Economic downturn has a mixed effect on Russian chemical projects

Russian projects stall

12 March 2010 00:00  [Source: ICB]

The downturn has caused further delays to many ambitious projects, but some are moving ahead

Sergei Blagov/Moscow

RUSSIAN COMPANIES have been slow to deliver on their earlier pledges to invest in new chemical and petrochemical projects. Meanwhile, it remains to be seen whether domestic demand will be able to absorb production from the major projects that are still moving ahead.

As many Russian companies reduced production volumes and were forced to accept lower prices last year, their ability to deliver on their earlier investment pledges became limited. In February 2010, the Russian industry ministry estimated that total investments in the country's chemical sector reached Roubles (Rb) 107bn ($3.55bn) last year, or 18% down year on year. Not surprisingly, no new major projects were announced in 2009.

"Although there have been some project delays, for the most part the key projects are still going ahead," says Andrew Sparshott, senior consultant, Russian and East European chemical industries, at UK chemical consultancy CIREC. "Lukoil's Caspian gas-chemical project and expansion of the Budyennovsk cracker has been targeted for 2016," he says.

The launch of Lukoil's planned $3.5bn (€2.6bn) gas-chemical complex in southern Russia, originally due on stream in 2010, proved well behind the original schedule. "It is now expected on stream in 2016 or 2017," says Lukoil spokesman Vladimir Semakov.

Lukoil plans to spend Rb80bn to build the complex. It is designed to utilize natural gas from Lukoil's offshore Caspian gas fields, and includes a gas processing plant and a 600,000 tonne/year polyethylene (PE) production facility in the Budyennovsk, in the Stavropol region, near Lukoil's existing PE/PP plant.

In March 2006, Lukoil first indicated plans to build the gas-chemical complex with up to 15bn m3/year of gas processing capacity. The project was previously expected onstream by 2010.

Despite the adverse economic environment, new projects by Russia's major petrochemical holding company Sibur are still going ahead. Sparshott notes: "Sibur's projects are expected to be finished in the 2012-2013 timeframe, including Tobolsk and Kstovo" (see page 20).

Sibur, controlled by natural gas monopoly Gazprom, still pursues a project to build new facilities to produce 500,000 tonnes/year of polypropylene (PP) at the premises of Sibur's subsidiary, Tobolsk-Neftekhim. "The project is due onstream in 2012," Sibur's spokesman, Rashid Nureyev says.

TOBOLSK GETS UNDERWAY
In 2006, Sibur created the Tobolsk-Polymer entity to oversee its new project in Tobolsk. In January 2007, Sibur selected global engineering group Fluor to act as the project management company. In December 2007, Tobolsk-Polymer selected Italy's Tecnimont and German engineering group Linde-KCA-Dresden to develop its project. In September 2009, Sibur and Russia's state-run Vnesheconombank (VEB) signed a $153m loan to finance Sibur's project in Tobolsk. VEB has indicated plans to grant Sibur loans totaling $1bn to develop the project.

In December 2009, Sibur and Tecnimont signed an engineering, procurement and construction (EPC) contract to build a new facility to produce 510,000 tonnes/year of propylene in Tobolsk. The equipment for the $885m project will be supplied in 2010-2011.

In February 2010, Sibur announced that it had raised capacity of its Gubkinsky gas processing plant to supply feedstock to Tobolsk, including the new PP production facility. Subsequently, Tobolsk-Polymer is tentatively expected to export up to 40% of its PP, according to Nureyev.

However, Sibur sources are reluctant to confirm any timeframe for the Kstovo project. In early 2009, the Nizhny Novgorod regional government said that construction of the Rb22.3bn polyvinyl chloride (PVC) plant in Kstovo was due to start this spring.

In June 2007, Sibur formed a joint venture, RusVinyl, owned on a parity basis by Sibur and Solvin - a company of which Belgian chemical company Solvay owns 75% and German chemical major BASF 25%.

The plan was for RusVinyl to build a 330,000 tonne/year PVC plant in the Nizhny Novgorod region that would eventually have a capacity of 500,000 tonnes/year. Construction was tentatively expected to start in 2008, and it was due onstream in 2010.

Sibur also indicated plans to focus on export-oriented upstream projects. In January 2010, it announced that the Russian government had approved its project to build a new port to export liquefied petroleum gas (LPG) and light oil products.

In the second quarter (Q2) of 2010, Sibur's subsidiary, Sibur-Portenergo is due to start construction of the export port terminal in Ust-Luga, in the Leningrad region of north-western Russia. Its facilities will have the capacity to export 1.5m tonnes/year of LPG and 2.5m tonnes/year of light oil products.

"[Russia's] production of petrochemicals, organic chemicals and plastics is mostly on the rise" Andrew Sparshott, senior consultant, CIREC

Domestic LPG demand is well below existing capacities of gas processing plants, and further expansion would require the creation of new export facilities, according to Sibur. In 2009, Sibur produced 3.35m tonnes of LPG, 7.3% up year-on-year.

Russia's other major petrochemical projects also remain behind the original schedule. For example, Salavatnefteorgsintez has been repeatedly delaying its planned 120,000 tonne/year high density polyethylene (HDPE) production facility, expected to cost Rb6.3bn.

Salavatnefteorgsintez, based in the Russian internal republic of Bashkortostan, had previously planned to build the HDPE unit by 2006. Then the company pledged to start HDPE production in Q1 2009, and then by the end of 2009.

Russia's OAO Ammoniy has also been slow to build new production units to produce 717,000 tonnes/year of ammonia, 720,000 tonnes/year of granulated urea, 380,000 tonnes/year of ammonium nitrate (AN) and 230,000 tonnes/year of methanol. The $1bn project in the town of Mendeleyevsk in the Russian internal republic of Tatarstan was previously expected onstream in 2012.

In October 2008, OAO Ammoniy announced that it had started construction of the ammonia, urea and methanol facilities. In September 2009, VEB confirmed its earlier pledges to invest $870m in the Mendeleyevsk project. However, in late 2009, OAO Ammoniy had to extend the project-management contract bid deadlines for its new facilities.

In the meantime, many Russian petrochemical companies have struggled to repay their sizable debts to domestic and foreign lenders. Notably, the country's major PE producer Kazanorgsintez reportedly remains on the brink of bankruptcy, seeking a bailout by the government. In recent years, Kazanorgsintez relied on domestic and foreign loans to expand its PE and other petrochemical capacities.

DOWNTURN WORRIES
The Russian authorities continue to voice expectations that the country's chemical sector will experience a continued downturn. The forecast for 2010-2012, issued by the Russian Economic Development Ministry, includes two scenarios.

In the pessimistic scenario, Russia's total chemical output in 2012 is expected to fall by 6.4% compared with 2008, but plastic and resin production will rise by about 1%. However, an optimistic scenario involves 6% growth in plastic and resin output between 2008 and 2012, although total chemical production would still be 4% down.

There have been signs of recovery, although Russia's 2009 petrochemical output was mixed. Last year, Russia's total PE and PP production was up, while PVC and polystyrene (PS) output was down, according to the Russian industry and trade ministry.

"Whilst Russia's market conditions are difficult, internally and externally, production of petrochemicals, organic chemicals and plastics is mostly on the rise," Sparshott argues. "Whether domestic demand can absorb this production will depend largely on how quickly Russia's GDP grows, but it does seem for the short to medium term that export activity will play a key part in keeping plants running at good utilization levels," he adds.

More on Russia

By: Sergei Blagov
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