Turkey’s upstream petrochemicals sector has been starved of investment and has not seen a major greenfield expansion since 1985. Over the same period, its downstream plastics processing industry has flourished.

This imbalance has made Ankara the world’s second-largest importer of petrochemicals after China. But the sector is now being opened up and is poised for rapid growth that could change the dynamics of global industry.

Despite being a large market of 76 million people, Turkey has only one producer of basic petrochemicals. Petkim was established by the government in 1965 and today has 15 main production plants in Aliaga near Izmir, which have a combined capacity of 3 million tonnes a year (t/y), including 740,000 t/y of thermoplastics and 249,000 t/y of fibres. The firm meets just 25 per cent of Turkish petrochemicals demand. In 2011, Petkim recorded profit of $67m against sales of $2.3bn.

Petkim privatisation

Ambitious capacity expansions were planned for Petkim post-1985, but they failed to materialise under the bureaucracy of government control. The firm was then included in the major privatisation scheme that Turkey launched in the 1990s, which saw state assets handed over to the private sector for development.

Azerbaijan’s state energy company Socar bought a 51 per cent controlling stake in Petkim for $2.04bn in May 2008. Some 38.7 per cent of the shares are listed on the Istanbul Stock Exchange, and Socar has since increased its ownership to acquire the remaining non-listed shares.

Socar was a natural owner for Petkim. The Azeri firm is a major shareholder of and key supplier to the oil and gas pipelines that provide Turkey with much of its energy needs.

The government sought an owner capable of expanding Petkim and reducing the country’s reliance on imported petrochemicals, and Socar intends to do exactly that by the end of the decade through a major redevelopment of the Aliaga site.

Petrochemicals imports account for about 25 per cent of Turkey’s trade deficit. In 2011, the foreign trade deficit was $105bn. Of this, $54bn was oil and natural gas imports, and $24bn was petrochemicals imports. About 85 per cent of the raw materials used in the chemicals and plastics sector are imported, according to the Turkish Exporters’ Assembly. Petrochemicals exports amounted to about $10bn.

In 2011, Turkey’s foreign trade deficit was $105bn; of this, $24bn was petrochemicals imports

The expansion plan drawn up for Petkim aims to increase its market share to 40 per cent by more than doubling its output to 6.3 million t/y by 2018, and further to 10 million t/y by 2023. The vision for the site is to develop an integrated refinery-petrochemicals-energy-logistics centre, similar to Jurong Island Chemical Park in Singapore. Petkim signed a consultancy contract with Jurong International in 2010 to draw up a masterplan for Aliaga.

Central to the redevelopment is a new 214,000-barrel-a-day refinery that Socar is building in joint venture with Turkish fuel distributor Turcas Petrol at Aliaga to provide feedstock for Petkim. The $5.5bn plant is scheduled for completion by 2015. The US’ Foster Wheeler carried out the front-end engineering for the project, and Fluor, also based in the US, is the project management consultant.

The construction of the refinery is just one element of a programme of investments that will see the Aliaga site transformed over the next decade. Other plans include construction of a 25MW wind farm across 700 hectares and construction of a container terminal with a capacity of 1.5 million twenty-foot equivalent units (TEUs).

A heads of agreement was signed in February with Dutch APM Terminals for the port’s development, with operating rights for 28 years. Construction is planned over two phases, with completion by 2014. A possible expansion to 3 million TEUs was included in the terms, along with an option to extend the operating rights by four years. A deal has also been signed with France’s Air Liquide to manage and expand the provision of industrial gases at Aliaga.

Expanding petrochemical production

When it comes to petrochemicals, the initial plan is to expand production of ethylene, purified terephthalic acid and phthalic acid by 2014 by debottlenecking existing plants, and to build a new butadiene extraction plant and cross-linked polyethylene (XLPE) capacity.

The XLPE unit will have a capacity of 30,000 t/y and is due for completion by 2014; 100,000 t/y of butadiene is due to come on stream the following year. Subsequent projects have yet to be confirmed, but are expected to include a new 800,000-t/y naphtha cracker. The total investment, including the refinery, will be more than $10bn.

“There is always a question of whether you do refining and petrochemicals together, but that is a huge amount of money, so they have been a bit cautious and have decided to do it in sequence,” says Paul Hodges, chairman of International Echem, a UK-based independent consultancy.

