Iranian petrochemical industries are now pioneering the use of industrial automation technology as is evident in their use of 'Field Bus' control system instead of the DCS' system. The implementation of such a large number of projects is unprecedented, if not unique, in the history of the world petrochemical industry; and with projects under implementation coming on-stream, NPC's share of the world's petrochemical production will rise from the present 0.6% to 1.4% by the year 2005 and Iran's share of international trade will nearly double to 3% from the current 1.8%.

The petrochemical industry in most parts of the world is, at last, showing signs of recovery. The industry was suffering even before the recession officially began in March 2001, cutting profits, stock prices, workforces, and capital spending along with adding a host of other costs. This year's world outlook, however, shows great variations among individual countries. In the U.S. in 2003, the petrochemical industry should show fairly solid growth in sales and earnings, though probably not at prerecessionary levels. Employment, research and development (R&D), and especially capital spending will grow as demand improves. However, the petrochemical trade deficit will swell.

In Canada, the recovery will continue as volume increases. Prices, which declined last year, are projected to stabilize in 2003, boosting revenues. Mexico, the other member of the NAFTA trio, will also show growth this year. In other Latin American petrochemical producing countries, Chile, Brazil, Argentina, and Venezuela are expected to show modest growth, although political instability remains a wild card in the region. In Europe, the chemical industry in European Union countries w-ll grow at about the same 3.0% rate seen in 2002, but growth in the so-called transition countries -consisting mainly of Southeast European and Commonwealth of Independent States (CIS) nations- will outperform that of the EU nations. Asia also has to be taken on a country-by country basis, with petrochemical growth reflecting a range of performances, from a 7.2% increase in demand in China to continuing economic problems in Japan.

Most observers agree that the U.S. petrochemical business cannot get worse than it was in 2001; a year that began with natural gas costs at record highs and ended with a recession much more severe than most people expected. Moreover, massive capacity expansions started up over the past year and a half in North America and the Middle East, digging a whole too deep for U.S. producers to climb out of. The situation was so bad that roughly 6 billion pounds of U.S. ethylene capacity lay idle last year. In fact, three ethylene crackers -too old and unproductive for further investment- will be decommissioned. To many observers, 2001 was reminiscent of the early 1980s, the last time U.S. ethylene producers faced such severe capacity rationalization. The observers warn that, like then, more crackers will be closed.

In fact, many experts question the very future of the U.S. ethylene industry. They see the center of gravity shifting from the Gulf of Mexico to the Persian Gulf, where feedstock is cheaper. The biggest market is the Asian market, and prices there are being set by Middle East-derived material. The U.S. has had a hard time stacking up against that. It is not an absolute blockage as it was at the beginning of last year, but it is still a very difficult market to sell into. So, some change in the U.S. is inevitable.

The ethylene industry in Europe typically runs at higher operating rates than in the U.S. European producers, after 1982, made the decision that they would adjust their supply because of Middle Eastern production and the reality that Europe would become a net importer of ethylene derivatives. In fact, Dow's own 1.3 billion pound addition in Temeuzen, the Netherlands, in February 2003, is the only recent major European capacity increase.

Most producers expected some improvement in the U.S. ethylene industry sometime during the second quarter of 2002, depending on the timing and strength of the rebound in the U.S. economy. There will then be a relatively steady recovery in 2003 and 2004, with the next peak in the profit cycle occurring by the end of 2004 or beginning of 2005. Some producers say ethylene oxide and glycol will be the first ethylene derivatives to improve, because no new capacity is on the horizon. Ethylene operating rates have already climbed to as high as 83%. But a return to normalcy in ethylene markets depends on the economic recovery and how much additional capacity gets shut down.

Even though the worst is likely behind the U.S. petrochemical industry, fundamental shifts in the global market do not work to its favor, and its ability to export to Asia-Pacific is likely to fall. Gradually, the proportion coming from the U.S. manufacturing base will go down as China will fill its needs both by inland construction and by increasing its imports. Those imports, to a smaller extent, will come from surrounding countries, and to a larger extent, from the Middle East.

