A Big Breakthrough In Mexican Chemicals

Braskem Idesa is in the middle of one of the most difficult tasks in all of the chemical enterprise: It is starting up an integrated petrochemical complex.

The venture has already installed an estimated 96% of the equipment for the $4.2 billion steam cracker it is building in the Mexican town of Nanchital. The number of workers on the job site, currently 13,000, is starting to ebb. Technicians are turning their attention from construction to precommissioning. They are testing electrical substations, boilers, and nitrogen systems. Last month, the first 11 of an eventual fleet of 1,300 hopper cars arrived.

Cleantho Leite Filho, director of institutional relations and business development for the firm, a partnership between Brazil’s Braskem and Mexico’s Grupo Idesa, believes the cracker will be making ethylene in November. He expects the polyethylene plants to start up a couple of weeks later.

“Now we are reaching the anxiety phase,” Leite says. “We are very anxious and also very proud of what we have accomplished up to now.”

Leite has many accomplishments to point to. Braskem Idesa initiated programs in the relatively poor area to cultivate needed support services for the facilities such as uniform cleaning and catering. It cataloged ancient Olmec civilization artifacts that it uncovered during excavation. “Doing a project like this in a developing country is different than doing it in the Houston area,” Leite says. “In Mexico, wherever you dig, there’s an elevated risk for finding some archaeological remains.”

But Braskem Idesa’s biggest accomplishment was getting the go-ahead from the government and the country’s state oil company, Petróleos Mexicanos (Pemex), to build the complex to begin with.

Mexico, though oil- and gas-rich, hasn’t seen a new ethylene cracker since Pemex opened its Morelos complex in 1988. Under decades of a Pemex monopoly in oil, natural gas, and basic petrochemicals, investment dollars were too tight for meaningful expansion.

Private industry believes it can do better, and Mexico’s government is finally giving it a chance. It recently enacted reforms that will open up Mexico’s energy sector to competition, a move industry watchers predict will lead to more feedstocks and more private initiatives in chemicals. Braskem Idesa, they say, is a model for Mexico’s petrochemical future.

Pemex has held Mexico’s hydrocarbon sector in a tight grip since the government kicked out foreign oil companies and nationalized the sector in 1938. The company drills, transports, and markets all of Mexico’s oil and natural gas. It also makes all the country’s basic petrochemicals as well as most first-line derivatives such as polyethylene, ethylene oxide, and styrene.

In the 77 years since Pemex’s formation, the Mexican government has become heavily dependent on the money the firm brings in. Pemex had $108 billion in revenues last year and paid almost half of it in taxes and royalties. Pemex hasn’t been able to spend as much on capital investment as international oil giants such as ExxonMobil.

The result has been an erosion of oil and gas production at a time when output from shale has exploded in the U.S. Since peaking in 2004, Mexico’s oil output has declined by more than 25%, according to the Energy Information Administration. Natural gas production peaked in 2010 and has since declined by 9%. Pemex has found keeping up with spending on chemicals even more difficult. By law, the national oil company has to invest its money where it can generate the best returns. With oil and natural gas prices high for most of the past decade, Pemex has directed its precious capital budget at oil and gas wells, not new chemical plants.

According to the National Association of the Chemical Industry, Mexico’s chemical trade group, the country consumed $37.1 billion in chemicals in 2014. Of that, more than half was imported.

Leite estimates that the deficit in polyethylene alone is 1.4 million metric tons per year out of a 2 million-metric-ton market. His project is meant to significantly plug that hole.

The chemical industry in Mexico is getting substantial pull from downstream sectors that have been burgeoning since the North American Free Trade Agreement was enacted in the 1990s, says Ricardo Cuetos, vice president for the Americas at the styrenic polymers maker Styrolution.

Sniffing an opportunity, Styrolution predecessor BASF bought land in Altamira, on Mexico’s Gulf Coast, in 1990. It built a polystyrene plant in 1997 and an acrylonitrile-butadiene-styrene plant in 2000.

