Kurdish region forges ahead in petrochemicals sector

26 November 2009

While the rebuilding of Iraq’s petrochemicals industry remains at an early stage, the Kurdistan Regional Government is pressing ahead with plans to build a hub for the sector

Iraq was a pioneer of petrochemicals development in the Middle East, building the region’s first integrated petrochemicals complex in 1976. But a series of wars and subsequent lack of investment mean the country’s petrochemicals industry has been unable to build on that early lead.

Today, the Iraqi petrochemicals industry operates at three principal sites: Khor al-Zubair, near Basra in the south; Baiji in the north; and Al-Musayyib, 60 kilometres south of Baghdad. All are owned by the State Company for Petrochemical Industries (SCPI), which employs 6,000 people.

According to US Aid, the US government agency responsible for economic assistance to Iraq, petrochemicals activities at these three sites produced combined revenues of barely $50m in 2002, the last full year of Saddam Hussain’s rule. By comparison, the Saudi petrochemicals industry produced revenues of $12.4bn in 2002.

Petrochemicals Complex One (PC-1), located at Khor al-Zubair, was built at a cost of $1.2bn in 1976. It is still operational, although war and sanctions have taken their toll on the plant’s productivity. Polyvinyl chloride (PVC) production at the site was stopped during the Iran/Iraq war of 1980-88, when its chlorine unit was damaged. The rest of the complex survived, but operating rates have been severely reduced.

The Baiji complex in the north of the country includes two 12,000 tonne-a-year (t/y) -carbon black units, a 30,000-t/y petroleum coke plant and a 50,000 t/y linear alkyl benzene unit.

The 1.17 million-t/y Petrochemicals Complex Two (PC-2), at Al-Musayyib, was earmarked by Hussein for development into a major industrial zone, matching Khor al-Zubair and Baiji. Civil works were completed and some units producing ethylene were installed, but the site became a target for allied bombing following Hussain’s decision to invade Kuwait in January 1991.

Iraqi engineers brought the plant on stream in 1992, but it has not reached its planned capacity of 1.17 million t/y. Attempts to resurrect the complex were hindered by sanctions and a lack of funds.

“What we need [in Kurdistan] is a couple of small plants producing fertiliser for crops or methanol for fuel”

Mohammad Amin Baban, economic adviser, KRG

Since the fall of Hussein’s regime in 2003, several major international petrochemicals producers have been considering the country for investment opportunities. Iraq has the world’s 10th largest gas reserves, so the potential to develop gas-dependent industries is significant, particularly since competition for gas feedstock allocations has intensified in the Gulf states.

Saudi Arabiahas said it plans to invest in Iraq’s petrochemicals sector, and last year state-owned Saudi Basic Industries Corporation (Sabic) held preliminary talks with the Iraqi government to build two production plants: one for polyethylene, the other for PVC.

The combined value of the projects is estimated at about $5bn. But construction contracts are not expected to be awarded until the end of 2011, with a completion date of 2015.

In 2007, the Iraqi government and US companies ExxonMobil Chemical and Chevron held talks over plans for a $3bn petrochemicals complex in Basra. The UK/Dutch Shell Group and the US’ Dow Chemical Company were also in preliminary talks with the Iraqi government the same year over a possible $2bn project to rehabilitate and expand the existing Basra complex.

Despite the lack of progress in discussions about Basra’s petrochemicals sector, one region in Iraq has increasingly become the focus of attention as a potential hub of production: the gas-rich north, which is under the rule of the Kurdistan Regional Government (KRG).

Gas city

In September 2008, the KRG assigned a 42-square-kilometre site in Anbar province for the proposed Kurdistan Gas City, after the completion of surveys on potential sites in the region.

The city is to be developed by Gas Cities, a joint venture of Dana Gas and Crescent Petroleum, both of the UAE. The city will include industrial, residential and commercial components, with an expected initial investment in basic infrastructure estimated at $3bn.

Investment during the operations phase is expected to range between $20bn and $30bn over 20 years. The result, according to Gas Cities, will be the creation of nearly 200,000 jobs for Iraqi citizens in infrastructure, industry and support services.

Gas Cities is currently conducting a feasibility study for the project. The new plants are expected to come on stream between 2013 and 2015, but this timetable may be ambitious.

“The project has not yet been approved,” says Mohammad Amin Baban, an Irbil-based -senior economic adviser to the Kurdish prime minister, Barham Saleh. “I am a chemical engineer by training and, in my view, the concept of a petrochemicals industry located here in Kurdistan is peculiar.”

For Baban, there is no great petrochemicals opportunity in Kurdistan because the region has no port from which to export products.He argues other industries, such as cement, would be a better fit because there is strong domestic demand.

“A project like this would make sense in the Gulf, where they already have access to gas to make petrochemicals and ports to ship them, but in Kurdistan it is not the same,” says Baban.

