OUTLOOK '19: Russia’s large petchems expansions face delays, higher taxes

Source: ICIS News

2018/12/27

MOSCOW (ICIS)--Russian major petrochemicals producers are keen to continue expansion projects in 2019, but economic volatility and higher taxes are likely to put a strain on project development.

Some of these ambitious petrochemicals projects have so far been developing slower than expected, and this slow pace of development is likely to continue in 2019.

The Russian authorities have repeatedly pledged tax breaks and direct subsidies to support investments in new chemical and petrochemical projects in order to encourage "import substitution" designed to limit the country's dependence on imports.

In 2018, total investments in Russia's chemical sector were estimated to exceed Russian roubles (Rb) 500bn ($7.5bn), nearly 20% up year on year.

In 2012-2017, these investments amounted to Rb2,000bn ($30bn), according to the Russian ministry for energy.

As a result of these large investments, Russia is expected to have increased its annual chemicals exports to $34bn/year by 2024.

As a comparison, the latest data available, corresponding to the January-October 2018 period, Russia's total exports of chemical products totalled $22.13bn, up 14% up year on year, according to the government statistics.

The Russian authorities and major businesses consider new chemical and petrochemical projects key to achieve "import substitution" as well as increase exports.

The country’s leading petrochemicals producer SIBUR moved in 2018 towards completion of its major project ZapSibNefthekhim complex, with full production capacity for ethylene expected at 1.5m tonnes/year.

The company has pledged to finish construction works by mid-2019, in a project which has the backing of the Russian government despite repeated indications of domestic polypropylene (PP) overproduction.

Apart from 500,000 tonnes/year of PP, SIBUR also expects to produce 500,000 tonnes/year of propylene and 1.5m tonnes/year of polyethylene (PE).

The project is located in the Tyumen region in western Siberia, and is expected to come onstream in 2020.

By November 2018, construction works at ZapSibNefthekhim were 90.5% completed, while equipment delivery to the site was 98.4% finished, according to the company.

Another large petrochemical project to come onstream is Nizhnekamskneftekhim (NKNKh) complex, the first phase of which is expected onstream by 2019 with production of 600,000 tonnes/year of ethylene.

A second phase, planned for 2025, will bring into the market an additional 600,000 tonnes/year of ethylene.

The project's costs is estimated at $7.8bn, according to the company.

DELAYS, COST OVERRUNS  
The Russian government has repeatedly pledged to grant direct financial support to infrastructure projects needed to build a key plant of the Eastern Petrochemical Company in Nakhodka port on Russia's Pacific coast.

The Eastern Petrochemical Company is controlled by Russia's oil major Rosneft and, despite earlier pledges to start construction work imminently, the project appear to be taking longer to start up than expected.

Plans to build the major petrochemicals and fertilizers complex in Nakhodka, in the Primorie region in the Russian far east, first surfaced as long ago as 1974.

Rosneft started considering this project again in 2007, forming the Eastern Petrochemical Company in 2011, but in March 2018 it found difficulties in agreeing gas supplies with Russian major Gazprom.

Rosneft was reportedly seeking gas supply from Gazprom's gas fields, but the gas major would have only been prepared to provide feedstock from its pipelines from the Sakhalin-1 venture.

The project also became subject to cost overruns. By 2018, estimates placed the construction costs for the Eastern Petrochemical Company at Russian roubles (Rb) 1,300bn ($19.5bn), compared to prior estimates of Rb659bn ($9.9bn).

The plant in Nakhodka would have capacities to produce 2m tonnes/year or urea, 1.1m tonnes/year of ammonia and 1m tonnes/year of methanol.

Start up date was expected for 2021, but it is far from clear whether this timeframe could materialise.

Other behind-schedule projects in Russia would include Novourengoi gas chemical complex (NGCC), in a project first envisaged in 1993 but frozen in 1996 due to a lack of funding.

Revived by Novourengoi, a subsidiary of Gazprom, in 2004, the project is expected to produce 300,000 tonnes/year of ethylene and 300,000 tonnes/year of PE.

Start up date is expected for 2021.
 
There are limited prospects for NGCC and other stalled projects to be significantly expedited in 2019, because the majority of Russia's chemical and petrochemical businesses are likely to be adversely affected in 2019 by increasing taxes.

Notably, Russia's value-added tax (VAT) rate is due to go up from 18% to 20% from 1 January 2019, and the increasing tax burden on corporates could potentially make some new projects less economically viable.

($1 = Rb67.13)

Focus article by Sergei Blagov