Sanctions dam vast Iran petrochemical wealth potential

There is enormous potential for investment in Iran's petrochemicals sector, which is currently a reservoir of wealth dammed by sanctions that may yet be lifted.

This is according to analysis from IHS, a leading global source of investment insight, whose IHS Chemical analysis states that despite Iran's political and legal challenges, coupled with associated red tape, there is real potential for petrochemicals investors including low-cost feedstocks to access major markets.

Iran has the world’s fourth-largest supply of proven oil reserves and the second-largest supply of conventional natural gas reserves, much of which is rich in ethane, a petrochemical feedstock. This is significant given that chemical feedstock availability in other countries such as Saudi Arabia, Kuwait and Oman, has become more limited.

Michael Smith, Vice-President of Europe, Middle East and Africa at IHS Chemical, explained: "If you are a global petrochemical producer looking at Iran for its investment and growth opportunity, and you can forget for a minute about the major business and political risks involved, it presents an attractive opportunity."

"Major chemical players are champing at the bit to explore the potential that Iran offers, but they will not be doing so haphazardly. These companies are used to operating in risky environments and managing significant risk - it's the nature of the business, but the reward has to significantly outweigh the risk, which is something they will be assessing very carefully and deliberately."

Geared for export

IHS estimates that Iran’s current petrochemical production capacity is just below 60 million tonnes. The country produces a wide range of petrochemicals, roughly 100 different products, ranging from acetic acid to mixed xylenes. While the vast majority of these products are produced in order to serve Iran’s comparatively advanced economy and a large population of nearly 80 million, a few products are aimed at export markets. These are primarily ethylene, polyethylene (PE), methanol, and mono-ethylene glycol (MEG).

The Iranian petrochemical industry, while quite diverse, is primarily focused on exploiting the country’s vast resources of ethane-rich natural gas. On the one hand, the country converts methane from natural gas to methanol and urea. But Iran also cracks ethane and other natural gas liquids to produce ethylene, which is then polymerised to PE or processed to MEG.

Aside from the lure of oil reserves and abundant ethane feedstocks, the price of ethane gas in Iran is kept low by government mandate. In general, ethylene production costs in Iran, based on ethane, are comparable to those in Saudi Arabia or North America; i.e. the lowest in the world. Both ethylene and polyethylene are key products for Iranian export, and lifting of sanctions would enable the Iranians to expand production and export an additional one tonne of ethylene/polyethylene within 12 months to two years, according to IHS Chemical estimates.

"Trading companies will be eager to access these volumes of Iranian ethylene and PE, but the impact on global operating rates, according to our IHS Chemical analysis, is not expected to be dramatic—less than one per cent lower than currently projected," said Smith. "Nevertheless, additional Iranian ethylene in the form of polyethylene could hit the market just when global operating rates are at a low point in the years 2017-2018, which would exert some downward pressure on prices."

Another key export commodity for Iran is methanol. Iran is a major methanol producer and exporter, with five tonnes of capacity, and methanol producers in Iran also enjoy very advantageous production costs. Lifting of sanctions would accelerate Iran’s methanol production plans and drive progress on many proposed projects. While Iran has proposed projects totalling more than 20 tonnes of new methanol capacity, IHS Chemical believes a more realistic figure of approximately 10 tonnes could be added by 2025.

Sanctions and their impact

In the early 2000s, Iran embarked on an ambitious petrochemical expansion plan based on the country’s huge abundance of natural gas. The original plan was to expand petrochemical production capacity from nine tonnes in 2001, to 100 tonnes annually by 2015. However, as a result of tightening restrictions on the flow of capital and goods, as well as limited access to necessary technology, parts and materials, Iran missed this goal by a long shot, according to IHS.

Before the sanctions were implemented, Iran was a major supplier of petrochemicals to Europe; primarily ethylene, PE and methanol. However, total petrochemical export volumes from Iran did not suffer significantly as a direct result of the sanctions. Under the sanctions, these products were simply redirected to Asian, African and some South American countries, principally China and India. Business with Europe, however, virtually disappeared.

The much larger impact resulted from the inability of Iran to maintain and invest sufficiently in its oil/gas and petrochemical feedstock and export infrastructure, which has led to chronically low capacity utilisation rates, not the least due to periodic shortages in ethane feedstock. Development of the Iranian energy sector has been impeded by international sanctions that have stifled the influx of essential foreign investment and technology.

Progress in the country’s steam-cracker investments has been slow since the start-up of the Kavyan 1 unit in late 2012, and feedstock is in short supply, IHS said. Progress on the Kavyan 2 unit has been delayed by the sanctions limiting gas shipping. Sanctions have also restricted

developments of the gas processing necessary to extract ethane for feedstock. Even the existing crackers at Bandar Assaluyeh are short of feedstock, so adding further steam-cracker capacity will be of little use until natural gas and feedstock availability increases.

Smith explained: "Lifting of sanctions on the industry and on Iranian finances will re-kindle foreign investment and allow Iran’s petrochemical industry to get back on a fast track to growth. In the short-term of 12 of 24 months after sanctions are lifted, Iran will rapidly start taking advantage of easier access to foreign capital markets, trade financing, oil markets and technology providers."

The re-integration of Iran into the global business community "will revitalise the country's petrochemical business in a major way" said Smith. "Iran will take steps toward resuming its important role in supplying global markets with much needed petrochemical products. As a consequence, the Iranian people are likely to benefit from increased industrial development and higher standards of living."