Local demand for petrochemicals drives investment in Egypt

05 May 2010

Egypt is well placed to meet its 2020 petrochemicals goal as schemes make good progress and local banks appear keen to offer finance 

Although the global market remains subdued, the strength of potential domestic demand continues to drive forward the development of Egypt’s petrochemicals industry.

While other Middle East countries have to count on long-term overseas consumption growth to underpin the viability of new projects, Cairo can rely on the resilience of a local economy that has been barely touched by the financial crisis.

The country is now well into the implementation of an ambitious 20-year petrochemicals national masterplan that aims to raise output by 50 per cent and establish Egypt as a major world player by 2020.

Key facts:

  • 50 per cent: Amount by which Egypt aims to raise its  petrochemicals output by 2020
  • $690m: Cost of the Port Said propylene/polypropylene project
  • $5bn: Cost of the Ain Sukhna petrochemicals complex

Projects on track

Local demand for petrochemicals has remained strong during the past 18 months, supporting the government’s decision to encourage investment in the sector.

However, some schemes of the three-phase masterplan are taking longer to execute than originally planned, as securing finance is a more lengthy process in the current economic climate. Nonetheless, projects continue to move from concept to detailed design, and onto construction and delivery.

Plans to expand the already profitable ethylene facility of Sidi Krier Petrochemicals – the company that pioneered Egyptian petrochemical exports nine years ago – are making headway. CB & I Lummus of the US has been chosen as the technology supplier for the Alexandria plant, and the award of the main engineering, procurement and construction (EPC) contract is expected later this year. Bids have been submitted by Italy’s Saipem, South Korea’s Samsung, Italy’s Tecnimont and Japan’s Toyo Engineering.

We are completing the projects in the masterplan. The first phase projects are on track

Mohamed Samy Abdelhady, Echem

Egyptian Styrenics’ (EStyrenics) polystyrene plant, also in Alexandria, should begin production next year, just a few months later than originally planned, and construction of a propane dehydrogenation and polypropylene plant for Egyptian Propylene and Polypropylene Company in Port Said is also nearing completion.

The steady progress of these schemes and other major investments is a vindication of the government’s decision to adopt a comprehensive national strategy for the creation of a broad-based petrochemicals industry in the country. The government established the Egyptian Petrochemicals Holding Company (Echem) in 2002 to lead the programme.

Echem projects
ProjectScopeStatusCostCompletion date
Aromatics complexScheme to produce 400,000 t/y of paraxylene and 600,000 t/y of benzeneITB due in first quarter of 2011$1bnThird quarter 2014
Kafr el-Sheikh refinery and petrochemcials complexScheme to produce 1.2 million t/y of paraxylene and 1.2 million t/y propyleneITB due in first quarter of 2011$1.7bnThird quarter 2015
Alexandria polyvinyl chloride plant expansionExpansion of capacity by 50 per cent to 120,000 t/yEPC due in third quarter of 2011$350mThird quarter 2014
Damietta dimethyl ether plant of dimethyl etherScheme to produce 200,000 t/y ITB due fourth quarter of 2010$8bnFourth quarter 2013
t/y=Tonnes a year; ITB=Invitation to bid; EPC=Engineering, procurement and construction. Source: MEED Projects

“It is good progress,” says Mohamed Samy Abdelhady, Echem vice-chairman for technology and business development. “We are completing the projects in the masterplan. The first phase of six projects worth $4.6bn are on track: two are completed and four are at various stages of construction.”

The first unit to begin commercial production in 2008 was a small acrylic fibres plant in Alexandria. That was followed in 2009 by the start-up of the $600m LAP benzene plant, also in the Mediterranean port city.

“Two more schemes will open by the end of this year: the EMethanex methanol facility and the Port Said propylene and polypropylene plants,” says Abdelhady. EMethanex is a Canadian/Egyptian joint venture building a 1.3 million t/y methanol plant in Damietta.

The two other schemes under construction are Estyrenics’ Alexandria facility and an ammonia/urea plant in Damietta being developed by Misr Fertiliser Production Company.

Financial stability

As a state-owned company, Echem provides a crucial element of financial stability that helps to attract partner investors.

“Egypt stands out as following a plan, which is perhaps unusual at a national level. They have been very successful,” says Roger Green, senior analyst at US technology consultancy Nexant. “Usually, there’s a mixture of government and private sector pursuing individual projects. But in Egypt, there is a much more strategic approach.”

But there are also projects being independently developed by private investors in Egypt. For example, the local Carbon Holdings has announced plans for a $5bn petrochemicals hub at Ain Sukhna, which will include ammonium nitrate, methanol and polyethylene plants. The venture is being led by Basil el-Baz, who is also chairman of Egypt Basic Industries Corporation. The ammonium nitrate facility, based on technology from the Spain’s Tecnicas Reunidas, will be the first to be built.

Carbon Holdings hopes to conclude financing for the scheme by the end of this year, with plans to get funding in place for the other two plants by 2011 and 2012. The UK’s Royal Bank of Scotland is acting as adviser for the project.

