Dow's Southern Petrochemical Pole

The chemical industry in South America has changed enormously over the past several years. Major local private players are emerging through consolidation, while state oil companies get serious about petrochemicals and move forward with new complexes.

Dow's own plans in the region came to fruition only in 2001. The company had conceived of its first South American ethylene complex, in Bahía Blanca, Argentina, in the 1960s but didn't move ahead with it. The government stepped in about a decade later, working with local partners to build a joint venture--Petroquímica Bahía Blanca (PBB)--that included an ethylene cracker that fed new polyethylene plants.

In 1995, Dow and YPF--now Repsol YPF--bought PBB and chlorine and polyvinyl chloride maker Indupa from the government for $350 million. Dow and YPF also bought the polyethylene company Polisur from local partners. The acquisition included a low-density polyethylene plant, as well as a floating polyethylene plant built on a barge in Japan and shipped intact to Argentina in 1981 to quickly take advantage of excess ethylene.

Dow later sold off the chlorine-chain assets to Solvay and kept Indupa's small polyethylene plant for itself. In 2001, it also bought out Itochu's 10% stake in PBB, allowing Dow and Repsol YPF to merge PBB and Polisur into one company in which Dow had a 72% interest.

While Dow was consolidating its position in PBB, PBB was dramatically expanding its base. In 1997, it started work on a second cracker and a polyethylene unit based on Dow technology. PBB completed the $720 million projects in 2001, increasing its ethylene capacity to 700,000 metric tons per year and its polyethylene capacity to 600,000 metric tons.

To feed the new unit with ethane, Dow formed Compañía Mega, in which it has a 28% interest, with Repsol YPF (38%) and Brazilian state oil company Petrobras (34%). The $700 million pipeline network, completed in 2000, moves natural gas liquids about 350 miles from the Neuquén Basin to Bahía Blanca for extraction. Petrobras exports propane and butane from the liquids to Brazil.

THE TIMING of these projects--in the middle of a four-year recession--wasn't exactly auspicious. On the one hand, the government's 2002 devaluation of the Argentine peso in response to the economic hardships provided some benefits to Dow, Vignart says. Peso-based costs, such as labor, decreased against the dollar, and peso-based natural gas contracts lost most of their value. For a short time, Argentina had some of the cheapest gas in all of the Americas, opening the door to exports. "This was a temporary advantage that in most cases disappeared in 2002," he says.

But the devaluation also had its drawbacks. In building the plant, Dow had accumulated some $100 million in tax credits with the government that also lost most of their value.

And although natural gas rates were renegotiated for large customers, they are still fixed for light industry and residential use. Combined with a robust rebound in the Argentine economy, the low gas prices have led to winter shortages and supply allocation.

But even with the problems, Vignart says that the new ethylene plant is running at 10% above its designed capacity. "Consumption has grown, and we are reaching the best rates ever," he says.

Despite the high operating rates, Dow isn't preparing an expansion, Vignart says, in part because of the lack of feedstock ethane. Experts say there is enough ethane in the ground for a new ethylene cracker but that natural gas companies aren't profitable enough right now to justify the massive investment in pipeline infrastructure that would be needed. "There is some additional ethane, but everything will depend on the expansion of gas pipelines," Vignart says. "You tell me when the situation normalizes, and I will tell you when the ethane will be available."

The company is, however, conducting a 30,000-metric-ton-per-year expansion of its floating polyethylene plant.

Since Dow started establishing its beachhead in Argentina, its competitors in the region have been expanding and streamlining. Braskem was formed through a government auction of Brazil's largest ethylene complex. Petrobras is strengthening its position in chemicals, buying Argentina's Perez Companc and considering multiple ethylene projects in Brazil. And government-owned Petróleos de Venezuela is finally moving forward with a petrochemical joint venture with ExxonMobil.

Vignart says he's up to the challenge these companies pose. "The competition is always improving and getting strong, and that's why we can never rest," he says. "We have to be continually improving and keeping our competitive position as good as possible."

Jorge O. Bühler-Vidal, director of North Brunswick, N.J.-based Polyolefins Consulting, isn't so sanguine, pointing out that Dow's sites around the world have to compete internally for new investment and that the company has priorities such as its new projects in Kuwait and Oman. "For Dow to expand capacity--not just a debottlenecking--they would have to see the situation in Argentina stabilize and change," he says. Dow's regional competitors, in contrast, are free to invest when feedstock becomes available.

However, Vignart maintains that regional expansion is a high priority for Dow in the age of globalization. "Dow's emphases on growth and on opportunities around the world have made investments have better chances outside of North America," he says.