The spending of some petrochemical industrialists reflects the change. For example, BP Chemicals reduced capital spending from $1.2 billion in 2001 to $800 million in 2002, with investment focused on completing projects in Asia. This is not going to be a particularly big spending year in North America, but so far nothing has been canceled. In all, five European and U.S. chemical producers - BASF, BP, Shell, Dow, and Exxon Mobil have six ethylene joint ventures with Chinese companies planned over the rest of the decade. Exxon Mobil is planning two ethylene ventures in China. Last year, it also started up an integrated cracker in Singapore. The first of the China projects will likely be BASF's, which is already under construction. Observers have doubts about the rest. In fact, last year, Chevron Phillips canceled plans with PetroChina for a cracker in western China.

Western companies are also pouring capital into the Middle East. In late 2000 and early 2001, Exxon Mobil started up two crackers in Saudi Arabia with partner Saudi Basic Industries Corp. Other startups include Borealis' Borough joint venture with Abu Dhabi National Oil Co. in the United Arab Emirates at the beginning of this year. The $1.2 billion complex has 1.3 billion pounds of ethylene and 1 billion pounds of polyethylene capacity. Chevron Phillips is opening a 1.1 billion pound ethylene joint venture later this year in Qatar, and it plans another cracker for 2006.

This trend will change the ethylene market in the U.S. to a more inward focus in North America, a self-supplying situation rather than an export scenario. It won't make sense for a country like the U.S. to import raw materials to process and export them to China, when China can import the same raw materials itself. It makes much more sense for the U.S. to consume its own goods rather than export again. The model will move gradually to a more European model.

An exception, is Canada, which will continue to have the ability to export to the Far East because of its new, large plants; an efficient supply chain for export; and cheap ethane. However, some (like Exxon Mobil) contend that the U.S. may continue to be an exporter in the long run. Because, Asia's growing self sufficiency will take a substantial amount of time, and there are closer markets, such as South America, for the U.S. to export to. In the foreseeable future, the U.S. and Middle East will continue to be significant exporters to those areas.

The North American market was built up on the assumption that natural gas would be readily available at low cost. Most experts agree the one lesson that the U.S. industry has surely learned from the past year is to be less dependent on ethane feedstock. Many U.S. producers have these kinds of projects under way. Dow is investing in its Gulf Coast operations to increase feedstock flexibility. In addition, its new cracker will be more flexible than the smaller units it is replacing. They will build ethane plus propane so they won't be forced to use ethane.

Most experts agree that propylene production in the U.S. will remain competitive globally because, unlike Europe and Asia, the U.S. has abundant refinery capacity that produces propylene as a by-product. Indeed, the U.S. propylene sector may be able to fill the gap caused by all the new plants in the Middle East, which are ethane-based and make little propylene, and all this ethane based capacity may lead to a global propylene shortage. The U.S. will be called up to meet these shortages. Thus, the U.S. could likely turn toward heavier faced stocks.

Petrochemicals in the Middle East

The Middle East is probably the most important influence on the global petrochemical industry today and will remain so for many years to come. The region's unparalleled production cost advantage and the willingness of its governments to diversify their oil-based economies have fostered exponential growth of an industry that may forever change the commodity petrochemical business.

The Middle Eastern industry has grown from being insignificant 20 years ago to being home to about 10% of global ethylene capacity today. For Europe and the U.S., the region is both threat and opportunity, gobbling up the export market on the one hand and presenting a profitable place to invest on the other. For Asia, the Middle East is a threat but also an important emerging source of petrochemical products. But the Middle East's success isn't unbridled. The war in Iraq, logistical and feedstock challenges could hem in the region's growth.

For Makoto Takeda, head scientist at Tokyo-based Dia Research Martech, the reasons for Middle Eastern countries to focus on petrochemicals are obvious. "The Middle Eastern oil-producing countries, led by Saudi Arabia, have in recent years promoted a policy of reducing their dependency on the oil economy and are actively tackling the petrochemical industry as a pillar for fostering domestic industry," he says. "With their background of superiority in feedstock, they are proceeding with expansions for their petrochemical industries at a pace, in some cases, unrelated to the world's supply-demand balance of petrochemicals."

Ethylene can be made in the Middle East for a fraction of the cost of making it in Asia, the destination for most Middle Eastern exports. The price of ethane in Saudi Arabia is set at $0.75 per million BTU, which translates to an ethylene production cost of $100 to $110 per metric ton. In Iran, ethane costs $1.25 per million BTU. In contrast, naphtha-based ethylene in Asia costs five to six times as much as ethane-based ethylene in Saudi Arabia.