“Until Iraq is stable, we won’t see a return to a consumer market, so we won’t have the pull for petrochemicals”

Gas City project source

While Kurdistan’s lack of a port may present a problem, the availability of gas will increase as investment in the country’s hydrocarbons sector grows. Iraq has 112 trillion cubic feet of proven natural gas reserves. Nearly 20 per cent of this comes from non-associated fields, primarily in the north. Production since 2003 has been steadily rising, but its 2008 dry gas production of 105 billion cubic feet a year (cf/y) is still significantly below the peak of 215 billion cf/y reached in 1989.

Dana Gas and its partner, Crescent Petroleum, began the processing and transportation of 150 million cubic feet a day (cf/d) of gas by pipeline in their major joint project in the Kurdistan region in October 2008. Their initial investment of $650m under a strategic alliance and service contracts signed with the KRG in April 2007 was at the time the largest private sector investment in Iraq.

According to Gas Cities, Kurdistan Gas City will require 400-800 million cf/d of gas, depending on what mix of industries it eventually chooses to develop.

But feedstock availability is not the problem. The key decision that needs to be made will be the product mix at the petrochemicals plants. About 800 kilometres from the nearest port, the logistics of the region would make an export-driven petrochemicals industry prohibitively expensive.

While the rest of the Gulf countries have focused on commodity polymers – large-scale production of cheap chemicals – due to their gas feedstock advantage and the ease of shipping, large-scale production would not fit the Kurdistan model.

“For something like ethylene or polyethylene, you need to produce at high capacity to make it worthwhile,” says Baban. “How much polyethylene can they possibly consume locally for packaging and construction?”

Sustainable industry

However, domestic demand for fertilisers could still sustain a significant petrochemicals industry in Iraq. Iraq’s two existing fertiliser plants, at Khor al-Zubair and Beiji, have been running well below capacity since 2003. Khor al-Zubair, with a design capacity of 1.06 million t/y, only produces about 260,000 t/y, while Beiji, with a design capacity of 1.15 million t/y, only produces 50,000 t/y.

This has resulted in weak domestic food production. According to the Japan Inter-national Co-operation Agency, a Japanese government agency that offers technical help to developing nations, Iraq’s self-sufficiency in major grains plunged to 20 per cent in 2003, down from 100 per cent in the 1980s.

“What we need [in Kurdistan] is a couple of small plants producing fertiliser for crops or methanol for fuel,” says Baban. “It is an agricultural area and this is what there is demand for.”

“The Gas Cities strategy is simple: to -produce petrochemicals for the local market,” says one UAE-based source close to the Gas Cities project.

“Their raison d’etre is to bring value to the gas chain. Feedstock may be available, but there is little point in trying to take on the -Saudis in commodities. The nearest market is Turkey, and that is saturated.”

Having been protected by international forces following Saddam Hussain’s invasion of Kuwait, the semi-autonomy of Iraq’s Kurdish northern area was enshrined in Iraqi law after the 2003 US-led invasion.

After years of neglect under Hussain, Kurdistan has developed more quickly than the south since 2003. Passing its own hydrocarbons law in 2007, the KRG has also signed oil production sharing, development and exploration contracts worth nearly $5bn with more than 35 energy companies over the past two years.

However, these contracts are controversial as Baghdad says only it has the right to sign them. Because of this, there is some unease on the part of international companies in com-mitting to oil, gas and petrochemicals projects in Kurdistan.

Even the Gas Cities partners, Dana Gas and Crescent Petroleum, are on an Iraqi blacklist of companies that have signed deals with the KRG without the consent of Baghdad.

“My impression is the blacklisting will eventually unwind,” says the UAE-based source close to the Gas City project. “It is to the benefit of -neither party and does not seem well supported.”

Security concerns

While the Gas City investors are unconcerned by Baghdad’s blacklisting, security remains a deterrent to investment. “Until Iraq is stable, we won’t see a return to a consumer market, so we won’t have the pull for petrochemicals,” says the UAE source. “From an outsider’s view, the political effect on economics is more important than the politics itself.”

As a concept, the Kurdistan Gas City project appears popular in the KRG for its job creation potential. “It is very important for the country as a whole,” says Mustafa al-Jarrah, an independent hydrocarbons consultant and former director of the SCPI. “It would be much better than simply exporting gas in terms of the development of the area and the industry, by upgrading the value of the products. I am sure it will receive support from the government.”

Finding the right mix of industries that will add value to Iraq’s abundant hydrocarbon resources will remain a challenge. Without the capital and infrastructure, pushing into the increasingly competitive olefins market is not an option. Small-scale, targeted petrochemical production looks to be the best way forward for Iraq.

Key facts

25 per cent - Production capacity being used at Khor al‑Zubair’s urea plant

260,000 t/y - Current production at the Khor al‑Zubair plant

Source: MEED

Ambitious: The planned Kurdistan Gas City

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