Russian petro-chemistry may go down the drain

04.04.2011 — Analysis

Oil refining makes no sense in Russia, as the profit gained from selling crude oil is much higher. The similar situation can be observed on the gas market: companies prefer to invest in commodity-based business rather than in chemical operations. The government intends to change the situation by developing six oil and gas chemical clusters. However, as the "RusBusinessNews" columnist has found it out, the authorities' support for processing of hydrocarbons exists only on paper: strenuous efforts aimed to promote "northern" and "southern" flows speak volumes about the government's priorities in the gas sector.

The Russian Ministry of Energy published the first part of the Plan for Development of Gas and Petrochemical Industry in Russia until 2030. Officials expect that its implementation will result in a fourfold increase in the consumption of light hydrocarbons, driving their processing at oil and gas chemical facilities from 28 to 55%. The emphasis will be placed on development of six clusters: West-Siberian, Volga, Caspian, North-Western, East-Siberian and Far-Eastern. They will be developed both in production areas and in the neighborhood of the main consumer markets for oil and gas chemical products. Government experts plan to sell plastics and resins to Europe and China, yet hoping for growing consumption in Russia.

However, independent experts are far from being optimistic, looking into future. Vladimir Arutyunov, professor at the Gas Chemistry Department of the Gubkin Russian State University of Oil and Gas, says that beautiful pictures showing petrochemical clusters located within the vast territory of Russia have been regular guests of conferences and presentations for more than a year. However, the speed, at which the projects are being implemented, does not stand up to criticism. For example, the construction of the Novy Urengoy Gas and Chemical Complex was commenced in the early 90s - the equipment was brought, but the construction was suspended for more than 10 years. Today, construction has been resumed and is going to be completed, at its best, in 2013-2014. By that time, Russia will be far behind other countries in petroleum chemistry: China has already reached the polyethylene output of 15 million tons a year, and the Novy Urengoy complex is most unlikely to be able to undermine its positions by producing 460 thousand tons. Russia ranks 19th place in the world's gas chemistry output, producing only 2 million tons of products (about 1-2% of the world's output).

In the meantime, the clusters have already boosted monopolization of the market for bulk polymers. Olga Sinelnikova, an analyst at the Market Report Company, notes that high-cost loans and raw materials, increased rates applied for services provided by natural monopolies, and obsolete equipment have already cast out polymer processing companies that had to withdraw from the investors' community. Only producers have now funds for projects, and large petrochemical companies have decided to set up their own "in-house" processing operations. However, even they have not been able to achieve success in chemical production.

Kirill Popov, an industry expert, states that the petrochemical industry (especially, in terms of ethylene, propylene and ordinary plastics production) is by 30-40% less profitable than sales of crude oil. Employees at the SIBUR Holding complain about shortcomings in the government's support. The payback period for petrochemical projects is 7-10 years, thus requiring a steady fiscal and macroeconomic policy pursued by the government within 15-20 years. In Russia, which is accused of an absent investment climate and a functioning market for raw materials, rules of the game are changing annually. It may be this instability that slows down the implementation of the projects: for almost five years SIBUR has been building facilities for propylene dehydration in Tobolsk (Tyumen Region) and polyvinyl chloride production in Kstovo (Nizhny Novgorod Region), which are scheduled for commission in 2013-2014. According to K. Popov's forecast, if Russia keeps on moving at such pace, it will lose the sector before it learns how to launch new production operations of the world class. There is no sense in having grievances about SIBUR: the holding gets its main earnings not from petrochemical operations, but from the commodity-driven business, processing associated petroleum gas.

The representative of the SIBUR Corporative Communication Department explained to "RusBusinessNews" that the corporation has to allocate multi-billion funds for construction of new product pipelines that are designed to accommodate increasing volumes of processed associated gas. It considerably slows down construction of new production facilities, giving the green light for imported petrochemical products. The government could turn the tide, if it provided financing for construction of new product lines for wide fractions of light hydrocarbons - the main petrochemical raw materials. The experience of other countries evidences the feasibility of the government's participation in development of infrastructure for gas collection and transportation of its processed products to petrochemical companies. In Russia, this aspect has not been touched.

On the other hand, the government, together with Transneft and Gazprom companies, is building and operating pipelines. Vladimir Arutyunov thinks that persistent lobbying of various "northern" and "southern" gas flows at the government level is eloquent of government priorities in the sector of hydrocarbons.

Vladimir Terletsky