own petrochemical capacity, and both these companies have no trouble finding finance. Iran still doesn't have a peer for either of these.
Although Iran produces about 100 petrochemical products, it's still in the middle of expanding its basic capacity. Main exports are ethylene, polyethylene, methanol and mono-ethylene glycol (MEG), but there's little new capacity ahead in MEG. As the largest car manufacturer in the Middle East, Iran also has a growing domestic market for polypropylene and butadiene. But its consumer goods industry requires other chemicals based on toluene and benzene, whose production isn't yet expanding. In some cases, Iran is even importing intermediate inputs.