The Economic Power of Petrochemicals

Petrochemical industry drew up its long-term plan in five phases and focused on two industrial poles of Mahshahr and South Pars.

Establishment of the infrastructure of the petrochemical industry started before the victory of the Islamic revolution. Based on a contract signed with Japan, construction of a petrochemical factory in Mahshahr started. However, soon after the inception of the Iraqi imposed war, the Japanese contractor that was apparently looking for a pretext to halt the project refrained from completing the factory. It was obvious that decision-makers on international division of labor had decided that Iran should remain an exporter of crude oil and not play a more constructive role. However, strong determination and inclination of the Iranian nation for development and doing away with monopolies, disturbed the deep slumber of imperialists and despite their will, Iranians decided to establish a powerful petrochemical industry in the country.

In the following interview, Mohammad Hassan Peyvandi, director of planning and research at the National Petrochemical Company sheds more light on the process of planning and long-term goals of the industry. Mohammad Hassan Peyvandi holds a bachelor’s degree in chemistry and petrochemical engineering as well as a mater’s degree in the executive management. He has worked on projects carried out by the National Petrochemical Industry as a director and is currently director for planning and projects at the National Petrochemical Company.

Please explain the main approaches and goals of the Iranian petrochemical industry.

First, we better have a look at the First Five-Year Economic Development Plan. The First Economic Development Plan, part of which was related to petrochemical industry, was influenced by the imposed war. Petrochemical sector tried to invest a minimum in petrochemical industries proportionate to minimum facilities it enjoyed in terms of feed and raw materials.

Those minimums included the amount of naphtha made available by refineries in Isfahan, Arak and Tabriz. The investment resulted in the establishment of small petrochemical complexes in Isfahan, Arak and Tabriz as well as a chemical fertilizer complex in Bojnourd, Khorasan. The main problem was that the country lacked any planning strategy for developing refineries. Even now after the construction of a seventh refinery, no other refinery has been slated for development and, for this reason; petrochemical feed is severely affected by dominant fuel in the country (gasoline). What petrochemical sector used as feed for Arak, Tabriz and Isfahan refineries and later, from Abadan refinery for Bandar Imam Petrochemical Complex during the First Economic Development Plan was part of the country’s gasoline fuel. Vulnerability of petrochemical industries due to use of naphtha feed, which is originally part of automobile gasoline, encouraged petrochemical industries to change their feed.

Simultaneously, another big occurrence was rapid development of South Pars gas resources. The gas coming from the field contains 8-10 percent C₂plus compounds, which could be an ideal feed for olefin units. Also, liquid gas containing that 10% C₂plus compounds was a good financial resource to finance projects. The massive volume of gas liquids which amounts to about 40,000 barrels per day for every phase of the South Pars Project could provide a suitable feed for aromatic units as well as olefin units supplying propylene.

Based on the abovementioned feeds, petrochemical industry drew up its long-term plan in five phases and focused on two industrial poles of Mahshahr and South Pars. The benefit of this planning was distancing from the effects of global crude oil price fluctuations. As we know, crude oil is affected by OPEC and similar structures in terms of production ceiling. With regard to price, in addition to supply and demand trend in the world, it is affected by political upheavals such as the war in Iraq, revolutions and economic crises.

Adoption of the planning strategy on the basis of gas feed would immunize the industry against such upheavals because the gas price is regional and competitive and the Middle East contains the biggest gas reserves in the world and enjoys the best competitive prices. Therefore, the economy of petrochemical development projects would yield a suitable return for investments. All these possibilities have enabled the petrochemical sector to not only develop during the Third Economic Development Plan on the basis of developmental planning for economic and global capacities, but also make up for the past dormancy during the Second Economic Development Plan. Thus, projects considered during the Second Economic Development Plan were made operational simultaneous with the implementation of the Third Five-Year Economic Development Plan.

What have been the consequences of developing petrochemical industries for the country?

Development of petrochemical industry activated domestic engineering, manufacture and manpower development as well as capital turnover. As a result, through about $10 billion investments at two special petrochemical zones of Bandar Imam and South Pars, as well as other parts of the country, domestic workshops capable of manufacturing petrochemical equipment were established. Also, measures taken by the Economy Council and Majlis to make maximum use of domestic manufacture and capabilities provided the private sector with a good opportunity in the fields of engineering, domestic manufacture, consultation as well as installation and construction contractors. So that, there is currently no vacant space to work in the above fields in relation to petrochemical industry and the speed of implementing petrochemical projects is controlled by the speed of equipment leaving domestic manufacturing workshops or problems resulting from domestic engineering or manufacture.

The recent examples show themselves during inauguration and this is natural because it is the first time that an Iranian engineering company carries out detailed engineering procedures on a several billion dollar project and, naturally, it won’t be devoid of minor errors that could be corrected.

