Russia gets to work

20 February 2012 00:00  [Source: ICB]

Russian propaganda poster, Rex Features
 © Rex Features
After decades of inertia in new project activity, the Russian petrochemical industry is finally stirring into action, with many facilities moving from the planning to construction phase.

At the end of January 2012, a Russian government commission rubber-stamped an ambitious plan, instigated in 2010 by then Russian prime minister Vladimir Putin, to establish a network of six petrochemical clusters across Russia.

Grandiose plans for transforming the country's chemical industry have been around for decades, but this time a combination of private sector impetus and government encouragement seems to be taking effect. The state wants to make better use of Russia's vast reserves of associated and non-associated gas.

Converting them to petrochemicals is seen as an attractive way to help the country move away from a heavy reliance on crude oil and gas extraction as the mainstay of its economy.

In the latest statement, the government claims the plan will, by 2030, double the production of petrochemical feedstocks in Russia and triple Russia's share of global ethylene production. According to ICIS data Russian ethylene production capacity was 3.28m tonnes/year at the end of 2011, representing 2.2% of the global total of 147.6m tonnes/year.

The plan claims demand for petrochemical products will triple in 2010-2030, driven by industrial, residential and road construction. The plan calls for clusters to be formed in six areas where pipe and road infrastructure will be provided by the government, to enable transportation of feedstocks, polymers and finished products. Private sector chemical companies and convertors will, in theory, be attracted to these zones.

The January 2012 statement confirms clusters in the West Siberian, Volga, Caspian, North-West, East Siberian and Far Eastern regions. This grand plan may not ever be realized in its entirety as it is so ambitious, but there is no doubt that the industry is becoming more active, and is entering a fast growth phase - led by growth-hungry companies such as SIBUR. As the table shows, there are several ethylene projects planned or underway.

SIGNIFICANT INSTALLATIONS

Other significant installations include Sibur's 500,000 tonne/year propane dehydrogenation and polypropylene (PP) project at Tobolsk, which is expected to be completed in 2013. RusVinyl, a joint venture between SIBUR and SolVin, is building a 330,000 tonne/year polyvinyl chloride (PVC) plant, also due on stream in 2013.

According to Andrew Sparshott, consultant with chemical consultancy Cirec, SIBUR has invested a considerable sum in its gas processing network in the Yamal-Nenets region over the past few years, helping to provide the feedstock base for petrochemical projects at Tobolsk. "The jigsaw is stage-by-stage coming together for investments," he adds.

The big question now is what will happen to the production of all these new plants, in a country which has only moderate economic growth. According to Sparshott: "No-one has an answer to this. They are trying to develop economic zones where processors can locate to consume the production. "In some cases building a plant can help generate more dynamic demand for a product through easy access, but Russia may need to embark on some high volume exporting in order to maintain good utilisation rates at some of the new plants."

Russia chemical projects

He says some projects, such as Rosneft's at Nakhodka on the Russian Far East coast, are being constructed with exports to Asia as the principle objective, but most Russian projects have the domestic economy as their primary target.

Relying on exports for new production capacity is hazardous. China is already Russia's main trading partner in chemicals, but it has plans to add more than 20m tonnes/year of domestic ethylene production over the next 10 years. It is also difficult to export to Europe or North America from Russia.

"It will be interesting to see what happens when the first wave of big projects come onstream in 2013-2014, followed by the next wave in 2016-2017," says Sparshott.

In an interview with Russian consultancy MRC in December, SIBUR CEO Dmitry Konov admitted the Russian market would be swamped with PP once the 500,000 tonne/year Tobolsk project is launched in 2013.

STRONG GROWTH

He said: "The Russian market will be oversupplied with PP after Tobolsk is launched, although we've seen strong growth in PP consumption in past years and we believe this will continue.

"When we launched the project in 2006 we expected over 50% of the production would be exported. Now we expect around 350,000 tonnes/year will be Russian based."

Output from the plant would be very cost-competitive, and SIBUR would build a network of distribution channels across its major markets to sell the output, he added.

Asked to comment on the short-term outlook for Russia's chemical industry, Sparshott expects modest overall chemical industry sales growth in 2012 of 4-5% at best. For the next 2-3 years there could be similar rates - higher than Western Europe, but not returning to the high rates of the early 2000's.

He adds: "There is relatively healthy demand for chemicals in Russia, although for a developing economy it could be faster, particularly when you consider how much investment in the infrastructure is required."

DOING BUSINESS IN THE RUSSIAN MARKET

What opportunities are there for global chemical companies in Russia?

Bernd ElserThe Russian market shows significant growth opportunities for chemical companies based on its oil and gas resources and on its demand growth from customer industries. Companies should do their homework and have a thorough understanding of the relevant demand patterns.

Can you give us examples?

In customer industries, such as fast-moving consumer goods, multinational companies have strong positions, and the demand pattern for chemicals is similar to mature markets. In other local, export-oriented customer industries, standards to export markets, especially the EU, require products to be aligned with EU norms and standards. In customer industries focused on local Russian demand, demand for chemical products show the widest spreads, and often chemical products can contribute to productivity and performance improvements for the customer industry

What kind of challenges are there in doing business in Russia?

There are challenges for multinationals. Partnerships between local businesses and multinationals are common, but often create additional management and governance complexity. The capability to start up and operate efficiently in partnership structures will be a key advantage to succeed. This is typically facilitated by lean business and service platforms, which enable supporting joint ventures and partnerships with scale, efficiency and skill.

What trends will affect the Russian chemical industry over the next five to 10 years?

The key question is whether Russia will leverage its oil and gas resources into the development of downstream value chain steps. It's estimated that 25% of global gas reserves and 12% of global oil reserves are located in Russia, but it accounts for a disproportionately small share of global chemical production.

So there is a significant and yet untapped potential to increase value generation from petrochemicals and polymers.

The intent to do this is reflected in Russia's chemicals strategy 2030, which outlines new chemical complexes.

Even though Russia's chemical strategy 2030 shows many similarities to the development paths of Middle Eastern countries, a closer look reveals one contrast - the Middle East countries' strategy features partnerships between local and multinational chemical companies, while the Russian investment strategy builds on partnerships between Russian chemical companies.

  • Bernd Elser is executive director of the Accenture Chemicals industry group


By: Will Beacham
+44 20 8652 3214



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