Pemex produces all of Mexico’s styrene and doesn’t make nearly enough to handle the country’s requirements. Thus, the Altamira plant takes in styrene and other raw materials by ship, usually from the U.S. Gulf Coast. It exports about half of the polymers it makes back to the U.S. and elsewhere.

As BASF anticipated, business in Altamira has been healthy, thanks to major manufacturers moving to the country. “The household appliance market is a good example of the growth we have seen in Mexico,” Cuetos says, noting that companies such as Whirlpool, LG, Samsung, and Electrolux have set up factories. Styrolution also does brisk business with carmakers in Mexico including Volkswagen, Ford, Nissan, and General Motors.

By comparison, industrialization has left the Mexican petrochemical sector behind. The government has attempted various strategies to turn it around, but until Braskem Idesa nothing worked.

In the 1990s, the government tried to sell majority stakes in Pemex’s petrochemical and fertilizer plants. The plan faced popular backlash. A subsequent plan to sell off minority stakes in the facilities fizzled because of lack of interest from prospective partners.

Pemex frittered away the 2000s pushing its Phoenix Project, a $2 billion complex that would have made ethylene, propylene, and polyethylene. Designated partners included Pemex, Idesa, polypropylene maker Indelpro, and Canada’s Nova Chemicals. It never advanced past the discussion phase.

Braskem Idesa’s Leite says the biggest problem with Phoenix was including Pemex as a financial partner. The petrochemical business was a low priority for Pemex and it couldn’t afford to lay out $1 billion toward a chemical plant.

In 2009, the government tried again with a different strategy: including Pemex as a supplier of raw materials, not as an investor. Braskem and Idesa won the bidding to build the plant. “That was the change of model that allowed this project to go,” Leite says.

Braskem Idesa isn’t the only trailblazer in Mexico. Chlorovinyls maker Mexichem has managed to partner with Pemex itself on a chemical project. The firms are spending about $200 million to modernize and triple the capacity of an aging Pemex vinyl chloride plant in Pajaritos.

“This joint venture took many years to negotiate,” says Mexichem Chief Executive Officer Antonio Carrillo Rule. “It was a very touchy subject to be able to basically do a joint venture where a private-sector company would keep the majority. It was a completely philosophical debate over whether Mexico was going to continue having monopolies or not.”

Mexichem is also looking outside of its home country for growth. With Occidental Chemical, it is building an ethylene cracker in Ingleside, Texas, that is expected to be up and running in 2017. OxyChem will use the ethylene from the plant to make vinyl chloride, which Mexichem will buy, largely for export to newly expanded polyvinyl chloride plants in Colombia and Mexico.

“If I wanted to put another ethylene cracker in Mexico, there is no ethane to do it,” Carrillo says. “That is why we are building in the U.S.”

That could change if broader Mexican energy reforms have their intended effect. The government of President Enrique Peña Nieto came into power in 2012 with a strong will to reform the energy sector. The following year, Mexico enacted changes to its constitution allowing for the private sector to explore, produce, transport, and refine oil and natural gas.

The plan has had its wrinkles. The government was able to auction off only two out of 14 offshore oil blocks earlier this summer.

Although some industry watchers saw the results as a disappointment, Rina Quijada, senior director for Latin America at the consulting firm IHS, called the auction “a step in the right direction” for a country that had a state monopoly in oil and gas for more than 70 years. “The next one will be better,” she says.

Quijada thinks the chemical industry in Mexico will begin benefiting from energy reform in 2018. The most immediate impact, she says, will likely be from investment in new gas pipelines that will bring shale gas down from Texas.

Also significant, Quijada says, is a Pemex reorganization that came with the reforms. Pemex will have a new subsidiary that will control the supply chain from ethane through polyethylene. Pemex officials, who declined an interview with C&EN, have in conference calls with analysts indicated their willingness to seek partnerships.

“This energy reform and this restructuring of Pemex will allow the formation of joint ventures that will bring in needed investment to grow the petrochemical business,” Quijada says.

Multi-billion-dollar projects, like the one now being completed in Nanchital, won’t happen tomorrow, Quijada acknowledges. “When are we going to see another Braskem Idesa?” she asks. “It might be on the horizon.”