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Wall Street Journal 6-1-11
* BUSINESS
* JUNE 1, 2011
Exxon Fuels a Chemicals Drive
Project Is One of Largest in 141 Years; Feeding Asia's Need for Diapers, Polyester Clothes
By RUSSELL GOLD
Exxon Mobil Corp. is nearing completion of one of the biggest projects in its corporate history—a giant expansion of a petrochemical facility in Singapore—in a big bet that Asian consumers will have a long-term demand for diapers and dent-resistant auto bumpers.
The Texas-based oil giant is best known for supplying the world with crude, natural gas and gasoline. But it is increasingly focused on expanding its chemical production, most recently with the multibillion-dollar expansion in Singapore. The company won't disclose the precise amount it is spending on the project.
Often forgotten inside the gargantuan company, Exxon's chemical division is enormous. It generated a division-record $1.52 billion in operating income during the first quarter. If it were a stand-alone company, it would be the second-largest chemical company in the world, by profit, trailing only BASF AG of Germany.
It is about to get even bigger. The Singapore expansion—which an Exxon executive earlier this year called "one of the largest projects ever executed" by the 141-year-old company—will boost Exxon's output of chemicals used to make plastics and other staples of modern life by more than 11%. Singapore will become Exxon's largest refining-and-petrochemical complex, bigger even than Baytown, Texas, which held that distinction for decades.
Exxon is bulking up on chemicals, analysts say, in part because this business is becoming more profitable. Historically, investments in its upstream business—finding and developing oil and gas—has yielded a better return than investments in chemicals. But that is starting to change. In 2010, Exxon's chemical unit generated better returns on capital—segment income divided by capital investment—than the upstream division for the first time since 1998. And in recent quarters, chemicals returns have routinely beat Exxon's refinery segment, typically a cash cow.
Exxon may also have run up against its practical limit on upstream investment, which is expected to draw $25 billion to $30 billion this year. "Even with its vast resources, Exxon only has so many people to run these operations," says Phil Weiss, an energy analyst with Argus Research. "They can't increase investment without having people to run the projects."
For Exxon, making more chemicals is a way to tap into the globe's largest emerging market. "At bottom, Singapore was a bet on China," says Stephen D. Pryor, president of Exxon's chemical division. He expects demand for petrochemicals to grow by 5% a year over the next decade; two-thirds of that growth will occur in Asia and half in China.
Not all chemical companies share this Asia-centric approach. Dow Chemical Co. and Chevron Phillips Chemical Company LLC, a joint venture of Chevron Corp. and ConocoPhillips, both said in recent weeks they are considering building world-scale chemical plants along the U.S. Gulf Coast aimed at the Western Hemisphere. "Dow believes that demand growth in the Americas will be robust enough to consume additional production," said spokesman Greg Baldwin.
There is another key difference between Exxon and other chemical makers. The Dow and Chevron plants are being built to take advantage of the newly abundant, low-cost ethane and propane being produced as byproducts by companies drilling natural gas and oil from shale rock. The facilities will produce ethylene, which is used to make plastic bottles and other products.
In contrast, Exxon built the Singapore facility to run off a wide range of feedstocks—petroleum byproducts that are changed into chemical products by using catalysts, heat and pressure. The facility will be able to process hundreds of different liquid feedstocks such as ethane and heavy oils, up from 80 before the expansion, said Exxon spokeswoman Karen Matusic.
Exxon will use complex software to determine how to maximize output from the expanded complex, switching production priorities on a daily basis to generate more gasoline, ethylene or other products.
Exxon plans to integrate its petrochemical facilities in Singapore with its adjacent refinery, a critical reason for building in Singapore. Thirty pipes will carry refinery byproducts to the chemical plant, and 20 pipes will carry leftover materials, such as heavy oils, in the other direction to be reused in the refining process. "Absolutely nothing goes to waste," he says.
Building in this flexibility requires additional upfront capital costs, say analysts, but Exxon believes it will generate higher returns. "It is a belief, based on our history, that flexibility will pay," said Mr. Pryor, the chemical-division president.
From Singapore, Exxon will attempt to sate Asia's growing demand for all things plastic: polyester clothing, water bottles, surgical masks and more. It has already begun priming the market for a new chemical product that Mr. Pryor says helps diapers feel like cloth, but retains the benefits of elastic, stretchable plastic. This polymer will also be used in automobile bumpers to make them more dent-resistant. China's per-capita spending by households grew by 10% last year, according to statistics compiled by Barclays Capital.
Exxon's Mr. Pryor said he prefers to be expanding near the biggest markets. "World-wide, primary petrochemicals will grow. ... And the big driver will be Asia," he says.
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