Commentary: Iran chemical supply glut

The impending lifting of sanctions against Iran – if implemented – could boost supply of oil and chemicals significantly to markets globally, adding to global overcapacity and downward price pressure fuelled by other Middle East and US shale gas capacity additions.

Iran has huge potential for chemical production, and an ambitious petrochemical development plan to run alongside increased exploitation of oil and natural gas. However, since the Iran revolution of 1979, increasingly stringent sanctions have been imposed on the country. These have stifled access to global technology, expertise, and financing.

If this changes, and the country is granted access to global markets for trade, finance and technology, there could be a rapid expansion in both petrochemicals and oil production. The country has the world’s second largest natural gas reserves and is fourth in proven oil reserves, according to the US Energy Information Administration.

The sanctions could be lifted at the earliest by the end of 2015, following a 90-day review period from the end of July plus time for verification that Iran has met requirements for dismantling its nuclear infrastructure.

The country already has a relatively well-developed petrochemicals infrastructure, including an ethylene pipeline network. Iran has around 59m tonnes/year of chemicals capacity. By some initial estimates, operating rates could currently be around 60%, according to consultancy Nexant. Assuming feedstock is available and the plants are maintained, these could quickly ramp up production, potentially adding up to 24m tonnes of chemical production to global markets relatively quickly.

It is notoriously difficult to find reliable data on chemicals production and projects in Iran. But the country’s National Petrochemical Company (NPC) has ambitious plans to double petrochemical production to 120m tonnes – from around 59m tonnes/year now – by the end of the country’s current Five Year Plan, targeted for 2016.

According to the plans, there are 67 projects, including five worldscale crackers totalling 5.3m tonnes/year of ethylene and significant volumes of polymers (see table). The figures for methanol (19m tonnes/year) and urea (10.7m tonnes/year) are even more startling.

These NPC plans – dated March 2015 – are detailed, run to 90 pages and give start-up dates between 2015 and 2018, later than the Five Year Plan target. The country’s inability to access global financing and technology means that a good proportion may be delayed further even if sanctions are lifted.

If a modest proportion of the projects do come on stream in the next 2-3 years, that could add to impending global overcapacity. The US has around 17m tonnes of new chemicals capacity planned, with the majority due on stream in 2017. Meanwhile, China and the Middle East are also adding significant volumes over the next 2-3 years.

Karl Bartholomew from ICIS Consulting says: “Extra Iran production will pressurise the new Middle East projects coming on stream. The question is: do we have enough demand? With the Middle East and US increasing production – and if Iran is able to increase operating rates – we will have a lot of basic petrochemicals looking for a home.”

He says chemical exports from Iran, like those from the rest of the Middle East, are likely to be targeted at Asia, Africa and Europe.

Iran has a large domestic population of 77m. Its economy is already advanced, with an automotive manufacturing sector accounting for 10% of GDP. But it has been held back by years of sanctions, giving it a GDP/capita of only $4,763 in 2013, according to the World Bank. Domestic demand could increase quickly once sanctions are lifted, boosting demand for chemicals internally.

According to Manuel Asali, training director for consultancy Nexant: “The country has a lot of downstream industries in place already. Iran exports raw polyethylene but imports complex polymers from Turkey. There could be a fast jump in the population’s acquisitive power, with some of that extra chemical production going to the domestic market.”

Nexant estimates that Iran’s per capita polyolefins consumption is around 115kg/year, compared to over 200kg/year in other advanced economies.