Saudi Arabia: No company has benefited more from this advantage than Saudi Basic Industries Corp. (SABIC), the majority of which is owned by the Saudi Arabian government. In 25 years, the company has grown to 40.6 million metric tons of petrochemical production and sales of $9 billion in 2002. In a bid to get a foothold in the European petrochemical market, SABIC purchased DSM's petrochemical business for $2 billion last year. The business has a capacity for about 2.6 billion metric tons of polymers and had 2001 sales of $2.1 billion, making SABIC the 11th largest petrochemical producer in the world. SABIC has said it is considering acquisitions in other regions such as Asia. SABIC is also taking a large step with Jubail United Petrochemical Co., which it is building alone. The venture will begin during the second half of 2004, bringing 1 million metric tons of ethylene plus ethylene glycol and -olefins to the market.

Abdullah S. Nojaidi, the firm's executive vice president for planning and investment, said "SABIC's expansion is far from done, and our goal is 48 million metric tons of capacity by 2010". Saudi Arabia alone has over a quarter of the world's proven oil reserves and well over a century's worth of natural gas. This means petrochemical producers in Saudi Arabia can depend on the continued availability of feedstock and energy resources for many years to come. Tapping these resources will be the Saudi Gas Initiative, which Exxon Mobil and Shell are lining up to help develop. Sources have said the project could support three or more ethylene crackers. However, talks on the initiative stumbled last year.

Much of the production is planned for the Petrochemical Special Economic Zone (Petzone) centered on the southern town of Mahshahr. Part of Petzone is an olefins project that was slated to come on-stream February 2003. It has the capacity for 520,000 metric tons of ethylene, plus propylene, high-density polyethylene (HDPE), and linear low-density polyethylene (LDPE). Another olefins project in the same area is expected to have 1.1 million metric tons of ethylene, as well as propylene, LDPE, polypropylene, HDPE, and ethylene glycol.

NPC has also set up the Pars Special Economic/Energy Zone to make petrochemicals near the Persian Gulf port of Assaluyeh. One project, set for completion in 2005, will include a 1 million-metric-ton ethylene cracker together with downstream HDPE, LDPE, and styrene units. Because of U.S. trade sanctions, Iran rarely teams up with foreign investors, but NPC has recently signed on South Africa's Sasol as a partner in a polyethylene plant at the site and may sign on SABIC. Another project in the Assaluyeh region, slated for completion in 2005, aims to have 1.3 million metric tons of ethylene capacity along with downstream HDPE, LLDPE, polypropylene, ethylene glycol, and -olefins plants. And in the offing for NPC is a 500,000-metric-ton ethylene cracker, with derivatives, on Kharg Island in the Persian Gulf. The company is also looking at an ethylene, propylene, HDPE, and polypropylene complex to be commissioned in 2006 in Ilam.

Seeing the success of Saudi Arabia and Iran, a number of other countries in the region, including the United Arab Emirates, Kuwait, Qatar, Oman, and Egypt, have either completed major petrochemical projects or are planning them.

United Arab Emirates: In the U.A.E, Borealis -itself 25% owned by International Petroleum Investment Co. of Abu Dhabi- completed its Borouge cracker joint venture with Abu Dhabi National Oil Co. in late 2001. The company has 600,000 metric tons of ethylene and two 225,000-metric-ton plants for LLDPE/HDPE. Henry Sperle, executive vice president of technology and projects at Borealis, says Borouge has so far exceeded expectations and adds that the partners are considering expansions. For example, the polyethylene plants can be expanded to a total of 600,000 metric tons. He also notes that natural gas development under way will make more ethane available for petrochemical projects in 2007 and could support a new 1.2 million-metric-ton cracker.

