Petrochemicals - Opportunity for WA?

Dr Andrew Swanson, Principal Chem Systems

Plaza Ballroom, Hyatt Regency, Perth WA 1 November 1996.

CIP

Introduction by Remco Van Santen, Convenor CIP

In 1961, the Altona petrochemical complex on the outskirts of Melbourne, was established with no indigenous feedstocks. Four years later in 1965, Australia's largest oil and gas reserves were discovered in Bass Strait - almost on its doorstep. It should have been a bonanza, not only for the complex, but also for the state of Victoria.

However, no value added project at the complex or anywhere else can today be attributed to Bass Strait. This despite the infrastructure being in place, nearby markets and a rapidly developing manufacturing sector that was hungry for plastics, rubbers and chemicals. At best, Governments gained revenue, windfall profits derived by existing players and, for most of us, cheap petrol.

Australia's largest source of its self sufficiency in oil and gas has come and is now slowly fading with little to show for it .

Today we look to our North West, and whilst with vast gas reserves, there is very limited infrastructure and it is very distant from markets. So I ask, why should it be anything more than just another Bass Strait? Of course with mountains of iron ore we are seeing at least one Direct Reduced Iron project, but was the ill fated PICL complex as close as we will come to petrochemicals in Western Australia? Why should things be different than Bass Strait? Remember too tariffs then enabled prices to be increased by up to 60 per cent - now they are just 5 per cent!

This morning's presentation by Chem Systems may well be the most important seminar of the CIP series.

Chem Systems is a leading international consulting group. It is based in New York and London with offices around the world. They employ around 100 full time professionals.

Our guest this morning is Dr Andrew Swanson, Principal in the Chem Systems petrochemical strategic planning and inorganic practices.

Before joining Chem Systems in 1992, Andrew was General Manager of ICI Australia's Olefins Division. He has worked in Australia, UK and the USA. He is a graduate of Melbourne University and earned a doctorate from Oxford University.

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Dr Andrew Swanson

Dr Andrew Swanson, Principal Chem Systems - Summary of salient points

The core aspect of Dr Swanson's presentation was that capital is very mobile and influenced by;

bulletMarkets (volume, growth, regional logistics);
bulletCosts (capital, variable and fixed); and
bulletBusiness environment (regulations, incentives and taxation).

Asian markets are fast growing and large.

bulletTo year 2005, Australia's market growth is projected to be at 2.9 per cent compared with at least 6 per cent in many Asian countries that compete with Australia for investment. This will see large middle classes earning more than US$22 000 per year, such as 30 million in Indonesia alone by year 2005.
bulletEast Asia's share of world ethylene capacity of 65 million tonnes in 1995 is anticipated to double by year 2000 to 20 per cent of world production. In comparison Europe's share will fall from 35 per cent to just 28 per cent.

Trade patterns

bulletDespite this high growth in capacity, a deficit in production is anticipated to continue (equivalent to around three world-class plants) in polyethylene and EDC/VCM/PVC.
bulletIn this environment, for polyethylene, the USA will be a net importer, with exports from the Middle East (1 Mtpa) , Asia (0.6Mtpa) and Europe (0.3Mtpa).
bulletOn the other hand for vinyl chloride monomer (VCM), the USA will continue to export 0.7Mtpa while importers include Asia 0.7Mtpa. Sometimes these trade statistics do not signal comparative advantages as illustrated by Japan which continue to export around 0.1Mtpa of VCM simply for strategic and business interests.

The north west of WA

The North West Shelf in WA (NWS) has the ingredients for a chloralkali plant with ethane, salt and energy. to produce ethylene glycol, polyethylene and EDC/VCM. Although the NWShas the ingredients, the costs are not always so competitive.

