The Urals Megaproject Will Determine Russia’s Raw Materials Future for Next 100 Years

14.04.2009 — Analysis

Long before the crisis, the Russian authorities have begun the search for the national economy ideas which would give momentum to the country's development. First came the national projects; the implementation of these hasn't turned into a regular test drive as sceptics predicted, but has made clearly visible the serious systemic issues resolution of which would take a number of years.

The national projects were followed by investment projects which laid claim to the funds from the Federal Investment Foundation. The crisis came suddenly and raised the "financial axe" over them. Critics unanimously assert that now is not the right time to spend money on future prospects - that we should plug this minute's holes in the national budget instead.

Oleg Demchenko, the Director General of the Industrial Urals - Polar Urals Corporation, is sure that even at the time of crisis the idea of long-term development of the Polar Urals remains relevant and will be profitable. In an interview with Vladimir Sokolov, a RusBusinessNews columnist, he provided figures and facts serving to support his point of view.

- Mr Demchenko, the supporters of the project maintain that it will help the Russian metallurgy to stop the dependency on raw materials from foreign suppliers. However, their opponents claim that our industrialists are not too eager to get involved as it takes a long time to develop the deposits. Which of the parties is closer to the truth?

- The Industrial Urals - Polar Urals project envisages the creation of a complete industrial infrastructure; it will ensure a break-through development, upgrade, and the engagement of the potential available in the Urals Federal District. The development of natural and raw material resources in the Urals mining area and the construction of key elements of the transport and energy support infrastructure. The implementation of the project will make it possible to establish a new large-scale source of mineral resources in a situation when raw materials are in increasing shortages all over the world.

More than 100 types of mineral resources have been found in the development area. The total value of the explored and forecasted resources of the Polar and Subpolar Urals is assessed as amounting to more than 10 trillion roubles or 400 billion U.S. dollars. The current exploration coverage of the area is merely 10-12%. Many experts are asserting that the large-scale in-depth exploration can lead to serious new discoveries of mineral raw materials in the Polar and Subpolar Urals. However, even the explored resources significantly exceed, by a whole range of indicators, the demands of the industry both in the Urals Federal District and Russia as a whole.

Indeed, the development of this raw material base is capable of doing away with the industry being dependent on imported iron and manganese ores, copper, coal, chromites, and a number of other resources. Today 100% of the manganese, 90% of coal, 70% of chromites, 80% of copper concentrate, and 40% of iron-ore raw materials consumed in the Urals is imported from abroad. Whilst the scale of the Polar and Subpolar Urals natural resource potential is capable of entirely covering Russia's needs for mineral resources; based on the resources already accounted for, for chromium for 120 years; phosphorites - 90; manganese - 80; coal - 80; iron - 80 years.

Following the instructions issued by the RF President, the project's working group has developed the document justifying the investment into the establishment of the Industrial Urals - Polar Urals transport corridor. The construction of the new transportation route along the eastern slope of the Ural Mountains will make it possible to commence the development of natural resources of the northern Urals as well as the Yamal Peninsula. The direct economic effect of the reduced distances for delivering raw material into industrial centres of the Southern Urals can amount to about 4 trillion roubles; the switch from imported raw material to domestic can bring a further 4.5 trillion roubles.

In 2006, the management structure for the project has been established - OAO Industrial Urals - Polar Urals Corporation. Its current shareholders are the Tyumen and the Chelyabinsk Oblasts, the Khanty-Mansiysk and the Yamalo-Nenets Autonomous Okrugs. The Kurgan Oblast is going to join them soon.

- The project is counting on the support from the Russian Federation Investment Foundation. What makes it stand out amongst other requests for the state funding?

