March 2019

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Europe: Russian petrochemicals industry on the verge of large-scale growth

The Russian government has announced its plan to increase the volume of support for its domestic petrochemicals industry over the next several years, with the aim of doubling its production and boosting exports, according to Russian Minister of Energy Alexander Novak and the press service of the Russian Presidential Administration.

Gerden, E., Contributing Writer

The Russian government has announced its plan to increase the volume of support for its domestic petrochemicals industry over the next several years, with the aim of doubling its production and boosting exports, according to Russian Minister of Energy Alexander Novak and the press service of the Russian Presidential Administration.

Planned support is expected to be in the form of additional subsidies and the creation of favorable tax regimes for producers. In general, the government plans to create more attractive and stable conditions for doing business in the Russian petrochemicals industry, ensuring stability of the industry’s tax regime for at least 15 yr. A final list of planned support measures will be announced by the end of 1Q 2019.

According to Novak, the government hopes to attract more than $40 B of additional investments to the industry by 2030, with the goal of doubling petrochemicals production capacity within that timeframe. In addition, Russia is planning to increase the competitiveness of its petrochemicals industry in the international arena. In the case of tax policy, the government plans to introduce a negative excise tax on liquefied hydrocarbon gases and ethane in the country.

According to the latest proposal of the Ministry of Energy, Russia plans to emulate Saudi Arabia, which implemented a subsidization policy that boosted the petrochemicals industry’s share of national GDP to 14% over the last several decades. This growth is significantly higher than what has been seen in Russia, where figures do not exceed 1.5% despite the country’s rich hydrocarbon reserves, which are comparable to those of Saudi Arabia.

At present, outdated technologies and high depreciation of fixed assets are two of the major problems of the Russian petrochemicals industry, despite some modernization by leading  producers in recent years.

This has led to a lack of production of key petrochemicals products in Russia, despite utilization rates of 85%. Most existing pyrolysis units in Russia were built in the mid-1900s. The total capacity of ethylene pyrolysis units is estimated at slightly more than 3 MMtpy, which accounts for approximately 2% of global production.

According to state plans, capacity should significantly increase over the next few years due to state support. Novak has said that the implementation of these plans will be part of the existing energy strategy of Russia for the period to 2030 (e.g., Plan 2030). The strategy was approved by the Russian Ministry of Energy in 2012 and involves the establishment of six large petrochemicals clusters in different parts of Russia, including the Volga, Caspian, West Siberian, East Siberian, Northwestern and Far Eastern regions. Each of these clusters will have its own olefins complex, a raw materials base and other associated infrastructure. These clusters will also include enterprises specializing in the production of finished petrochemicals. Most of these enterprises will be small- to medium-sized.

Of these clusters, special attention will be paid to the petrochemical facilities being established in the Far East. These facilities will primarily export to the Asia-Pacific region.

The Eastern Petrochemical Company (EPC)—a petrochemical enterprise built by Rosneft—will serve as the basis for the Far East cluster. The new enterprise will have the capacity to produce more than 10 MMtpy of petrochemicals and will process oil from the Eastern Siberia-Pacific Ocean pipeline.

At the time of this publication, Rosneft and China’s Sinopec are negotiating the construction of a new gas chemical complex in the Krasnoyarsk Territory. At its initial stage, the facility will have the capacity to process up to 5 Bm3y of associated natural gas, with the possibility of expanding to 10 Bm3y. The facility’s feedstock will come from the Yurubchensky oil and gas fields.

The development of the Volga cluster will be another priority for the Russian government in the field of petrochemicals. Part of the project includes the construction of a large-scale ethylene plant at the Nizhnekamsk Petrochemical Plant.

According to state assessments, Plan 2030 will boost Russia’s ethylene production from 8 MMtpy in 2018 to nearly 13 MMtpy by 2030.

Structure and production

The Russian petrochemicals industry is primarily dominated by large companies, with the leading players being Sibur Holding, TAIF Group of Companies, Rosneft, LUKOIL and Gazprom. Unlike many international petrochemical giants (Dow, BASF, etc.), none of these companies are purely petrochemicals. Instead, they are mostly vertically integrated oil companies with petrochemicals businesses.

The Ministry of Energy believes that Russia’s domestic production will be enough for the implementation of Plan 2030. In 2018, oil and gas condensate production in Russia amounted to nearly 600 MMt, of which more than 50% was sent for processing. In the case of associated petroleum gas, production reached 83 Bm3 in 2018, of which 40% was processed at domestic gas processing plants. As a rule, the production of raw materials for petrochemicals facilities is usually carried out near pyrolysis plants.

Producers hope for state support during the implementation of petrochemicals projects. These companies are hoping for state assistance during the establishment of infrastructure for the new enterprises, as well as for ensuring regular supplies of raw materials for their processing needs. Companies are ready to actively introduce new technologies to expand the range of high-value-added products.

Sanctions

Russia has a shortage of production of certain high-value petrochemical products, particularly special composites and additives. The introduction of new technologies should help partially solve this problem. However, most of these new technologies have been traditionally imported to Russia from abroad, mainly from Western countries, while the ongoing sanctions against Russia significantly complicate the further transfer of technology.

While the Russian petrochemical industry was not directly affected by sanctions from the US and the EU, they still resulted in restrictions for supplies of various technologies, equipment and raw materials used in Russian petrochemicals production. In addition, the existing sanctions have significantly complicated lending to Russian petrochemicals enterprises by Western banks. Despite the sanctions, the Russian government has high hopes for the development of its petrochemicals industry.

Threat of oversupply?

In accordance with Russia’s Ministry of Energy report, over the past 15 yr, Russia’s petrochemicals production has ranged from 7%–9%. Despite good prospects for further production growth, Russia’s leading petrochemicals analysts have warned national government and domestic oil producers that the implementation of their ambitious plans to double petrochemicals production may lead to oversupply.

For example, Dmitry Konov, Chairman of Sibur’s Management Board, stated that Russia’s existing petrochemicals capacities are already competitive in the global market. The main difficulty is related to the capital intensity of industry projects. These capital-intensive projects will require significant incentives from the government, which could be problematic, considering the complex state of the Russian economy.

Dmitry Akishin, Gas and Chemistry Division Head at Vygon Consulting, believes that Russia has opportunities for the development of petrochemicals; however, the doubling of production could be too optimistic for the industry. “To repeat the path of Saudi Arabia, it is important to have comparable support tools of domestic petrochemicals production, as in Saudi Arabia,” said Akishin. “The Kingdom uses a regulated price for ethane, which is set at $54/1,000 m3 compared to $200/1,000 m3–$300/1,000 m3 in the world market. In addition, it provides a 30% discount on LPG and allocates about $10 B–$15 B of annual investments in the development of infrastructure for the industry through state-owned companies.” HP

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