Capital costs

Compared with the US Gulf Coast at 1.00

Australia

bulletPilbara (the North West Shelf region) 1.15
bulletCapital city 1.05

Saudi Arabia 1.00

Malaysia and Thailand 0.95

Indonesia 1.15

West Canada 1.15

It is assumed;

bulletno unexpected civil engineering surprises (ie. rocky land, not uncommon in the Pilbara); and
bulletsocial infrastructure is assumed (improving but still deficient in the Pilbara).

Clearly, though capital costs are declining in Australia, they are still too high.

Competitiveness in perspective

The following table considers the input costs. It shows Australia to be in the medium category for competitiveness.

                    LOW             MEDIUM           HIGH          

              SALT USA, Canada (domes)  Pilbara (solar salt)  Asia US$18 to $20     
                    US$2 to $3 per       US$7 to $12 per       per tonne             
                    tonne                tonne                                       

    HYDROCARBONS Middle East $0 (at   Pilbara at LNG        Thailand, North Asia  
                    well head),          netback US$1 to       >US$3/Gj              
                    Malaysia <$1/Gj      $3/Gj                                       

             POWER USA (cogeneration    Pilbara               Asia                  
                    and hydro)           US$0.02 to $0.04KWH   >US$0.04/KWH          
                    US$0.02/KWH (and                                                 
                    less)                                                            

Based on these costs, the cash cost of an electrochemical unit on a cash cost basis in the Pilbara was estimated at US$230 per tonne of chlorine in the Pilbara. This cost compares with with $200 to $323 Middle East, US Gulf Coast and Europe.

Note The cash cost is the production cost excluding capital, depreciation and return on capital.

Therefore excluding capital related costs, the Pilbara is competitive with many Asian countries.

Eroding any net advantage of locating in Australia are the favourable terms offered by competing regions such Indonesia , Malaysia and Thailand where up to 10 year "tax holidays" are provided to investors.

Incorporating these costs and tax-based incentives, internal rate of return (%) was calculated for different regions (for LDPE - polyethylene).

Malaysia 32.8

Thailand 30.8

Philippines 32.6

Indonesia 28.8

Western Australia current status 15.3

bulletif given an eight year tax holiday 19.1
bulletif no tax incentive but no shipping cost 22.3
bulletif eight year tax holiday and no shipping cost 28.3

The table clearly shows that even with similar tax incentives, the Pilbara is not competitive with the major competing countries with shipping costs a significant influence. The following table was used to indicate relative cash costs for chloralkali in competing regions (note different scales of production).

Conclusion

The Pilbara is competitive at variable costs and fixed costs on a "cash cost" basis. It is disadvantaged when capital costs are incorporated and the business environment is also less favourable than most Asian countries. It is also disadvantaged from being isolated from a national electricity grid to take up surplus power generated by such a plant.

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Editor's conclusion and observations

Though competitive on a variable cost basis, when capital related costs and transport costs are included, Australia is not competitive with competing Asian countries. Therefore, unless Australia offers tax and other incentives, as in competing countries such as Indonesia, Thailand, Malaysia and the Philippines, it will be difficult to attract investment in a petrochemical venture.

Relative costs of producing ethylene undertaken by Chem Systems showed Australia to be more expensive than Malaysia, but cheaper than the benchmark USGulf Coast as well as India, Taiwan etc. Of course again, this is on a production cost ("cash cost") basis that eliminates that advantage.

Gas prices have been negotiated in Western Australia at A$1.40/GJ (US$1.10/GJ) according to Australia's Mining Monthly (March 1995). This price is about one-half the deregulated price ruling before 1995. Pipeline overhead charges are additional.

Remco Van Santen with editorial input from Dr J E Wajon.

NOTE

Cash cost is the total manufacturing cash cost including direct labour and management as directly related to the manufacturing activity excluding interest on working capital (depreciation on plant and equipment), interest on debt and distribution expenses. Cash cost is therefore that cost which is obviated by closing down the operation.

© 1996; Chemlink Pty Ltd, PO Box 673, West Perth, Western Australia 6020. Tel 09 447 6666.

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