- The project consists of a system of interdependent measures aimed at creating the three main blocks: the transportation, the energy, and the development of natural resources on the area of more than 390 thousand square kilometres. As I have already said, the core of the transportation infrastructure is the 849 kilometre long Polunochnoye-Obskaya trunk railway along the eastern slope of the Ural Mountains; together with the 554 kilometre Obskaya-Bovanenkovo and 406 kilometre Obskaya-Salekhard-Nadym railways and the 795 kilometre Tyumen-Uray-Agirish-Salekhard motorway this will become the shortest route to connect the industrial Urals, the Polar Urals mineral resources deposits, and the oil and gas production area and providing the access to the Northern Sea Route and Norilsk.

The energy block has scheduled the construction of five gas thermal power plants (GTPP's) in the Igrim village (20 MW), a combined cycle power plant (CCPP) in Noyabrsk (124 MW), a state district power plant (SDPP) in the Polar Urals (500 MW), the Tarko-Salinskaya SDPP (1,200 MW), and a GTPP in the Kharp village. There is also the first train of the coal-fired Severo-Sosvinskaya SDPP (1,200 MW) running on local coal. The Obskaya to Bogoslovsk Aluminium Smelter (1094 kilometres) and the Salekhard to Nadym overhead lines also have to be constructed. These lines will make it possible to provide reliable power to the existing and newly commissioned consumers in the area in question.

The scale of the natural resources development block is very impressive. It is planned to establish 18 mining (based on the iron ore, chromites, copper and zinc, and manganese licensed subsoil areas), ore enrichment, and timber processing plants by 2019. Should the complete implementation of the project be achieved this number may reach 60! The resource base for these plants has been proven by the findings made by industry institutes. The construction of timber processing complex plants is also a part of this block.

- What are the prospects are created for the development of northern territories, and for Russia's economy as a whole, by these components of the project?

- The railways and motorways constructed within the project will serve for the improvement of the Russian Federation transportation infrastructure, ensure accessibility of the new mineral and raw material base, and establish a new efficient framework of cargo transportation. The railway network will establish an entirely new transportation framework in the Russian North. The new transportation corridor is capable to provide for the transportation of more than 20 million tons of liquefied hydrocarbons from the peninsula each year. In addition to that, this will facilitate the Arctic shelf development, give access to the Northern Sea Route, Norilsk, and the ice-free Indiga Bay, and encourage the development of port infrastructure.

The addition of the longitudinal transport corridor to the existing latitudinal routes will open new transit transportation opportunities. Due to the possibility of cargo forwarding via Nadym-Salekhard and further to Murmansk, the effect of the construction of the contemplated Tomsk-Surgut-Nadym railway will be multiplied. The establishment of the new North-South transport corridor will open the opportunities for new cargo routes to the Republic of Kazakhstan and the countries of the Central Asia.

The power infrastructure will also be significantly improved. Essentially, the entire Urals Federal District will be relieved of the power shortage threat; the existing limitations for the area development parameters will be removed; and the power tariffs which are as high as 20 roubles per kW in the Subpolar and Polar Urals regions, will be reduced.

And finally, virtually unlimited renewable resources, timber in particular, will become available for commercial use. There are standing wood reserves in the Urals Federal District amounting to 8 billion cubic meters (10% of the Russian reserves total); at the moment only 20% of the possible annual volumes is harvested. The megaproject will make it possible to start the commercial exploitation of the forests in the Subpolar Urals region.

- What are the volumes of investment into the Industrial Urals - Polar Urals? Which of the costs will be met by the State, and which by investors?

- The public-private partnership has been selected as the mechanism for the project implementation. The required total sum of capital investment for the establishment of the producing and processing plants conglomerate (including the transportation infrastructure facilities) amounts to 543.7 billion roubles in the 2007 prices. It is planned that the Russian Federation Investment Foundation will invest 105 billion roubles; 79.1 billion roubles will be invested by the subjects of the Russian Federation included in the Urals Federal District. Furthermore, two thirds of the funds (359.7 billion roubles) will be put up by private investors. I have to stress the high budget efficiency of the project. The money invested will return to the State budget within 6 years. The total tax revenue over 12 years will amount to 412 billion roubles.