The same is true about domestic manufacture too because a big apparatus like a reactor, with many input and output nozzles, might contain errors in manufacture and assembly that would only show by observing its dynamic and chemical behavior during commissioning. This is natural. Therefore, we believe that the most is made of petrochemical investments in the process of economic and industrial development of the country, not only in terms of increasing production, but also in terms of taking advantage of existing potentialities and capacities of other sectors in creating jobs and a remarkable added value that is not only earned through converting hydrocarbon substances to petrochemical products, but also from development of engineering, equipment manufacture and manpower sectors. The end result of this planning is reduction of the cost prices of projects in national terms. For example, we can say that the cost price for production of one ton ethylene under equal conditions in terms of feed has been reduced by about 30% or more in comparison to the First Economic Development Plan and despite global inflation. Of courses, to have a more accurate surmise we must wait until products of those projects enter the market.

How is the capital needed for developing petrochemical industries supplied?

The petrochemical industry is basically a capital-intensive and technology-intensive industry and there is no doubt about it. The national petrochemical industry has embarked on investing in projects with suitable economic justification by taking advantage of financial resources earned through domestic or foreign sales of its products and within the context of permits issued by the Islamic Consultative Assembly and the Economy Council. Other investments are made according to finance permits and through the supports offered by the Ministry of Oil. We have had no problem with regard to financing projects.

What plans have you made with regard to market?

The National Petrochemical Company paid due attention to international markets during the Third Economic Development Plan. It scheduled its projects taking into account the country’s relative and competitive advantages including gas resources and skilled, inexpensive manpower as well as domestic manufacture and engineering capabilities while taking into consideration all projects that would be made operational worldwide during the concluding years of the Third Five-Year Economic Development Plan and the early years of the Fourth Economic Development Plan. The company paid special attention to big markets of China and India in its planning as well as that of the Southeast Asia. We could not confine ourselves to competition in the Persian Gulf alone in view of available raw materials, but we had to be able to produce high-quality products at competitive prices by making use of suitable technology for the target markets. This was not possible unless through increasing the capacity for production and supply of substances that were in demand in the said markets. Therefore, petrochemical industries planned production of such products as methanol, ethylene, aromatics and their derivatives such as the various kinds of polymers on the basis of relative and competitive advantages of natural gas, ethane and gas liquids.

To acquire a share of the market, we must produce adequately and the clients must be assured about permanent and continued supply of their needed material by us at any time and under any conditions. Also, quality of products and the technology used for production must not only match rival products, but be superior. On the other hand, the delivery mechanism must be such that the customer would be sure about security and continuation of production.

For this reason, projects for constructing onshore reservoirs and warehouses in Bandar Imam as well as construction of an export dock at special economic, petrochemical zone and a big export dock at South Pars region, which is one of the biggest portal export installations for liquids and solids were planned which are currently being implemented and would complete the cascades of production process as well as quality and supply simultaneous with realizing production goals of the Third Five-Year Economic Development Plan.

At the same time, Petrochemical Commercial Company took measures for developing sales offices and representative offices in target markets as well as education and development of human resources through consolidated and coordinated planning with underway petrochemical projects.

We hope to increase our 0.7% share of global production in 2001 to 2.3% in 2006 by considering all available global capacities with regard to major petrochemical products. During the same period and since most underway projects aim for exports, the current share of global exports which is about 1% would hit 5.5%.

Foreign observers have opined that most petrochemical development projects are ambitious. What is your opinion?

We don’t want to lose the opportunity and there is no reason why we should not be determining prices and assume a defensive position despite having abundant resources. Why a country like Taiwan, which lacks raw materials and even enough land, should account for a much higher share of the global market than us? If we do not use the ethane coming from the South Pars field for petrochemical purposes, this valuable substance would be consumed at homes and power plants as fuel. At present, 900,000 tons gas is being used by household and power plant sectors, while after implementation of the huge Maroun project at Bandar Imam Special Economic-Petrochemical Zone, it could be converted to polymer and then to polyethylene and polypropylene whose added value is about 60%. We must note that ambitious measures follow motivations that lead to ambitious decision-makings. And when there is a scientific logic behind those ambitious steps, like Maroun project, we would face no problems.

To realize you goals, you would need specialized personnel. What plans are considered by petrochemical industries for providing needed manpower?

The manpower needed by petrochemical industries should have been planned in two categories of experts and directors. With regard to the first category, all scientific centers of the world have admitted that Iranian graduates enjoy high quality and scientific capabilities. Therefore, the best talents are chosen from among domestic graduates through special examinations that are held by the National Petrochemical Company through Oil Industry University as well as the company’s management, administrative and educational departments. They pass a two-year apprenticeship at production units of petrochemical industries and are then chosen to lead production and engineering projects.

Moreover, education is not only supervised by the administrative and educational management, but also through special theoretical classes attended by professors of domestic universities as well as skilled craftsmen of petrochemical and oil industry by Fanavaran Fonoun Jonoub Educational Company in Mahshahr, which is a subsidiary of the National Petrochemical Company.

With regard to management, Rahbaran Company, which is responsible for education and providing up-to-date management information, holds continuous courses on every Thursday for senior- and medium-level directors of the company.

