Plastic fantastic

04 March 2003
Few things faze the average Cairene, so the plastic palm trees that have sprouted along the left bank of the Nile over the last month draw only the occasional wry remark from passers-by. Lurid green by day, neon by night, defying both drought and decorum, these urban accessories are the latest fling in a long consumer affair with all things plastic. A commonly heard joke is that the government is planning to cut its food import bills by growing plastic dates.

The quip is not far from the mark. The government does indeed intend to help balance the budget by setting up a home-grown plastics industry. But the scale of the project is rather more ambitious. The development over the next two decades of a worldscale petrochemicals industry in Egypt will require at least $10,000 million of investment: not the sort of money that grows on trees.

Some 1.2 million tonnes of polyethylene, polyvinyl chloride (PVC), polystyrene and other plastics are consumed by the domestic market each year - over 18 kilogrammes of plastic for every Egyptian. A fragmented local industry accounts for a small proportion of local demand, about 470,000 tonnes a year (t/y). Most of the remainder is imported from countries with well-developed petrochemicals industries such as Saudi Arabia, South Korea and India. The task ahead is not only to slash the annual import bill, but to take on those producers in the world markets.

'We have to compete with other countries in this area,' says Petroleum Minister Sameh Fahmy, who joined delegates at the First MEED Petrochemicals Conference in Cairo on 22-23 January to outline progress on the government's long-term ambitions for the sector. Those aspirations are bold ones. 'The overall masterplan envisages 14 petrochemicals complexes, comprising 24 projects and some 50 production units,' says Fahmy. By 2010, total annual production is expected to reach some 15 million t/y, worth about $7,000 million at current market prices.

Development of a petrochemicals industry is the next logical step for Egypt. While oil production has slowly dwindled over the last decade, the gas sector has gone from strength to strength, with major discoveries in the Mediteranean, the Western Desert and the Gulf of Suez. Egypt now has an estimated 58.5 trillion cubic feet (tcf) of gas reserves, compared with proven reserves of 6.2 tcf in 1982. Most of the gas at present is used for domestic power generation, but planned exports by pipeline to its neighbours will be bolstered by the development of two worldscale plants on the north coast for the liquefaction and export of natural gas.

About 1,400 tonnes a day (t/d) of ethane are produced at four recovery plants on the north coast. A further 1,600 t/d of capacity is being developed at present, and further plans to build an additional 3,000 t/d of capacity are in the pipeline. Most of the ethane is produced for dedicated, small-scale plants, but the Egyptian Natural Gas Holding Company (EGAS) has started evaluation of a gathering system to connect existing and planned gas treatment facilities and is preparing a feasibility study for a new ethane extraction plant of its own.

Despite the discovery of abundant reserves of natural gas in the Western Desert and off the Delta coast in the last decade, Egypt has to date made little headway with major petrochemicals projects. The main obstacle has been a lack of co-ordination in the sector, a failing that has been remedied with the launch of the Egyptian Petrochemicals Holding Company (ECHEM) in 2002. 'We have spent our first year in the process of company formation and working on organisational structure and strategies,' says the chairman of Echem Moustafa Shaarawi. 'As the masterplan gets under way our main aim is to encourage and support investors, acting as a one-stop-shop, and to set up strategic alliances with local producers, offtakers and international shareholders.'

The company is one of three strategic bodies now answering directly to the Petroleum Ministry, the others being the Egyptian General Petroleum Corporation (EGPC), which previously had the awkward task of overseeing all three oil, gas and petrochemicals sectors, and EGAS. 'What is encouraging is the new level of government commitment to the sector,' says one local investment banker. 'ECHEM has really been acting as a locomotive for these projects'.

ECHEM and EGAS have worked together closely on the development of the three-stage petrochemicals masterplan, prepared by the UK's Chem Systems, now part of the Nexant Group. Gas pricing is a key issue to be resolved before getting international investors on board, as is access to feedstock. 'There are three government bodies now which producers can sign feedstock agreements with,' says Sharaawi. 'These supply agreements will guarantee the supply of gas or naptha as feedstock.'

Availability of local and competitively-priced feedstock is a clear cost advantage for Middle East-based petrochemicals producers, for whom production of ethylene averages about $150 a tonne, less than half the costs incurred by Asian producers. But for long-term investors looking for guaranteed returns in Egypt, the problems caused by the cyclical nature of the worldwide petrochemicals market are compounded by the volatility of feedstock prices.

As a result, the government has prepared a new gas pricing formula, which will see gas delinked from crude oil prices and kept within specific price margins. 'We need to link the gas to some of the [petrochemical] end products,' says Fahmy, who is preparing to present the new formula at a meeting of gas producers in Qatar in February. 'And of course a floor and ceiling might be a good method to secure the prices for the buyers and sellers of long-term contracts.'

ntified for the first phase of the masterplan, due to get under way in 2004. The arrival of ECHEM on the scene has already galvanised two of the schemes - a propylene plant and a linear alkyl benzene (LAB) plant - which were launched before the company became actively involved. Of the other projects launched under Echem's own initiative, the government is in discussions with offtakers for a 1.7 million-t/y methanol plant and hopes to appoint a foreign partner towards the end of the year for a $350 million styrene/polystyrene plant.

