Supply Chain Council of European Union | Scceu.org
Freight

LatAm needs more competitive feedstocks as EU-Mercosur trade deal approaches

BUENOS AIRES
(ICIS)–Latin America must capitalise on its
potential competitive advantage in energy and
petrochemical feedstocks, especially as the
Mercosur countries open up their economies with
an EU trade deal.

“The effort from Mercosur in opening up the
economy and lowering or eliminating import
duties in a period of falling prices is a
threat to established industries in South
America,” said Antonio Lacerda, senior vice
president of chemicals and performance products
for BASF in South America, in an interview with
ICIS.

“This will be a major topic in 2020 – on how to
balance this while respecting that economies
have to be open,” he added.

The two key Mercosur countries – Brazil and
Argentina – both have huge hydrocarbon
resources in the offshore pre-salt fields for
Brazil and the Vaca Muerta shale gas formation
for Argentina. Yet both are far off from
meaningfully exploiting these to their full
advantage.

For Brazil and Argentina’s chemical sector,
feedstock and energy competitiveness is
critical be able to compete in the world
economy. And this becomes more urgent in light
of the signing of the EU-Mercosur trade deal.

In June 2019, the Mercosur countries –
Argentina, Brazil, Paraguay and Uruguay – and
the EU reached a trade agreement to remove
trade barriers between the regions. The EU
estimates this will eliminate around €4bn in
duties annually for EU exporters.

Mercosur will eliminate duties on 91% of its
imports from the EU, including chemicals, over
a transition period of up to 10 years for most
products with 15 years for some of Mercosur
most sensitive products, according to the
agreement.

And the EU will eliminate duties on 92% of its
imports from Mercosur over a transition period
of up to 10 years.

“The Mercosur-EU trade agreement doesn’t mean
you have to be the cheapest in the world, but
it helps to be on the cheap side,” said Jorge
Buhler-Vidal, director of Polyolefins
Consulting.

“When you look at the Vaca Muerta and potential
petrochemical projects, it may not be as cheap
as the Middle East or the US Gulf Coast, but it
would still be on the lower left side of the
cost curve. If South Korea can compete in Latin
America, a plant in Argentina can compete,” he
added.

ARGENTINA’S VACA MUERTA CASH
COW
With a new Argentina
government led by President Alberto Fernandez
starting on 10 December, many players are
awaiting a clear energy policy.

The new president will also have to deal with
an economy deep in crisis with unsustainable
debt levels and a plunging currency. Martin
Redrado, chairman of Fundacion Capital, told
delegates at APLA in Buenos Aires, Argentina,
that a consensus among factions of the incoming
government has emerged around energy policy.
Overall, they want to adopt policies that will
support the development of the oil and gas
reserves in the Vaca Muerta.

Argentina already has the largest production of
shale gas outside of the US. Further
development could support expansion of
Argentina’s petrochemical industry centered in
Bahia Blanca and bolster the economy,
especially if the country can become a net
exporter of natural gas.

Potential energy policies include looser
foreign-exchange controls for oil and gas
producers, and tax rates comparable to those
paid by producers in the Permian basin in
western Texas in the US, said Redrado.

Shale gas in Argentina could provide the
feedstock for a variety of petrochemicals
projects, ranging from on-purpose propylene to
methanol, said Federico Veller, commercial
executive manager for YPF Quimica, in an
interview with ICIS.

One potential project is a doubling of urea
capacity at Bahia Blanca to 2.5m tonnes/year by
2024. Other possibilities include a world-scale
methanol plant, and a propane dehydrogenation
(PDH) plant feeding a downstream polypropylene
(PP) unit.

In the meantime, Brazil’s petrochemical
industry continues to await more competitive
feedstock supply to operate at its full
potential and displace imports.

“For the chemical industry, there is a
frustration with growth. It’s a challenge in
Brazil especially with low utilisation rates
because of the lack of competitiveness of
logistics and energy,” said Fernando Musa, CEO
of Braskem, at an APLA panel discussion.

“There are still imports coming into Brazil.
There’s a scenario where demand continues
growing a bit higher than GDP but the industry
doesn’t have the growth rate it should have. We
need more competitive plants operating at
higher utilisation rates,” he added.

And it’s not just about more production needed
from Brazil’s pre-salt offshore fields and
infrastructure to bring that onshore.

Part of the problem of uncompetitive feedstocks
lies in state-owned Petrobras’ control of the
midstream natural gas pipeline and processing
sector, which is now changing, Musa noted.

“Petrobras’ control of the midstream sector is
changing but has not fully changed yet. So we
pay more and this translates to less
competitive product,” said Musa.

Brazil is undergoing the most significant
transformation of its energy sector in its
history featuring greater competition, the head
of its national energy agency told delegates at
APLA.

“Brazil is going through the biggest
transformation in its history. We are finally
replacing a monopoly with an industry,” said
Decio Oddone, director general of the Brazilian
National Agency for Petroleum, Natural Gas and
Biofuels (ANP).

COMPETITION
ANP has
pushed for the opening of competition and
transparency in Brazil’s gas pipelines network
which was dominated by Petrobras, the sale of
unutilised oil and gas fields, and the sale of
Petrobras refineries to foster competition –
all of which are progressing, said Oddone.

Petrobras has already committed to selling
eight refineries representing around 50% of
refining capacity, and selling gas pipelines
which would provide greater access to natural
gas treatment plants, he added.

“Additional ethane and propane will allow for
more expansions. In Sao Paulo and Rio [de
Janeiro] we probably will be able to build one
or more crackers to consume the feedstocks,”
said Oddone.”

Ultimately, opening up the gas distribution
market to increased competition could cut the
price of natural gas in Brazil from
$11-12/MMBtu to around $6-7/MMBtu, said BASF’s
Lacerda.

In addition, short-sea freight, which is
limited to a handful of companies, will be
opened up 
to foreign competition, making
freight rates more competitive, he said.

With Brazil’s recent energy reforms, ANP
projects the country’s crude oil production to
more than double in 10 years from about 3m
bbl/day today to around 7m bbl/day, plus
associated natural gas. Of Brazil’s 4m bbl/day
in crude oil and equivalents production today,
around 1m bbl/day is gas.

“ANP is making changes and this will create the
necessary conditions with the sale of
refineries and changing the regulatory
framework for natural gas. And this will create
opportunities to extract more ethane and
propane from natural gas,” said Braskem’s Musa.

For Brazil’s natural gas liquids (NGL) supply,
the petrochemical industry “will need to be
patient and wait for production to grow”, said
Musa.

Braskem is still evaluating an expansion of its
540,000 tonne/year ethane cracker in Duque 
de
Caxias, something that has been in planning
stage since at least 2015.

“We need competitive feedstock and are working
with potential partners. It is still in the
study phase,” said Edison Terra, vice president
of Braskem’s business unit for polyolefins,
renewables and Europe, in an interview with
ICIS.

FASTER
DECISION-MAKING
Ultimately, Latin
America’s petrochemical and energy sectors need
to speed up decision-making to keep up with the
world.

“A game changer for Latin America would be how
we make decisions. In other parts of the world,
decisions are made quickly. Here it takes a
long time, especially when it comes to
investments,” said Pedro Manrique, vice
president, commercial and marketing for
Colombia-based Ecopetrol, at an APLA panel
discussion.

“In North China, it took 21 months to build a
refinery and petrochemical complex, including
roads and railways. This 
is how they make
decisions,” 
he added.

However, in any petrochemical investment
decision, sufficient and competitive feedstock
supply is a prerequisite. Parts of Latin
America are moving in the right direction.

Additional reporting by Al Greenwood

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