Basil el-Baz, chairman and CEO of Carbon Holdings

01 October 2014

Basil el-Baz believes Egypt can compete with the US and Saudi Arabia when it comes to world-class petrochemicals facilities

For someone in the final stages of securing financing for a multibillion-dollar petrochemicals project in an uncertain business environment, Basil el-Baz, chairman and CEO of Carbon Holdings, seems unusually relaxed amid the clatter of cups and saucers in the tea lounge of Cairo’s Four Seasons hotel.

“It is all about perseverance,” he says. “These deals are big and the variables are constantly changing, so it requires grit.”

With a total budget of $7bn – including financing charges, owners’ costs, and engineering, procurement and construction (EPC) contracts coming in at almost $5bn – Carbon Holdings’ Tahrir project is the largest active petrochemicals scheme in Egypt.

Tahrir scope

The work includes the construction of a 1.5 million tonne-a-year (t/y) ethylene cracker and a polyethylene facility with capacity of about 1.4 million t/y. It involves four primary EPC contractors, three primary subcontractors, about eight different offtakers, a multitude of licensors and four national export credit agencies: Export-Import Bank of the US (US Exim); Export-Import Bank of Korea (Kexim); Korea Trade Insurance Company (Ksure); and Italian Export Credit Agency (SACE).

With so many moving parts, even in the most benign of settings the Tahrir scheme would be a challenging deal to put together, but Carbon Holdings is trying to finalise it in post-revolutionary Egypt, a factor that adds an extra dimension to the challenge.

As well as having to cope with the economic and political shockwaves caused by the 2011 uprising and the 2013 counter revolution, Egyptian businesses also have to contend with a crippling gas shortage that is currently causing huge problems for the petrochemicals sector, as well as frequent black-outs across the country.

El-Baz is unfazed by these. “Our philosophy in general has always been to not blindly follow the crowd,” he says. “That’s where we can add serious value. We can go from 0-100 in 24 hours. We can make decisions immediately, and we can change direction overnight.”

The son of Osama el-Baz, a former senior political adviser and veteran political negotiator to former presidents Anwar Sadat and Hosni Mubarak, El-Baz attended Harvard University in the US. There, he specialised in industrial economics, before returning to Egypt to set up Egypt Basic Industries Corporation (Ebic), a $650m ammonia plant.

The facility eventually became the world’s sixth-largest exporter of ammonia and was bought by local contractor Orascom Construction Industries in 2005. Carbon Holdings would go on to become Egypt’s largest private petrochemicals company.

“Even when we were developing Ebic, people were telling me Egypt was the wrong place for my business,” says El-Baz. “We haven’t done one project without being told, ‘This will never work,’ or ‘This doesn’t make sense.’ But we’ve done all right.”

Project success

Since Ebic, Carbon Holdings has developed several petrochemicals projects including Egypt Hydrocarbon Corporation, a $550m ammonium nitrate facility that became the first major industrial scheme to close in post-revolution Egypt, and is currently due to come on stream in the fourth quarter of this year.

In 2013, Carbon Holdings acquired local polypropylene producer Oriental Petrochemicals Company, overhauling its facilities and expanding capacity to 350,000 tonnes a year (t/y).

Although each of these projects involved uncertainties, the Tahrir scheme’s complexity and large budget makes it by far the company’s biggest challenge to date.

El-Baz is currently looking to finalise financing for the deal, which is proving to be less than straightforward. In March, he said the financing negotiations were going to be completed before the end of the year, but it now looks likely the wrangling will spill over into 2015.

“Realistically speaking, we’re now looking at the first quarter of next year, but we’re going to keep trying for the end of this year,” he says.

This is not the first time deadlines have had to be pushed back. Carbon Holdings started work on the project one year before the 2011 uprising. Originally, it was expected to be completed in 2017, but due to delays caused by the revolution and subsequent turmoil, the main construction contractors have yet to deploy and Carbon Holdings is currently targeting commissioning in 2019.

The main concern voiced by analysts about the Tahrir Petrochemicals Complex is that it will not be able to compete with other countries that offer lower operating costs to chemicals facilities.

Among the key threats are US-based petrochemicals facilities that are taking advantage of the country’s boom in cheap shale gas.
El-Baz does not share the analysts’ concerns. “Historically, North American crackers are not export-oriented,” he says. “Also, the US dependency on light feedstock extracted from shale gas will leave that region short of other commodities that we produce in abundance.”