Kuwait: Dow Chemical says it has had similar success with its Equate joint venture with Kuwaiti government-owned Petrochemical Industries Co. and Boubyan Petrochemical Co. The venture has an 500,000-metric-ton ethylene cracker with ethylene glycol and polyethylene derivatives. Dow wants in on expansions that Kuwait is considering, says Theo Walthie, business group president for hydrocarbons, energy, and ethylene oxide/glycol at Dow. "We are extremely satisfied with the relationship, the reliability, and the economic and safety performance," he says, noting that the current capacity could be doubled. Qatar: Qatar is also carving a role in the industry. Earlier this year, Q-Chem, a joint venture between Chevron Phillips Chemical and Qatar Petroleum, started Qatar's second ethylene complex. The facility includes a 500,000-metric-ton ethylene cracker, a polyethylene plant, and a 1-hexene unit in Mesaieed. Qatar Petroleum is planning other projects. Last year, it formed another joint venture, QChem II, with Chevron Phillips, set to build polyethylene and -olefins plants in Mesaieed, each with a capacity of 350,000 metric tons. In addition, Qatar Petroleum and Atofma are major partners in Qatofin, which is planning a 450,000-metric-ton polyethylene plant. And Qatofin and QChem H are planning a 1.3 million-metric ton ethylene cracker in Ras Laffan. All these projects are expected to be completed in 2007.

Egypt: Egypt has yet to develop a sizable petrochemical industry, but is reportedly considering a 1 million-metricton cracker with an international partner. Andrew Spiers, vice president of Nexant/Chem Systems, says factors such as Egypt's growing feedstock availability, large domestic market, and logistical advantages into Europe bode well for the country.

Oman: Oman is also considering a cracker, though Spiers says that earlier initiatives along these lines with BP did not proceed. However, the country is planning to build a 340,000-metric-ton polypropylene plant with LG International by 2006.

Iraq: Because of the Iran-Iraq War, the Gulf War, and economic sanctions throughout the 1990s, Iraq doesn't have much of a petrochemical industry. Before the war, Iraq operated a 130,000-metric ton ethane-based ethylene cracker in Basra that was connected to small polyethylene and polyvinyl chloride plants. The complex was rebuilt after bombing during the Gulf War, but the PVC plant never restarted, and the ethylene plant is running at very low rates. Now that the regime is changed, an Iraqi chemical industry could develop as it has in other Middle Eastern countries, but observers say that is at least a decade away.

However, war is not the only thing that has limited the Middle Eastern petrochemical growth. The region's feedstocks are not unlimited, and government-owned oil companies are looking to charge more for them. Moreover, future feedstocks will cost more to get out of the ground. Logistics are also an issue. Middle Eastern petrochemical suppliers enjoy cheap rates on Asian container ships that unload goods in the Middle East and go back empty. Notwithstanding, most are still optimistic about the region, saying it makes sense to use the Middle East supply source as a base load for the world, because that is an attractive and economically viable solution.

Petrochemicals in Iran

On the world energy map the location of Iran is very strategic, due to its access to both the Caspian Sea and the Persian Gulf, a region where most of the world's energy is stored. This country owns about 9%of the world's crude oil and 18% of its gas reserves. The Iranian government desires to move away from an economy based on oil exports and to put the development of its gas resources, (with proved reserves of 23 trillion cubic meters) at the top of the official agenda.

So, the development of the petrochemical industry has been chosen as its main national objective. Access to large quantities of ethane recoverable from natural gas guarantees ethylene production at low cost and over and extended period of time. Under such ideal conditions and with the use of large ethane crackers and low production costs the maximum competitiveness for petrochemical products would be attainable. The production cost of ethylene has been estimated at $100 and $165 per ton for ethane crackers in the Middle East and USA, respectively. In Europe, where 73% of ethylene is produced by naphtha crackers, the cost in the same period is estimated at $220 per metric ton.

Long- term feedstock availability and relatively low production costs have attracted many multinational corporations to make the best possible use of these potentials already available in the Middle East. Many joint venture companies have become active in the development of the petrochemical industry in this region. At present, projects for annual production of 3.4 million tons of ethylene and 4.6 million tons of down stream products are under execution within the framework of such cooperation. Because of its potentials, the Middle East is bound to become the most active region for development and growth of the petrochemical industry in future, and Iran's top strategy is to take a major portion of this development.

In accordance with the government policy on rapid development of the petrochemical industry, many steps have been taken to make foreign investments in this industry more attractive for our future joint-venture partners. Such actions include creation of special industrial economic zones, revision of legal to taxes and tariffs, guarantee of capital and profit transfer, and providing the required utilities and the needed infrastructure for industrial and commercial operations. The availability of a highly trained but inexpensive work-force and a sizable internal market, will also work in Iran's favor, to attract foreign investment.