In 2011, Turkey imported 1.266 million tonnes of polyethylene, and of that 313,000 tonnes came from Saudi Arabia

Paul Hodges, International Echem

With the expansion of Petkim and the construction of its other flagship project, the Trans-Anatolia Gas Pipeline, Socar is set to become the largest foreign direct investor in Turkey. The first phase of the pipeline will have a capacity of 16 billion cubic metres a year and will be completed by 2017 at a cost of $6bn. A second phase could see capacity expanded to 30 billion cubic metres.

The transformation of Aliaga into a petrochemicals cluster is intended to reduce the amount of petrochemicals that Ankara imports, from 7 million t/y today to 4 million t/y by 2023, and to increase the value of petrochemicals exports to $50bn. Foreign partners are also being sought to build petrochemicals production at the site.

The year 2023, which marks the 100th anniversary of the founding of the Turkish republic, has been set as a target date by the government. By then, it aims to rank among the world’s 10 leading economies, with exports of $500bn and foreign trade of $1 trillion. In 2010, the total value of the country’s exports was $114bn. Increasing domestic petrochemicals production will be crucial to hitting these targets.

Special chemical industry zones

The Turkish government is supportive of the cluster concept adopted by Petkim and sees special chemical industry zones as key to developing the petrochemicals industry. In the long term, it hopes to develop others in coastal areas.

A study of the volume of imported materials identified 25 products to be prioritised for local development, including polypropylene (PP), polyvinyl chloride, polystyrene, high- and low-density polyethylene, polyethylene terephthalate and carbon black. Free land and tax incentives are being offered to lure investment.

By contrast, Turkey’s downstream plastics processing industry is well established, with more than 6,000 firms and a capacity of 5.1 million t/y, making it the fourth-largest market in Europe, equal with Spain. The sector is worth about $16.5bn in production terms. It contributes about 3 per cent of Turkey’s gross domestic product and employs 200,000 people.

“Turkey has a very strong downstream business in terms of plastics processing and fibre production,” says Hodges. “There is a lot of expertise and the key for the new Petkim owners is to build new capacity and meet that demand locally on a competitive basis. The problem is it is a lot more difficult to do that today than it would have been 5-10 years ago. There is now a lot more competition than there was. Back in 2004-05, you hadn’t had the great wave of Middle East expansion; you hadn’t had the great wave of expansion in China; the markets were reasonably well balanced. Fast-forward and you have had a major ramp-up in capacity, which is still continuing in certain parts of the world at a time when growth projections are much lower.”

Globally, producers have grown accustomed to exporting to Turkey. How they respond to the planned new investments in the longer term will determine the success of Ankara’s petrochemicals expansion drive.

“In 2006, Turkey imported 716,000 tonnes of polyethylene, of which 148,000 tonnes came from Saudi Arabia,” says Hodges. “Last year, it imported 1.266 million tonnes, and of that 313,000 tonnes came from Saudi Arabia. Its top five suppliers are Saudi Arabia, Iran, Spain, Qatar and India, and that is tough competition for a domestic producer because it doesn’t have a competitive feedstock advantage.”

Saudi investment into Turkey

An indication of how some might respond came earlier this year, when Saudi Arabia’s Advanced Petrochemicals Company announced it was forming a 70:30 joint venture with Turkish petrochemicals trader Bayegan Group to build a propane dehydrogenation and PP plant in Turkey at an investment cost of $1bn. Construction is expected to start in 2013, with completion in 2015. The plant will be located in the Adana-Iskenderun area on Turkey’s southern coast and will have a capacity of 500,000 t/y.

Turkey currently consumes 1.5 million t/y of PP, a figure forecast to rise to 2 million t/y by 2015. Domestic production by Petkim currently amounts to just 144,000 t/y.

In Saudi Arabia, Advanced has 450,000 t/y of PP production capacity at Jubail Industrial City. This marks its first investment abroad, but it is no surprise that it chose Turkey; it buys 30 per cent of its output.

With petrochemicals demand growing by 10-15 per cent a year, Turkey has to expand local production to prevent its trade deficit from spiralling out of control. Average growth across the petrochemicals industry is just 5 per cent a year, making Turkey an attractive market. Its drawback is a lack of domestic energy supplies that makes it a high-cost production base.

With the government’s determination to cut back on imports, producers may have to choose between investing in Turkey or risk losing a key customer. Those with access to low-cost energy supplies have much to gain from taking advantage of government incentives.