Fénix Petrochem project to be downsized

08-Sep-05

Mexican government has given the nod for the long awaited Fénix petrochemicals project, to help boost domestic polyethylene and polypropylene production. However, approval has been granted after a decision to downsize the project, reducing investments by 58% to US$840mn from US$2bn. The new downsized project will encompass: *Expansion of the ethylene capacity from 600,000 to 875,000 metric tpa at both the existing plants at La Cangrejera and Morelos petrochemicals complexes in Veracruz state. Upgradation of the Morelos plant is expected to commence in November 2005 and wrap up by end 2008, while the La Cangrejera expansion is expected to start in April 2006 and wrap up by the end of 2009.. * Construction of a new aromatics complex in Altamira, Tamaulipas state, to begin in June 2006 and be completed by 2009. The government has been endorsing the project since 2002 as part of efforts to turn around a 10year decline in Mexico's petrochemicals industry and a history of false starts in attracting private capital. But July 2005 saw the project face a fresh hurdle, when it became apparent the finance ministry would not agree to subsidize natural gas feedstock as requested by the private partners in the project. These partners asked for a 10% discount on natural gas condensates to make the project profitable but Pemex made them a counteroffer to charge export parity prices for the raw materials minus the cost of transport to the US, which is Pemex's main market for gas condensates. In the event of the partners rejecting the new offer, Pemex was ready to prepare an alternative project to upgrade the La Cangrejera and Morelos complexes. Canada's Nova Chemicals and domestic petrochemical companies Grupo Idesa and Indelpro are the private partners in Fénix. The original project proposal included a new 1 million tpa ethylene cracker that would produce propylene to be sold under long-term contracts as well as sufficient ethylene for two polyethylene plants and possibly a third. This new proposal appears to have preempted the response of the partners by offering yet another option. Is this alternative project a "better option" for the country since the government cannot guarantee long-term discounts on raw materials? Does reduction in the scale of the project mean that the private sector will not be the main investor as originally planned?