- Which sites and sectors within the Industrial Urals - Polar Urals project are the most attractive for private investors?

- Together with the Federal Subsoil Agency and the Russian National Institute of Mineral Resources, 22 subsoil plots have been prepared for licensing; they have become the basis for the calculation of future cargo flow for the Polunochnoye-Obskaya-Salekhard railway. OAO Industrial Urals - The Polar Urals Corporation has currently obtained 9 licenses.

We apply the following way of attracting investors for geological exploration and development of the subsoil: affiliate companies are established to which the obtained licenses are transferred. A share in the affiliate company is sold to the strategic investor. The Corporation attracts investments into the projects requiring geological survey and exploration of the Polar and Subpolar Urals subsoil, and the projects implemented on the basis of the license agreements.

For the implementation of individual investment projects, affiliate companies are established which, as a payment into the registered capital, are granted the property rights under relevant license agreements. In addition to that, the Corporation helps to involve portfolio investors in the construction of the Salekhard-Nadym railway, the implementation of individual investment projects within the energy block, and the generating facilities construction projects.

- What work is being currently performed within the project? Has the financial crisis adjusted the project implementation in any way?

- New railway lines - Polunochnoye-Obskaya-Salekhard-Nadym - are currently at the design stage. The first part of the design documentation for the new railway lines has been submitted for expert evaluation last December. In early April, the complete set of the design documentation will be submitted to the Glavgosekspertiza (General State Expert Review Directorate of Russia). The development of the Severo-Sosvinskoye copper and zinc deposit has already begun; this project attracted more than 7 billion roubles of private investment.

9 licenses for geological survey, exploration, and production of mineral resources have been obtained; design and cost estimate documentation for the performance of geological exploration on the licenses has been drafted; the performance of this work is being arranged for. The deposit development and production projects have been prepared; mining, crushing, and sizing equipment has been purchased; construction and assembly works have commenced.

The construction of the Noyabrsk combined cycle power plant, with over 3 billion roubles of private investment, is near completion. At the same time, the construction of the Nadym-Polyarny latitudinal power transmission line (more than 400 kilometres), as well as the lines connecting the local systems of the towns of Salekhard and Labytnangi and the Kharp mining district into one power grid, is underway. We are expecting to complete this work in 2011.

- In connection with the crisis, there were suggestions to suspend the project, so that the budget funds were not spent on megaprojects in hard times like these. What would you answer to that?

- Why answer? May the critics put their questions to the Academy of Sciences, the Ministry of Economic Development, the Ministry of Nature, the Ministry of Transport, the Ministry of Regional Development, and the Ministry of Industry and Trade of Russia - not the salaried managers of the Corporation.

- How do things stand in the geological exploration? What are the current proven reserves of iron and other ores, and of coal? Uralnedra (The Urals Federal District Subsoil Usage Agency) declared that the Polar Urals deposits are mostly small and may not justify the investment, therefore the project parameters must be revised.

- Russia's Ministry of Nature has adopted a resolution on the new "Integrated Plan for the Development of the Mineral Resources Base of the Industrial Urals - Polar Urals for 2010-2015", with an increase of geological exploration funding to reach 11 billion roubles. The Federal Subsoil Agency and the Russian National Institute of Mineral Resources have so far prepared 22 subsoil plots for licensing; these have become the basis for the calculations of the future amounts of cargo transported along the Polunochnoye-Obskaya-Salekhard railway line which will reach a minimum of 15-17 million tons of cargo annually. I should note that in our country the economic viability of the railway construction is based on a minimum of 10 million tons.

- What is the need to build a railway on this specific route: Polunochnoye-Obskoye? Why the development of the Polar Urals resources cannot be conducted on the basis of the existing railway to Vorkuta, along the western part of the Ural Mountain Ridge?

- This is because ore occurrences of main resources and reserves are located on the eastern slope of the Ural Mountains, and the railway is being built in order to establish a new ore mining base.