The future of the petrochemical market on the Gulf Coast just might lie to the south.
``There's considerable pessimism surrounding the Gulf Coast petrochemical industry, but Latin America is an opportunity,'' market veteran Steve Arbogast said at Flexpo 2006, a recent industry conference in Galveston, Texas.
Arbogast has more than 20 years of petrochemical experience with ExxonMobil Chemical Co., and currently is an executive professor in the finance department at the University of Houston. Finding a future for the Gulf Coast requires a rethinking of Latin America's traditional market role, he explained.
``Historically, Latin America served as a swing market for excess capacity in the Gulf Coast,'' Arbogast said. ``Extra ethylene and polyethylene could be sold into the merchant market there.''
``A lot of these [Latin American] markets are too small for a world-scale ethylene cracker. So they've relied on distribution and basic commodity grades and have built few long-term relationships.''
But the region already had begun to shed that image by 2003. It now accounts for more than 6 billion pounds of polyethylene demand, but regional production is just more than 2 billion pounds, leaving about 4 billion pounds of import requirements. About 5 percent long-term annual growth is expected, with market demand hitting almost 9 billion pounds by 2010.
Complicating the situation is the status of a pair of projects: Mexico's much-delayed Phoenix Project, which had hoped to take advantage of that nation's natural resources; and the Jose Olefins Project in Venezuela. Jose Olefins was to be a 50-50 joint venture between ExxonMobil and Venezuelan national oil firm Pequiven, but ExxonMobil was expelled from the country in early 2006 by a Venezuelan government led by controversial President Hugo Chavez.
Jose Olefins was to have produced more than 2 billion pounds of polyethylene and ethylene. If both Jose and Phoenix proceed - and neither is guaranteed - Latin America's import needs would be reduced by about 1.8 billion pounds by 2010, according to Arbogast.
Aging Gulf Coast petrochemical infrastructure also will play a role in the region's development, according to industry veteran Gene Allspach, who also spoke at the conference. Allspach spent more than 20 years in petrochemicals, including a five-year stint as president and chief operating officer at Equistar Chemicals LP before retiring in 2002.
By 2010, at least seven of the 46 ethylene plants operating in the Gulf Coast during 2005 could be shut down as they complete their expected 40-year life spans, Allspach said. If some plants only make it to the 30-year mark because of tough operating histories, another 14 or 15 could be added to the shutdown list. If that happens, half of the Gulf Coast's ethylene units could disappear in the next three years.
``If ethylene capacity comes down, polyethylene capacity has to come down with it,'' Allspach said. ``It can sound pessimistic, but you can look at it as an opportunity as well.
``There's an opportunity to replace capacity that's become obsolete. All the polyethylene in the world can't come from the Middle East.''
That being the case, Arbogast pointed out that it's still ``difficult to build new ethylene crackers on a volatile price projection.''
``We need a pricing floor to develop for alternative energies so we know what to expect from ethylene,'' he said. ``We also need to make crackers more flexible as far as what feedstocks they can run.''
Gulf Coast-based petrochemical firms probably will need to add more dedicated marketing and increase capacity by debottlenecking in order to meet demand in South American markets, Arbogast added.
``North American demand is the great imponderable,'' he said. ``The future of the Gulf Coast isn't what it was, but it's not as pessimistic as some would say.''