International negotiations on Iran’s nuclear programme will resume on April 7 as the Joint Plan of Action (JPOA), between the P5 + 1 and the Islamic Republic of Iran reaches its third month. Negotiators will seek to strike a permanent agreement over Iran’s entitlement to nuclear technology, one that may see further unlocking of foreign reserves and looser restrictions on cars, precious metals, and petrochemicals exports.
With positive signs coming from either side of the negotiation table, one must ask what will happen to the GCC region’s petrochemicals industry if a definitive agreement were to be reached?
With its access to cheap and abundant ethane, Iran was once a major exporter of methanol and polyethylene. Sanctions aside, the country has the capacity to become a formidable player within the petrochemicals sector. According to a report by Platts, the country has a capacity of over 7 million mt of ethylene, representing little under 5% of global installed nameplate capacity, making it the second largest producer and exporter of petrochemicals in the Middle East after Saudi Arabia.
Currently, most of Iran’s petrochemicals exports head to China, Iraq, the UAE, India and Afghanistan. Iran’s European markets on the other hand, have continued to shrink over recent years as the US levied even stricter trade sanctions on Iran. In 2010, the EU imported over $1 billion worth of petrochemical products from Iran, now that figure is down to about $50 million.
The country’s petrochemicals exports have shrunk by approximately 30% as a direct result of sanctions. In terms of crude and also refined products, the US has allowed select countries to continue purchasing from Iran, but at significantly reduced volumes. Even with permissions from the US, obtaining insurance for cargoes from Iran has significantly impacted trade, explained Andy Gibbins, MENA vice president for the Euro Petroleum Consultants.
“Iran has suffered from lower levels of productivity due to lack of investment, but also from barriers to exporting products,” he said.
The sanctions-related market crunch has led Iran’s petrochemical sector’s capacity utilisation to fall below 80%. Saudi Arabia on the other hand, has increased utilisation to over 90%, while also boosting its nameplate production capacity. In fact, between 2008 and 2012, the GCC’s basic-petrochemicals output capacity climbed by an average rate of 13.2% per annum, while utilisation rates have stayed around the 87% mark.
Many throughout the industry have acknowledged that aside from technological and product innovation, and operation excellence; Iranian sanctions have helped the GCC’s petrochemical industry take a larger share of global petrochemical export markets.
Barriers to markets aside, Iran has also been hit by sanctions in a more obscure way. Although the South Pars/North Field, shared between Iran and Qatar, may be the world’s largest accumulation of hydrocarbons, delays in the development of new phases of the field caused by limited access to new technologies, have severely damaged the country’s petrochemical industry.
“As a result of the combination of gas feedstock shortages and economic sanctions leading to technical equipment problems and declining exports, the capacity utilisation of Iran’s petrochemical sector has declined significantly over the past two years,” said Jens Zimmerman, senior analyst of energy markets at Wood MacKenzie.
So the easing of sanctions on Iran is very likely to help the country’s petrochemical sector to import the necessary equipment and technology to meet growing demand for gas, while also enabling the country to expand export markets. This will be particularly noticeable in Asia, where Iran’s petrochemical export markets are already developed.
But for now, even with current and future sanctions relief, the country is unlikely to hit its announced target in its Five Year National Development Plan (2010-2015) to double petrochemical production capacity. “The gas feedstock shortage won’t be resolved by the temporary lifting of sanctions under the JPOA but can only be resolved if sanctions will be lifted permanently,” said Zimmerman.
It is still unclear how European and American companies will react in terms of investing in Iran’s hydrocarbon sector, at least not until a permanent agreement is reached.
“I would not expect any significant investment commitment during the sanctions-easing period,” said Zimmerman. “It’s unlikely that the sanctions-easing under the JPOA alone will have a significant impact on Iran’s petchem sector and that it will quickly become a threat for other established GCC petchem producers.”