The development of the Egyptian petrochemicals industry is supported by strong fundamentals. “We have certain advantages here in Egypt. We have a large market and we have a good strategic location,” Abdelhady says.

In contrast to the Gulf states, Egypt represents a huge sales opportunity in itself, with 82 million consumers and a diversified industrial base. Even though much of the population falls into the low income bracket, the demand for basic plastics and other downstream petrochemical products is huge. Moreover, the country has weathered the worst effects of the global downturn, with resilient industrial growth and stability in the financial sector.

The strength of local consumption offers a firm platform upon which to build the commercial feasibility for a new project.

Bank support

“Egypt can support a lot more activity through local demand, so the need to export is a little less,” says Nexant’s Green.

This is particularly important for projects that are coming on stream at a time of global economic uncertainty and depressed demand for petrochemicals in Asia and Europe.

Projects also receive strong backing from local financiers. Egyptian banks have demonstrated the capacity and keenness to finance new petrochemicals development on a significant scale.

The commitment to lend is not confined to state-owned banks. Commercial International Bank (CIB), a leading private lender in the country, headed up the consortium of four local institutions involved in financing the $690m Port Said propylene/polypropylene project, which was arranged in 2007.

Also in 2007, CIB contributed $79.5m to the $530m loan for the EMethanex plant, alongside the National Bank of Egypt, which also lent $79.5m. Three international lenders, France’s Calyon, the UK’s Standard Chartered and Japan’s Bank of Tokyo-Mitsubishi UFJ, also took part in the financing as well.

“The debt market has been stressed by the banking crisis, so lenders are cautious. But one of the things Egypt has in its favour is a strong group of local lenders. There is no lack of inclination to lend by local banks and securing finance has not been a problem for projects,” says Green.

The fact that some output will be sold domestically for local currency, does not appear to deter lenders; financiers are not pressing for projects to be export-only.

Analysts say the banks’ confidence has been bolstered by the strength of the industry leadership provided by Echem.

“[Echem] tends to be fairly steadfast in pursuing these projects. They do deliver what they say they will deliver … the government is taking a much more organised approach than in other countries, so that’s a great positive,” says Green.

A number of other projects are also moving forward. Design work on the $350m expansion of Echem’s Alexandria polyvinyl chloride plant is under way, and construction is expected to start on a dimethyl ether facility in Damietta, with completion scheduled for late the following year.

The $80m facility will provide feedstock for the nearby EMethanex methanol plant and is likely to be financed by local banks, say analysts.

The large Ain Sukhna complex planned by Carbon Holdings will be an interesting test of bank and investor confidence in a private sector development. The final costs will run into billions of dollars, say analysts, but the initial ammonium nitrate plant will represent a modest funding requirement, estimated at $200m.

Feedstock is a key issue for any developing petrochemicals industry and Egypt does not have anything like the low-cost naptha that Saudi Arabia can offer its petrochemicals firms. Egypt can only produce a limited volume of naphtha – enough to meet feedstock needs of Echem’s planned aromatics plant, according to Abdelhady.

The US’ Kellogg Brown & Root has been carrying out studies for the scheme, following the collapse of earlier talks with US’ Fluor.

Gas is the nation’s main asset, with substantial reserves in the Western Desert and the Mediterranean Sea. The country’s principal gas is methane, which will be the feedstock for the Damietta methanol plant. But there
are also reserves of ethane – this can be cracked locally to produce ethylene, polyethylene and propylene.

This downstream chain is particularly relevant to Egypt’s local needs. Polypropylene is widely used for the production of basic
plastics, used in bags, packaging, irrigation pipes, carpets and everyday housewares. There is huge demand for such products in a populous country with slowly rising basic living standards.

Egypt is fortunate in the mix of gas feedstock that it has available. Ethane is not easy to transport, so it makes sense to convert this into petrochemicals. Ethane-based production also offers the best economic returns compared with other feedstocks such as naphtha.

Egypt has established itself as an important LNG exporter, but the transformation of gas into petrochemicals offers greater added value.

Echem is already preparing to implement the second phase of the masterplan – the development of a plant to produce ethylene and polyethylene, and an ethylene glycol project. Studies for the former have been completed, says Abdelhady, and it will be developed with the support of local companies and banks. However, international investors will be invited for the ethylene glycol project, once feedstock has been allocated.

Abdelhady says Echem is not quite ready to market the proposal.

“It’s not a matter of finance or economics. It’s a matter of gas availability and due diligence,” he says. “We hope to have the gas resources allocated to it locally within one or two months.”

The feedstock that is particularly constrained is naphtha. But this can be imported easily – at an added cost.

So the coming years could also see the development of several oil-based projects in Egypt. India’s Reliance Industries, Indian Oil Corporation and Echem are looking at projects combining refining with downstream capabilities. If all goes according to plan, Egypt will be well on the way to meeting its 2020 target.

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