This amount of compounds can provide feedstock for the total petrochemical products of the world for 45 years. Iranian petrochemical industries are now pioneering the use of industrial automation technology as is evident in their use of 'Field Bus' control system instead of the DCS' system. The implementation of such a large number of projects is unprecedented, if not unique, in the history of the world petrochemical industry; and with projects under implementation coming on-stream, NPC's share of the world's petrochemical production will rise from the present 0.6% to 1.4% by the year 2005 and Iran's share of international trade will nearly double to 3% from the current 1.8%.

The establishment of a Petrochemical Special Economic Zone (Petzone) with necessary infrastructures for implementation of big petrochemical projects has provided suitable conditions for investment. With over $2.8 billion in foreign exchange plus 6,000 billion rials in national currency being spent on only 1,700 hectares of land (which means $1.7 million dollars plus 3.6 billion rials on each hectare), this region is set to enjoy high economic potentialities and turn into a leading industrial zone in the country. These figures show the amount spent only by NPC without taking into account other investments already made or to be made in the region.

In the past four years, 41 contracts worth $5.2 billion on engineering and manufacturing equipment for the new projects have been awarded to Iranian, as well as, international firms and companies. Furthermore, during the time span we have entered into 105 contracts with domestic contractors worth 5.4 billion rials to construct and carry out projects. March-September 2002 witnessed a $370 million dollars deal and some 2.78 billion rials of domestic revenues. The figures are to grow to $900 million for the former and 7 million rials as far as the latter is concerned.

NPC's Strategy

NPC has chosen certain strategic plans and policies to facilitate faster growth and more profitable operation of the petrochemical industries in Iran.

Capacity utilization

Privatization

NPC'S top management and policymakers believe that active participation of the private sector, both local and foreign, is essential for sustained growth of the petrochemical industry in Iran. Policies for encouragement of private sector participation include allocating NPC shares to private sector both inside and outside of Iran; supporting local private sector investments in the petrochemical industry; supporting local engineering firms and production companies; allocating parts of engineering, and most of construction jobs, to the local private sector; and allowing the private sector to invest in new projects in the petrochemical industry.

Expansion of the Petrochemical Industry

For future expansion of the petrochemical industry, NPC has adopted policies which take into consideration the industry's merits and prepare the technological base for construction and profitable operation of petrochemical plants. The aim is to carry out new projects based on products with higher added value; maximize the use of ethane as feedstock and to benefit from the capabilities of local firms in terms of engineering, design, parts, catalysts and chemicals; and attract local and foreign capitals in the forms of finance and joint ventures. For planning future expansions a long term development plan was required. So, in 1989 the Planning and Development Department of NPC initiated, with the help of other related institutions and individuals, a long-term study on the "Strategic Plan for the Development of the Petrochemical Industry in Iran". Considering national and international factors such as the local market, export potentials, feedstock availability and profitability, a 25-year development plan, consisting of five development phases, was drawn up. Phases 1 & 2 are presently under implementation. The third five year plan or phase 3 which is designated for implementation during the period 20012005, consists of five petrochemical complexes, one (8th olefin ) to be located in Bandar Imam, and the remaining four in Assaluyeh. These projects are ready for implementation.

Exports

As indicated previously, the policy of the Iranian government is to move away from crude oil exports to exports of noncrude and especially petrochemical products as a source of foreign exchange earning. The idea to expand exports through becoming much more competitive; supporting the private sector to enter the export market; expansion of marketing network outside Iran; working with foreign creditable companies for marketing; improving product quality and packaging; better after sales services, and supporting local export establishments.

To provide easier adoption of foreign know-how and development of local technology, NPC plans to invest more on its R & D activities. Certain policies are adopted for such development, such as cooperation with research centers outside Iran; carrying out joint research projects with local institutions and universities; systematic link with local and foreign research centers; and design and operation of pilot plants for research purposes.

Designation of Special Industrial Economic Zones

To provide a suitable environment for attraction of foreign and local investments in the petrochemical industry, NPC has made a great effort to develop two special economic zones, one in Bandar Imam and the other in Assaluyeh, details of which have been mentioned previously. There is no doubt that the potential foreign investor can gain a great deal by investing in Iran's petrochemical industry. Now that the Iranian government and its laws welcome such investments and provide assistance and protection for capital, the opportunity is too good to miss.

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