A world class petrochemical project?
Western Australia has aimed to establish a world-class petrochemical project centred on chloralkali production. In June 1998 the state government announced that a consortium of Shell and Dow was selected as the preferred venturers. The project would be located in the north west of the state. (The Government will not assume an equity interest).
The A$2bn venture would commence construction in year 2000 and production in 2003. It would involve;
450 000 tpa of ethylene production - jointly owned and operated
400 000 tpa monoethylene glycol by Shell
690 000 tpa of ethylene dichloride (EDC) by Dow
500 000 tpa of caustic soda by Dow.
It has some characteristics favourable for its establishment
as below. However, it's scale is limited by ethane supplies which have been
tied up by the LNG exporters (who can claim to export the wettest (ie. densest)
LNG in the world in containing C2 that is now tied up in long term supply
contracts. In our opinion, and supported by discussions with industry, the
Government had an opportunity right up to 1995 to come to an agreement to
support the extraction of ethane, or at least, cover the risk of ethane
extraction facilities that have now not been installed. The cost would have
been much smaller than today as the LNG venturers justifiably considered the chloralkali project was unlikely to proceed. There was a window of opportunity
available to government. And so, in our opinion, the chloralkali project is
unlikely to proceed and resources allocated in its promotion, a waste of
public funds. The following are some positives for it.
Western Australia is a very large LNG gas exporter supplying 10 per cent of world trade in liquefied natural gas. Plans are for a doubling of production to 20 million tonnes per year by year 2003. Since deregulation, very competitive gas prices of around US$1.30 per gigajoule (ie. about the same on a per MMBTU basis) are achievable in the home market. Gas presents an important source of advantage.
The state is also a very competitive exporter of salt suitable for the chloralkali operations with production facilities alongside the gas exporting installation. The project would however benefit from the $7 to $10 per tonne freight advantage over Asia thus saving around $5 to $7 per ECU (say 2 per cent).
Australia, takes nearly one-half of deep sea trade in caustic soda and it is the single largest destination for caustic soda trade requiring 1 million tonnes per year for its alumina industry. Australia presents a very large secure market for caustic.
PVC in Australia
Australia produces its PVC requirements exclusively from imported VCM with some 240 000 tonnes per year imported through the state of Victoria.
The cash cost of an electrochemical unit in the region of the proposed project in Western Australia was estimated by Chem Systems in 1996 at US$230. This cost compares favourably with $212 per ECU in the US Gulf Coast to above $300 in Asia. Of course the more recent devaluation of currencies has brought the cost down in Asia closer to the rest of the world. Western Australia too has become marginally more competitive.
The combined competitive advantage is summarised in the following chart that identifies the key competitive factors. It shows an estimated $20 per ECU advantage, say 5 per cent before incentives in competing countries are allowed for.
Australia does not offer tax concessions for new investment as available in competing regions so that that this small margin of advantage is effectively negated from the perspective of any potential investor. Therefore, without the taxation and other incentives provided in competing regions, the infrastructure related assistance provided by the state government would be an important influence in its prospects for establishment.
The project is predicated on supplying caustic and with the chlorine as a by-product. Given the low ECU costs, it could provide EDC as low as $100 per tonne - in other words, sell the chlorine at effectively a negative price. Chlorine at potentially such low prices would place pressure on marginal producers in Asia and reinforce the trend to imports. Australia would be very competitive supplier.
Over the next five years, some 40 per cent of the world's capacity increase in PVC manufacture is anticipated to be in the Asia and a deficit of 2 million tonnes per year of chlorine is projected by year 2000.
The growing deficit in PVC capacity in Asia will be met by imports of VCM/EDC to represent one-half of the world's trade. Net imports of VCM are projected to increase from the current level of 1.2 million tonnes per year to 1.6 million tonnes per year, and EDC to 3 million tonnes by year 2003.
By year 2003, the region will import 6 million tonnes of vinyls of which some 80 per cent will be as the PVC precursors EDC and VCM. Some countries will remain net exporters of PVC resin, but a net importers of chlorine. The Asian region would therefore present a blackhole for Australia's chlorine.
A potential investment in Western Australia would initially produce some 450 000 tonnes of chlorine which is only one-quarter of Asian requirements.
The PPP will be very important for Australia - perhaps more than recognised by most within the country. Australia's chemical industry has been in decline since the mid 1970s and so the PPP will provide a very important signal to the world about Australia's competitiveness.
The PPP should not seen in isolation but in terms of the stimulation and externalities. For example, the project will require oxygen, extracted from air, it will produce nitrogen, that combined with the co-produced hydrogen (electrolysis) provides for ammonia. The production of ammonia could also be used to manufacture sodium carbonate (solvay process). Other petrochemicals projects may be stimulated.
It worth noting that the scale of ethylene production is modest by world standards, it would make economic sense for other ethylene derived products to be produced such as polyethylene resin and acrylonitrile. Instead it produces ethylene glycol, which is expensive to transport for such a low value added chemical.
The stimulatory and externalities of the project are vast. The author has spoken at several overseas conferences, where it was made clear, the world has looked at this project. Expediency and naiveté on the part of the government sponsor has undermined its prospects.
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