OUTLOOK '09: Russia petrochemicals set to slow in 2009

02 January 2009 12:20  [Source: ICIS news]

By Sergei Blagov

MOSCOW (ICIS news)--The future of Russia’s new petrochemicals projects for 2009 is now in doubt as the global financial turmoil begins to bite.

The total value of new projects, announced or confirmed earlier this year, has been estimated at about $20bn (€14bn), which is to be disbursed over the next three to four years.

However, these investment pledges to develop the country's petrochemical sector now seem destined to remain on the drawing board, at least through 2009.

Soaring international oil and gas prices brought Russia's state and corporate coffers more windfall revenues in early 2008 and the country’s oil companies began eyeing some major petrochemical projects.

Lukoil's fully owned petrochemical subsidiary, Lukoil-Neftekhim, had long planned to build a new $3.5bn gas-chemical complex in southern Russia by 2010.

Although it has not been officially announced, the project was thought to have been shelved, at least for the next year, amid a backdrop of job and expenditure cuts.

Earlier in December, Lukoil indicated plans to cut its capex (capital expenditure) by three times, from $15bn this year down to $4bn-5bn in 2009 if crude oil remained at $45/bbl or below.

Lukoil-Neftekhim was also said to be considering cutting hundreds of staff positions at its head office, as well as at its Karpatneftekhim, Saratovorgsintez and other subsidiaries.

Russia's state-controlled gas giant Gazprom has mulled ambitious petrochemical projects, but even before the economic crisis the implementation has rarely progressed on schedule.

In particular, Gazprom-controlled petrochemical major Sibur drafted an ambitious investment programme.

This included a new $1.3bn plant to produce 900,000 tonnes/year of polypropylene (PP) and up to 500,000 tonnes/year of polyethylene (PE) in Tobolsk; a plant to produce 650,000 tonnes/year of PE and 450,000 tonnes/year of PP in the Orenburg region; and a new 500,000 tonne/year PE plant in the Astrakhan region.

These projects were due to start in 2008 or 2009, as Sibur announced plans to invest up to $6bn to upgrade production facilities and build new units until 2012. But then it was announced that Sibur's venture in Orenburg would be delayed until 2013-2015.

Furthermore, Sibur’s own assets have started to underperform in the current environment, casting doubts on other big projects.

In December, Sibur’s Tomskneftekhim cut its low density PE (LDPE) production by 40% due to falling prices and indicated plans to limit its capex by 30% in 2009. Sibur-Neftekhim also said it would limit its capex by 30% next year.

The economic climate has meant that Russian chemical companies are reviewing costs very closely and reducing expenditures on non-essential items, said Andrew Sparshott, a senior consultant with CIREC.

The petrochemical projects likely to be affected by the current financial environment are those falling under the category of non-urgent capacities, such as polyolefins plants at Astrakhan and Orenburg, said Sparshott.

There have been other indications that Russia’s petrochemical companies were increasingly feeling the pain of the crisis.

The country's leading PE producer, Kazanorgsintez, saw its credit rating downgraded and was reported to be facing serious financial problems.

Acron Holding slashed its mineral fertilizer output by 50%, Uralkali cut its potash production by 500,000 tonnes in the fourth quarter and Balakovo Mineral Fertilizers suspended fertilizer production at its plant in November. All cited the financial crisis.

Reduced production volumes and lower prices, both domestic and international, were expected to adversely affect corporate balance sheets next year, limiting Russian companies' ability to deliver on their earlier investment pledges.

Local authorities in many Russian regions have also announced ambitious petrochemical projects.

Regional authorities in Volgograd suggested a major investment project to build a petrochemical hub to produce 500,000 tonnes/year of  polyvinyl chloride (PVC), 450,000 tonnes/year of PE, and 400,000 tonnes/year of PP at an estimated cost of $3bn, which would rely on direct government subsidies.

But as Russia's foreign currency reserves have been going down fast, the government appears to be an unlikely underwriter of major projects.

Petrochemical companies were expected to struggle to secure sufficient funding in 2009 as many already owed huge sums to domestic and foreign lenders.

Cost cutting and delayed or abandoned projects look likely to be a prominent theme for the year ahead.  

However, there may be a silver lining, said Sparshott. Although product prices have fallen in most cases, Russian petrochemical producers should at least benefit from lower raw material costs in the first part of 2009.

($1 = €0.71)

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By: Sergei Blagov
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