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July 2006 Headlines

At mid-July, the near-term focus rapidly shifted to the impact of the recent rash of unplanned methanol outages and reduced production rates. For several months, discussions had been on the pending impact of the planned production maintenance stops. However, when the majority was nearly complete and volumes were still adequate, spot prices held, albeit at lower levels. With most global methanol stocks now drawn down to minimum levels by planned maintenance outages, the addition of unplanned shutdowns has forced spot buyers (an MTBE producer, co-producers and traders) into a tightening market, resulting in North American spot prices firming back up. Opportunist sellers with volume took advantage of the significant, very prompt end-July spot demand to push prices to the peak witnessed in the last few business days of the month. Presently, it is uncertain if these elevated levels will hold or if prices will be offered back down later in August. As we've mentioned several times in the past, it's the unplanned and unforeseen that can have the greatest impact on the market. In this case, the many individual companies who thought pricing would firm with the pending outages were right in the end, but for the wrong reasons. Had the unplanned outages not occurred, selected spot buyers most likely would not have entered the market and business would have been managed at lower prices.

The reference US Gulf natural gas price continued its slow decline in July. The US FERC Houston Shipchannel natural gas index price was fixed at $5.69 USD/MMbtu, down only 1% from June's posting. As of 12 July, the spot cash Henry Hub natural gas price closed at $5.71 USD/MMbtu. Also as of this date, Nymex September, October and November natural gas prices closed at $5.992, $6.379, and $7.737 USD/MMbtu, respectively. These are slightly below levels quoted at this time last month.

While oil prices reached new highs in July, natural gas pricing decreased further, with the US FERC Houston Shipchannel natural gas index fixed at $5.69 USD/MMbtu. This is $0.05 USD lower than June's index. For the first half of July, natural gas prices were holding to the weak side. However, at the end of the month, natural gas prices surged on near record summer demand and stabilizing stock levels. For the first time since inventory data collection began in 1994, the latest weekly US EIA natural gas report on stock levels showed a net withdrawal from inventory during the period of May through September. As of data for the week ending 21 July, US inventories are at 2756 billion cf, 22% above the 5-year average, 16% above the level recorded for the same period last year, and 20% greater than the same week in 2004. Both prompt and forward month natural gas prices have rebounded back above $7.00 USD/MMbtu. As of 27 July, spot cash Henry Hub natural gas prices closed at $7.00 USD/MMbtu. Also as of this date, Nymex October, November and December natural gas prices closed at $7.363, $8.858, and $10.253 USD/MMbtu, respectively.

On 12 July, Methanol Holdings Trinidad Limited (MHTL) signed a $1.2 billion USD loan agreement with one of the divisions of German bank KfW, KfW IPEX-Bank. The loan is said to be one of the largest ever issued in the region and will be used to finance the approximate $1.5 billion USD petrochemical complex MHTL is planning. The new downstream-integrated petrochemical facility will produce ammonia, urea, nitric acid, ammonium nitrate and melamine through a total of seven production units and is being referenced locally as the AUM project. This further diversifies MHTL's chemical assets outside of the methanol family, while optimizing the utilization of Trinidad's competitively priced raw material feedstocks and strategic location.

On 25 July, it was announced that the government of Argentina would begin assessing an increased export duty on natural gas sales equivalent to $2.25 USD/MMbtu. At this time, it is uncertain if Methanex would feel any impact on the gas volume (32% of total volumes required) sourced from Argentina. Methanex reported the events as a warning, but does feel its contracts will protect them, as they have wording in effect shifting any costs or tax to their suppliers. It is early, and the true outcome has yet be witnessed, as the new tax is higher than the cost paid by Methanex under the current contract terms that extend until 2025 and 2029.

Losses in methanol production have been felt from a number of restrictions to plants operating in the region. MHTL's M5000 was indicated to be down with mechanical problems at mid-month July, but returned after a week of repairs. Both production facilities located in Venezuela, SuperMetanol and Metor, were indicated to be out for short periods of time earlier in July. The Chile I plant had been planning a shutdown in the second quarter and did close for a lengthy period from mid-June to mid-July. Methanex reported that the entire Chile production complex was struck by a widespread electrical outage during the last weekend of July, resulting in the shutting down of all units. The plants were slowly returning to production as we go to press. Other than these issues, Methanex has reported that no impact has been felt yet by natural gas supply reductions from Argentina to their Chile operations, but are still planning for potential curtailments.

The recent methanol supply chain events have not left Europe unaffected. Production losses to South American methanol capacity, the lower operating rates at AMPCO's methanol unit in Equatorial Guinea, and restrictions and losses in Germany have all added up to lower supply volumes in Europe. The impact may widen, as the pending lengthy shutdown to the Metafrax facility and the Romanian outage will add to the lost methanol supply volume going forward in the quarter. Europe is presently in the middle of its summer holiday season, leaving many players away and enduse derivative facilities in brief holiday shutdowns or at lower operating rates. Most consumers are still supplied under contract scenarios, so the burden of supply is fully felt by the co-producers and marketers. Unlike the United States, there are no large MTBE producers who are swing spot buyers. As such, demand and pricing for spot volumes has not reacted in a similar fashion. There is likely to be further upward pressure on spot, but presently the price and activity is somewhat muted.