However, the centrepiece of the Egyptian petrochemicals industry will be a 1 million-t/y ethylene cracker and polyethylene plant. The government is understood to be close to signing a joint venture agreement with Chevron Phillips Chemical Company of the US for the complex. Chevron Phillips has already made significant inroads in the petrochemicals sector in Saudi Arabia and Qatar, where the governments' drives to develop their gas potential have set a clear precedent to Egypt.

'To be honest I had my doubts about such major projects being launched in Egypt in the current economic climate, but the progress on the LNG [liquefied natural gas] projects would seem to show there is no lack of interest in these worldscale schemes,' says the head of one international chemicals company. 'I can imagine quite a few of the big companies are watching what is going on here.'

The rapid progress of the Egyptian LNG [ELNG] project at Idku, where equity is split between EGAS, EGPC, the offtaker and the foreign companies, has provided a natural financial model for the five core petrochemicals schemes. The combination of firm government backing and clearly underwritten supply and marketing deals helped to sell the scheme to the international financial community, which has backed $550 million of the total $1,150 million project cost. International partners bring with them not only marketing expertise and new technology: their presence improves the bankability of the projects. In addition, the government has agreed to take a back-seat on executive decisions, an important consideration for potential investors worried about the intricacies of Egyptian bureacracy and legal systems.

The success of the ELNG formula has demonstrated a clear route for the petrochemicals masterplan to follow. 'The plan is for the government to take a 20 per cent equity stake in these petrochemicals projects, possibly going up to 40 or 50 per cent, but we need to secure international financing as well,' says Fahmy. 'We want to invite investors to invest in Egypt, but to have a win-win situation we need to be a part of that investment.'

The government lead has also helped to galvanise activity in the local private sector, where the prominent Oriental Group is pursuing reverse integration into petrochemicals through its subsidiary Oriental Petrochemicals Company (OPC). The company has built a 160,000-t/y polypropylene (PP) plant in Suez, which supplies the raw materials to carpet factories operated by the Oriental Weavers Group, the original core of the business empire. The involvement of Echem in a planned propylene joint venture has persuaded OPC, under its own steam, to double capacity at the PP plant to accommodate some of the new feedstock.

The new 350,000-t/y dehydrogenation facility will be developed alongside the existing PP plant on the Gulf of Suez, taking advantage not only of a conveniently located offtaker but also the facilities provided by the neighbouring port and power plant at Suez. 'This is a world-scale project, with really the highest capacity that can be achieved under the sun,' says Mohammed Khamis, chairman of OPC. 'We will mostly direct exports to Europe, and the rest will go to our expanded plant. We see Echem as the godfather of our second train.'

Domestic demand for polyethylene alone is expected to reach 650,000 t/y by 2010, providing a stable base for an indigenous petrochemicals industry. There will also be considerable savings on import and logistics costs, worth about $80 a tonne. Looking further afield, polyethylene demand in Europe is forecast to reach 18 million t/y by 2010, from about 13 million t/y in 2000. Proximity to the European market is a key selling point for the Egyptian petrochemicals plan, as are the advantages of cheap skilled labour and well-developed port facilities.

The government is capitalising on these factors by setting up dedicated Special Economic Zones (SEZ) to house larger, integrated petrochemicals projects, and has set aside a number of sites on the Mediterranean and Gulf of Suez coasts for industrial olefins complexes. The six largest sites cover some 24 million square metres in total.

'Alexandria and Suez are ideally situated for petrochemicals projects,' says Emir Nemr, technology director for Fluor Corporation. 'Not only for the export facilities, but also the ease of propane supply from the Gulf of Suez and ethane extraction on the north coast.' This factor has not been lost on the Sidi Krier Petrochemical Company (Sidpec) complex outside Alexandria, which has been producing modest quantities of ethylene and polyethylene since 1998 and is now debating the possibility of developing a third train.

ECHEM has drawn up a model for the first SEZ, which will be located at Gamasah to the east of Alexandria. The complex will comprise a central olefins unit, with five intermediate petrochemicals projects, a research and development centre, hotel and recreation facilities and housing units on the shoreline. Companies will enjoy competitive corporate tax rates of 10 per cent and income tax rates of 5 per cent, as well as exemptions from sales taxes, stamp duties and state development duties - some of the most painful disincentives for foreign investors in the past.

For international investors eyeing up these new opportunities in Egypt, the petrochemicals market looks promising, but for how long? For the government, time is of the essence. Worldwide demand for petrochemicals is expected to grow by about 5.5 per cent a year on average over the next decade. However, production of polyethylene and polypropylene is already beginning to ramp up as new capacity comes on line in Saudi Arabia and the Gulf. Egypt will have to act fast to get its foot in the door. 'There is a window of opportunity for gas and petrochemical projects which I repeat, I reiterate, I insist does not go much beyond 2010,' says Mohammed Osman, professor of petrochemicals and petroleum refining at Cairo University. 'That window of opportunity has to be taken by Egypt, and it has to be taken now.'

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