The other key competitor cited by analysts sits right on Egypt’s doorstep.

Saudi Arabia is making huge investments in the petrochemicals sector in an effort to create much-needed jobs and will significantly increase its exports to the Middle East and North Africa region over the coming years.

Chemicals competition

National oil company Saudi Aramco alone is expected to produce an extra 3 million t/y of petrochemicals once it has completed its $19bn plant at Jubail, which is due to be operational in 2016. This will take the kingdom’s total petrochemicals exports to 100 million t/y. Analysts are worried that access to cheaper feedstock will allow the new Saudi facilities to undercut petrochemicals plants in Egypt, including the Tahrir complex.

El-Baz disagrees. “Irrespective of how much the raw materials cost somewhere else, if the consumer is here then this is the place to set up the facility,” he says.

Egypt’s rapidly expanding population may have helped create the current natural gas shortage, but it is also the country’s trump card, according to El-Baz. “I have the ability to industrialise and have a backbone behind me that will consume my production,” he says. “This is not only my advantage over Saudi Arabia, this is my advantage over anyone.”

Our philosophy in general has always been to not blindly follow the crowd. That’s where we can add serious value

With the largest population in the Middle East, at about 86 million, El-Baz believes Egypt’s consumer market has long been underserved and underappreciated. The CEO is predicting that the production of large quantities of commodity plastics in the Tahrir complex will create a big opportunity for local manufacturers and lead to a boom in the sector.

“Historically, we’ve never given an opportunity for manufacturers to set up shop in Egypt because we don’t have raw materials for them,” says El-Baz. “I expect that initially the products will mainly be exported, then, very slowly, you will see increasing numbers of manufacturers setting up, making everything from plastic pipes to bottles, fishing lines or pens.”

El-Baz says the Tahrir complex has been designed differently from most other petrochemicals facilities, a factor that will further work in favour of Carbon Holdings.

Rather than installing a standard hydrocracker, or replicating other successful facilities in the region, Carbon Holdings has specifically targeted a number of commodities that it believes have high value today and are likely to see the most demand in the future. Ethylene is the central building block of the petrochemicals sector and producing it from naphtha or natural gas, in what is known as the C2 stream, is the staple process of most crackers. This is not the case with the Tahrir plant.

“I like to call the C2 stream my byproduct,” says El-Baz. “It is not my main business.” In most of the region’s crackers, nearly all of what is produced is ethylene, but in the Tahrir complex, it is less than 45 per cent.

Instead, the complex will produce a higher ratio of propylene, used to make products that include polypropylene; butadiene, used to produce synthetic rubbers used in car tyres; and benzene, which is used to make other heavy chemicals and is also a component in gasoline.

The facility will also tap into a new market for Carbon Holdings, by producing the specialty co-monomer 1-Hexene, which can be used to manufacture a more flexible form of polyethylene. 1-Hexene is currently only produced by a handful of companies around the word, including US energy firm Chevron and Saudi Basic Industries Corporation (Sabic).

Feedstock advantage

The Tahrir project also differs from some of the struggling schemes in Egypt in that it is not reliant on natural gas.

“The current gas shortage was always anticipated,” says El-Baz. “Even as far back as 2008 and 2010, it was being discussed that we would have a squeeze that would last between two and three years. We knew there was going to be a lag between the development and production. The 2011 revolution just brought the squeeze earlier and extended it.”

Irrespective of how much raw materials cost somewhere else, if the consumer is here then this is the place to set up

The Tahrir complex is designed to use naphtha as a feedstock, and the planned power plant that is going to be built onsite does not need natural gas to operate. The power station will be designed to use a dual feed system so it can be started with liquids and then run on gas from the naphtha cracker.

“Obviously that is a very valuable stream,” says El-Baz. “You could feed that into the cracker and make more products, but my base case is an assumption that there is no natural gas. If there is, fantastic. All the better for us. That only makes the story more attractive.”

Amid the swirling uncertainty of post-revolutionary Egypt, the defining advantage that Carbon Holdings has over its competitors, according to El-Baz, is that, unlike its publicly listed and state-owned rivals, it does not have to worry about what analysts or committees say about its projects.

“I’ve seen many good schemes cancelled not because there was something wrong, but because a publicly listed company needs results every quarter,” says El-Baz. “Putting a deal like this together can take three, four or even six years. If you have a setback in year two, it will probably be ancient history by the time you start construction. You don’t quit, you keep on working through it.”

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