With regard to training directors for future leadership of the industry, after approval and confirmation of the Oil Ministry, a program for educating 112 directors through a master’s degree course in the field of executive management is underway in cooperation with Sharif University of Technology and Canada’s Calgary University. The participants are chosen out of medium-level directors of the company through special tests on management, language and interview.

In addition, developing the higher educational culture at petrochemical regions including Bandar Imam, through establishing a branch of Amir Kabir University for courses needed by petrochemical industry including polymer is another underway plan for developing manpower resources of the petrochemical industries.

The special issue that received special attention by the managing director was providing needed manpower for petrochemical projects during installation and construction phases that included skilled technicians in various fields including welding according to oil industry standards, plumbing, precision tools, electricity and so forth. In these fields, young people holding high school diplomas were trained by holding practical workshops at the special economic zone and entered labor market after passing technical courses. Most of them have been employed by contractors in the region.

What was the reason for stagnation of petrochemical projects during the Second Economic Development Plan?

The reason was that some officials and planners were of the opinion that the plan’s projections were ambitious and inaccessible. They decided to postpone parts of the plan and this led to partial inactivity of the sector.

How are domestic industrialists supposed to attune to petrochemical projects?

We think that such industries must be developed rapidly. After the Third Economic Development Plan was initiated and in view of the huge prospects for petrochemical industries up to 2014 when they are expected to produce about $20 billion worth of petrochemicals annually, a big market must be set up for development of petrochemical industries as well as domestic engineering.

Of course, I do not believe that everything should be made in Iran, but we must see what projects enjoy economic justification. If you wanted to produce up to $30 billon per year, you would have to take advantage of all domestic and foreign facilities. Some parts and equipment are specifically made for a factory, like the rotor of a compressor for olefin units. This compressor has been designed for a specific capacity and a specified gas composition at the average molecular weight of gas and it is obvious that demand for such equipment would be limited. Such equipment would be in demand in international market, not in a special regional market. So producing such equipment in view of the long time needed for manufacture would not be economical for any industrial units. However, other equipment including furnaces, reactors, and heat exchangers are so varied and take such a short time to be manufactured that they would be economically justifiable.

The next point is that just in the same way that the National Petrochemical Company has established a Research and Technology Company adjacent to Arak Petrochemical Complex, downstream petrochemical industries must focus their efforts during the next several years on producing technology and basic engineering. In that case, the process of sustainable development would be completed. Most importantly, conditions must be provided for the attraction of foreign investments in the industry because under such circumstances, technology transfer would be more convenient, investment risk would be distributed and presence in international markets would be made easier.

How much attention does the National Petrochemical Company pay to technology transfer in its underway projects?

We have established a research and development department known as “Research and Technology Company” in Arak which is equipped with many semi-industrial (pilot) units as well as research laboratories. On the other hand, according to the contract signed for purchasing technical know-how and implementing basic petrochemical engineering operations, the licensing companies have been obliged to construct a pilot unit in the country. The goal of construction and purchase of pilots could be summarized as:

First, being of educational use for personnel; so that, the employees could practice the processes and gain adequate skill without any interruption in production.

Second, working on pilot and changing the process, operational conditions, composition of the feed and other effective parameters that could lead to process improvements, which is considered a new innovation.

If modifications on a pilot lead to innovations, we would hold the license for those innovations. Sometimes, the original license changes so extensively that the resultant license would totally belong to the modifying company. Commitments regarding the original license would not hold water for the modified version too; that is, the modifying company would be entitled to sell and multiply it. Therefore, taking good advantage of pilot units can lead to acquisition of technical know-how, boosting domestic technical capabilities, developing technology and creating new license through innovation.

What has been done in addition to building pilot units besides petrochemical complexes?

Empowering domestic engineering and manufacturing companies could play a major part in creating technology and obtaining technical know-how. As you know, various stages of implementing a project include: basic engineering, detailed engineering, procurement, manufacture, transportation, installation, pre-launch stage, performance testing, improvements and final launching. During the First Five-Year Economic Development Plan almost all these stages were carried out outside the country and only a small part of installation was carried out by domestic companies. At present, only basic engineering and about 50% of equipment manufacture, which mainly includes large dynamic equipment such as turbines and compressors, are done outside the country and other stages are carried out domestically.

Boosting domestic capabilities for basic design could enable us to acquire technical know-how. One step that we had taken unknowingly in this direction was construction of MTBE unit, during which the MTBE license holder did not give us the needed technology due to sanctions. However, we constructed the unit by relying on domestic capabilities and produced its catalyst at a high risk rate (through joint technical know-how) in Europe.

Huge petrochemical projects carried out in recent years have developed domestic engineering and manufacture. Although ceding domestic projects would entail such problems as delay in implementation, most problems would be related to launching and improvement stages. However, gaining experience and increase in scientific, technical and executive capabilities of domestic companies would be ultimately to the country’s benefit and would make up for the said problems. Providing facilities as well as suitable grounds for basic and applied study and research and optimal use of the elite and specialists in the country would be another good way of creating technology.