Methanor vof's last operating methanol production line in the Netherlands closed at the end of June, with a final decision on the future of the facility's hardware and operational plans for an alternative product still pending. In early July, the company's Board of Directors short-listed the number of interested parties down to about three groups. One group is being evaluated to convert the plant to bio-methanol production in a phased-in process. The markets for bio-methanol are not yet fully developed, so the early analysis would suggest converting one production train to produce bio-methanol, bringing the second train online at a future date. Bio-methanol would be in direct competition with ethanol for a share of the fuels market, but at a discounted price due to the high premium that ethanol commands. The other option being reviewed for the plant would be a direct sale of the assets for disassembly and movement to offshore locations (Russia, Iran, or China). The board expects to have a decision in hand by early August.

In an effort to cool down the heated pace of coal liquefaction project proposals, China's National Development and Reform Commission (NDRC) this month issued guidelines that it hopes will help control the rush to invest in such projects. Under the NDRC's stipulations, approval will not be granted to coal-to-liquids projects with capacity of less than 3 million tonnes, methanol and DME projects of less than 1 million tonnes, and coal-to-alkene projects of less than 600,000 tonnes. Also, local governments must consider environmental, logistical and safety concerns and requirements for each project. With the market in its early stages, technologies still considered "experimental," and no national development program in place, the main concern is that the ballooning number of projects will create an oversupply situation.

Cambrian Oil & Gas Plc (COIL) announced this month that they plan to take a 12.6% stake in Methanol Australia Limited. COIL had earlier purchased 5.5 million ordinary shares and will increase that to 19.5 million ordinary shares. Methanol Australia is also planning a new share issuance to current shareholders in an effort to raise $8.7 million Australian dollars, with COIL underwriting half of the issuance. Methanol Australia (Tassie Shoal Methanol Project) is one of two companies seeking to develop offshore methanol projects in the NW Timor Sea region.

Venezuela's Citgo Petroleum announced that its Board of Directors approved a plan to realign the company's US gasoline network, focusing their efforts in the East and Gulf Coast and withdrawing from parts of the Midwest, Kentucky, Oklahoma and Northern Texas. The move, to be completed by the end of March 2007, will result in an approximate 14% reduction in Citgo branded gasoline retail locations in the US. The company had been purchasing nearly 130,000 barrels per day of product on top of their own production to supply their network, putting Citgo at a "competitive disadvantage."

In a related note, Lyondell Chemical announced on 20 July that efforts to sell the Lyondell-Citgo Refinery operations in Houston, Texas have been halted. Plans to sell the asset were initially publicized in April 2006. The facility can process 268,000 bbls/day and is able to process very heavy high-sulfur crude oil into clean fuels, including reformulated gasoline and low-sulfur diesel. Lyondell noted that the sale did generate considerable interest, with offers exceeding $5 billion USD, yet these were "insufficient to overcome the significant benefit of retaining an ownership position." Lyondell owns the majority stake in the venture at 58.75%, with Citgo holding 41.25%. The partner companies are still exploring alternatives, including the possibility of Lyondell buying out Citgo's stake, with a decision on the asset to be announced in the near future.

On 3 July, Neste Oil and SABIC announced they had finalized the sale of Neste's 10% share in the Ibn Zahr joint venture to partner SABIC. Originally announced in March 2006, the $120 million USD deal increases SABIC's share ownership to 80%, with 10% stakes held by Ecofuel and APICORP (Arab Petroleum Investments Corporation). Ibn Zahr, the Saudi European Petrochemical Company, is located in Al Jubail, Saudi Arabia. The company produces only polypropylene and MTBE. The IBN ZAHR group has a total of three MTBE facilities, with a total combined nameplate capacity of approximately 1.40 million tonnes per annum.

Celanese has filed a $960 million USD lawsuit against the UK's BOC Group related to their 2004 gas supply agreement for Celanese's new acetic acid unit in Nanjing, China. BOC is believed contracted to supply carbon monoxide and associated feed gas streams for the new acetic complex scheduled to come online in early 2007. It is uncertain at this time if the lawsuit and filing is linked to any non-performance by BOC or if it will affect the timing of the Nanjing project. Filed in Dallas County District Court, Texas, the Celanese suit seeks $250 million USD in compensation and $710 million USD in punitive damages. Specifics on the case have not been released. The BOC Group, which is to be bought by Linde AG, intends to fight the suit, claiming it has "no merit," and does not expect the matter to affect its impending sale.