Russian Giants Push Into CEE Petchem Markets

Source: CMR


By Sean Milmo

Russian petrochemical producers Sibur, Gazprom's chemicals subsidiary, and Lukoil are set to become major influences in the petrochemical markets of Central and Eastern Europe (CEE) by gaining a key presence in the Hungarian and Ukrainian chemical sectors.

But the companies, now two of the biggest Russian producers of petrochemicals, are poised to move into the CEE's petrochemicals market only after an apparent change in tactics by Gazprom.

Instead of trying to force its way into the Hungarian sector, Gazprom has opted for conciliation with that country's three main petrochemical producers: BorsodChem, TVK and MOL.

Later this month, Sibur (Siberian-Ural Petrochemical & Gas Co.) is scheduled to outline proposals for a cooperative program with BorsodChem and TVK, Hungary's two main petrochemical manufacturers.

Last month, Lukoil won a tender giving it joint control of the petrochemical assets of Oriana, the Ukraine's biggest state-owned chemicals producer. Its ethylene cracker in Kalush has been a feedstock supplier to TVK and indirectly to BorsodChem.

After signing a cooperative agreement in petrochemicals last September, Sibur and Lukoil are likely to collaborate on the supply of raw materials to the Hungarian petrochemicals industry. In the longer term, their collaboration could extend elsewhere in the CEE.

Sibur will present its plans for BorsodChem and TVK to an extraordinary general meeting of shareholders of BorsodChem, in which Sibur recently acquired an option to buy a 25 percent stake.

That option agreement is with the Irish-based financial company Milford Holding, an investment vehicle for Gazprom, which BorsodChem executives think may hold another 5 to 10 percent of their company through indirect shares.

Sibur will put forward proposals for cooperating with BorsodChem in the supply of ethylene and vinyl chloride monomer. It will also detail plans for the supply of naphtha to TVK, in which BorsodChem has a 15 percent share and in which Gazprom has an undisclosed amount of indirect shares.

The program outlined by Sibur is likely to be consistent with Gazprom's long-terms plans for the Hungarian chemical industry, as detailed in a letter from Rem Vjahirev, Gazprom's president, to the Hungarian minister of finance last month.

Gazprom has suggested that both itself and MOL, Hungary's oil and gas company, which is mainly a supplier of petrochemical feedstocks, should jointly control TVK.

MOL, which last week raised its stake in TVK from 30 percent to 33 percent, has been trying, with BorsodChem's support, to block Gazprom's moves to gain influence over the management of TVK. At one point, Gazprom, through Milford, threatened legal action over MOL's purchase of TVK shares.

But MOL and BorsodChem appear to be taking a more placatory attitude toward Gazprom's maneuvers. BorsodChem executives are welcoming Sibur's plan to take a share in the company because of the likelihood of better access to raw materials and additional funds for capacity expansions.

TVK has a central role in Hungary's petrochemicals industry because it runs the country's only ethylene plant, a 300,000-ton-per-year cracker. It also controls the ethylene pipeline between Oriana's 250,000-ton-per-year cracker in Kalush and TVK's site at Tiszaujvaros, from where there is a pipeline extension to BorsodChem's site at Kazincbarcika. MOL supplies naphtha and other raw materials to TVK and BorsodChem.

"The main aim of cooperation between Lukoil and Sibur in the Ukraine and Hungary is to improve feedstock provision to Oriana, increase ethylene supply to Hungary, and thus optimize the work of BorsodChem and TVK," says Zinaida Gorlova, general director of Irbis, a Moscow- based chemicals consultancy.

Lukoil officials have already had talks with BorsodChem's chairman and chief executive Laszlo Kovacs about resuming ethylene production at Kalush. In addition to providing feedstock for the plant, Lukoil will also invest at least $37 million to modernize the unit.

Gazprom, which initially wanted to participate in the partnership taking control of Oriana, has a long-term goal of becoming a feedstock supplier to petrochemical operations in Central and Eastern Europe, in keeping with its strategy of broadening its operations beyond just providing gas in the region. It is the main external supplier of gas to Hungary, Rumania and Poland.

"Gazprom's long-term plans originally centered on using the TVK pipeline from Kalush as a means of supplying ethylene, not only to Central and Eastern Europe, but also to Western Europe," says Spencer Jakab, an analyst on Eastern Europe at Credit Suisse First Boston, London.

"Both Lukoil and Gazprom are flush with spare cash from foreign earnings, which they would prefer to invest in assets outside Russia in places where there is a lower political risk."

In the past few years, CEE petrochemical producers have considered building a consortium cracker in the region, as well as possibly linking the Oriana-TVK pipeline with a pipeline connecting the crackers at Dow Chemical's BSL complex in eastern Germany and at Litvinov in the Czech Republic.

Two years ago, Mr. Kovacs told a London chemicals conference that CEE producers were considering a consortium cracker of 500,000 tons per year on a pipeline network linking all of the region's existing crackers. That would have raised existing total capacity by around one-third.

With the exception of Dow, petrochemical companies in Western Europe have generally not been interested in investing in the CEE, which now presents expansion opportunities for Russian companies.

"The reluctance of Western European companies to move into the region has meant that CEE companies themselves, especially in Hungary, have been so far the main drivers for consolidation," Mr. Jakab says.

Earlier this year, after declaring its goal of becoming a major player in Eastern Europe's petrochemicals sector, MOL bought a 36 percent stake in Slovnaft, the Slovak refiner and petrochemicals producer, with an option to take a majority stake in two years.

Both Sibur, in which Gazprom took a controlling share last June, and Lukoil plan to provide a platform for strong growth for Russian petrochemicals.

Sibur either controls or coordinates the activities of more than 50 petrochemical operations in Russia. It exports synthetic rubbers, MTBE, fertilizers, propylene, glycols, polypropylene and other bulk plastics. It supplies one-third of the raw materials for Russia's tire industry, and it is itself a leading tire producer.

Lukoil plans to increase its petrochemicals output from 1.4 million metric tons to 5 million tons in 2005. It is Russia's first integrated oil company, with operations extending from oil wells to filling stations. It plans to buy a refinery in the US and establish a filling-station network in that country.

"The active participation of Gazprom and Lukoil in petrochemicals is good for Russia, because they have the capability to upgrade petrochemicals capacity" says Ms. Gordova.

"This has been shown by the way Lukoil has radically improved the operations of Stavropolpolymer in southern Russia, where ethylene and polyethylene output has almost tripled. Ethylene supplies to the chemicals complex at Dzerzhinsk have also been radically improved. This was after Sibur made available large supplies of feedstock to a cracker at Norsi, which is linked by a 70-kilometer pipeline to the complex."