Financial Times: Oil companies unravel chemical elements (ShellNews.net)
By David Firn and Carola Hoyos
Published: August 6 2004 04:00
Posted 7 August 04
Three of the world's four largest oil companies are divesting big chunks of their chemicals businesses. BP, Royal Dutch/Shell and Total have all begun the process of carving out non-core chemicals activities in a move that signals a tighter focus on upstream operations.
Shell is furthest ahead. Its polyolefins business, which makes basic ingredients for plastics, is combined in the Basell joint venture with those of BASF, the German chemicals group. After several years of restructuring, the assets are up for sale.
BP is understood to be planning a US stock market listing for its olefins and derivatives business, which accounts for half its $13bn of petrochemicals operating capital. It will keep its aromatic chemicals and acetyls businesses, which are more closely integrated with refining, and also have a strong position in Asia, the fastest growing chemicals market by a significant margin.
Meanwhile, Total of France is carving out its chlorochemicals, intermediates and performance products to leave its chemicals interests more closely focused on those integrated with its refining operations.
The carve-outs are part of a trend that has seen oil companies concentrate on their upstream operations. At the same time chemicals companies have also been restructuring in response to investor demands for more tightly focused assets.
ICI, the UK's largest chemicals group, sold most of its petrochemicals assets to focus on higher-margin speciality chemicals in the 1990s. Dutch group DSM sold its petrochemicals business to Sabic, the Saudi industrial group, last year, leaving DSM with a strong balance sheet to acquire speciality businesses, and Sabic a presence in Europe.
John Feldmann, BASF executive director with responsibility for plastics, says selling Basell will allow his company to focus on its core plastics businesses.
In the past, succeeding in petrochemicals was a matter of having the biggest plant, the best technology and being first to market with products that could displace other materials in fibres, packaging, automotive construction and consumer goods. "Now it is all about cost," says John Bonarius of CMAI, the chemicals consultancy.
Western groups face increasing competition from the Persian Gulf, where producers have access to natural gas. That gives them a $200 a tonne advantage over Europe's oil-fed petrochemicals crackers.
However, some analysts question the wisdom of breaking up oil and petrochemicals businesses. Jon Rigby, of Commerzbank, says Shell and BP's operations are integrated closely enough with refining to offer true synergies. "I don't see a huge amount of value generated by selling assets where these assets are in an integrated chain . .. And additionally at these high oil prices, the last thing the oil companies need is more cash."
With oil prices above $40 a barrel, oil companies are awash in cash and returning much of it to shareholders.
But the chemicals businesses yield far smaller returns than oil exploration and production. CMAI says polyolefins have yielded re- investment grade earnings for only five years in the past two decades.
Perhaps it is no surprise that the latest wave of divestments coincides with a cyclical upswing in petrochemicals that is expected to peak in 2007. Rising demand after a three-year recession will ensure polyolefins are in tight supply until 2006, when new capacity will come onstream, according to CMAI forecasts.
"Lord [John] Browne [BP chief executive] is quite smart. He's bringing the business to the market at the right time," says Mr Bonarius. "In the next few years there will be more demand growth than capacity additions."
However, Jenny Bouch of Jacobs Consultancy says selling Basell will not be easy. With sales of €5.7bn ($6.9bn) and operations in 19 countries, Basell is the world's biggest polypropylene company and the number-one European polyethylene maker. Some analysts say it could be worth €6bn, in line with the sales multiple Sabic paid for DSM's petrochemicals. But poor-quality earnings mean it could be worth less than €3.5bn.
"The cyclicality in earnings in the polyolefins sector has traditionally acted as a strong disincentive to private equity investors; while Basell's dominant position in world polyolefins markets will make an acquisition difficult for a trade buyer - particularly in polypropylene, in which Basell is the global leader," she says.
Those analysts who question the wisdom of spinning off chemicals businesses say oil companies should demerge the operations - giving shareholders the choice to hang on to their investments - or learn to run their chemicals businesses better. They may have no choice.
Bayer, the German chemicals group, has abandoned an IPO of Lanxess, its commodity chemicals and polymers business, in favour of a spin-off to shareholders because of hostile market conditions. Either way, disposing of some of the world's largest commodity chemicals businesses in a fragile economic recovery is unlikely to prove an easy task.