“The leading companies invested no matter what, it is Sibur, TAIF and others”
REW 2019: how gas and petrochemistry moguls laid the foundation to develop the sector and what projects and actions of regulators can change the situation in the market
Today the development of petrochemistry is going ahead of the growth of the world economy. Moreover, the sector lives under conditions of active changes in general. On the sidelines of Russian Energy Week International Forum, which is being held in Moscow these days, participants of the business programme discussed what domestic and external challenges could change the development of the sector and what restrictions impeded Russian producers from increasing competitiveness in the world’s gas and petrochemical markets. Particularly a bill on the imposition of ethane excise, which will be introduced to the Government of Russia next week, is one of the solutions. More is in Realnoe Vremya’s report.
Slowdown of world economy
A discussion about key factors of global gas and petrochemistry’s competitiveness at REW 2019 began by saying that the sector is, on the one hand, held in a vice-like grip of regulation of the Ministry of Finance and, on the other hand, the Ministry of Energy. Vice Minister of Energy of Russia Pavel Sorokin started with this point and ironically noted that here, in the hall, representatives of the biggest companies were seated between the two ministries’ employees.
“I would like to dispel such a myth anyway and show that we are all aimed at performing one common task. What do all people think about petrochemistry today?” Sorokin asked. “Everyone is talking about high growth paces, that there are higher than the world’s average GDP. I am offering to leave these concepts because it is quite a simplified view. There is a global nationwide task — to augment investments in the economy to 25% of GDP. And it is not just investments for the sake of investments. They must pay back.”
So, according to him, there will appear new jobs, regions will develop, while entrepreneurs will get added value. At first sight, everybody will be happy and pleased. But the vice energy minister urged to soundly evaluate the market’s prospects: “Slowdown of the world economy is one of the key trends now, which, unfortunately, will stay further on”.
Sorokin thinks that the general uncertainty, particularly because of trade wars of the USA and China, too facilitate the economy’s decline. The uncertainty of the economic growth of the Celestial Kingdom itself also makes an impact. In addition, as the speaker noted, consumption of big volumes of polymers in the world depends on the consumer market and the construction sector, that’s to say, confidence in the future. “In other words, we must understand that there is a risk of slower growth of petrochemicals consumption. In the country, we should create such conditions so that our good will be on the market despite the slowdown in the demand for a product. It is a nationwide task. We shouldn’t give up the market. Even if we are talking about the creation of artificial concessions,” he claimed unequivocally.
Together with the Ministry of Finance, the Ministry of Energy is creating a package of measures to support the whole line of petrochemicals. So an agreement was reached to impose a reverse excise. It is a new scheme designed by the Ministry of Energy to support liquefied petroleum gas (LPG) processing. It is offered to provide a reverse excise at 7,300 rubles per tonne of LPG to equalise conditions for this feedstock with naphtha processing and stimulate investments. In other words, to stimulate the creation of new pyrolysis capacities of LPG in Russia, we need to equalise the efficiency of processing of this feedstock and naphtha consumption whose reverse excise today is 9,700 rubles per tonne, and customs subsidy is 3,200 rubles.
Sorokin noted that nowadays 11 million tonnes of ethane was buried in the country in associated manufacturing processes. “In my opinion, the fact that this ethane isn’t used here, that it doesn’t participate in the creation of a value-added production with export potential is a huge loss for the state,” he stressed and added that the gas and petrochemistry development plan of Russia through 2030 will be reconsidered: “We should look at other principles, we shouldn’t deal with bureaucratic reports, saying how well we performed the plan but be guided by strategic goals.”
“We overslept the growth in demand for plastics”
Aleksey Sazanov, director of the tax and customs policy department of the Ministry of Finance of Russia, looked at the sector’s development from another angle.
“Of course, we overslept the growth in demand for plastics and significantly lost the share of the world market compared to the early 2000s and missed a lot of opportunities. Under the existing conditions, most of the new pyrolysis projects, first of all, gas feedstock projects, aren’t profitable,” Sazanov noted and later raised the topic of reverse excise but on ethane.
“As for the ethane bill, it will appear next week, and you all will be able to see it,” the head of the department claimed.
According to him, the question of whether current projects for feed gas processing will be supported or it includes new projects only remains unanswered. “If we support new projects, the current ones will have unequal competition as time goes by. At this moment there is still a lot of issues about feed gas processing stimulation. However, a reasonable compromise must be found in the end,” Sazanov concluded.
Breakthrough in the whole sector
State agencies’ desire to work with sectoral problems inspires hope to businesses, moderator of the discussion Aleksey Kondrashov, senior adviser to BCG, an international company specialising in managerial consulting, noted.
Then representatives of factories continued the discussion — Mikhail Karisalov, board chairman, director general of Sibur Holding PJSC that has delivered over 2 million tonnes of petrochemicals in the market in the last 10 years.
Mikhail Karisalov’s speech was expectedly linked with one of the projects of the holding — ZapSibNeftekhim complex that received the first lot of natural gas liquids (NGL) in late summer.
ZapSibNeftekhim is a part of the Tobolsk Industrial Site, which today unites three big productions: monomers, polymers and electrical and heat power generation.
The implementation of the project is designed to develop deep conversion of by-products of gas and oil production in Western Siberia, including associated petroleum gas (APG). The new complex will allow to use up to 22,4bn cubic metres of APG to useful processing, thus preventing its combustion in the field and 40m tonnes of emissions of harmful substances a year.
The project, which is in the top 5 world’s biggest polymer plants, undoubtedly, makes significant changes in general. “It is a big project in terms of CAPEX — a bit more than $8,5bn of capital expenditures. And 2 million tonnes of polymers of this factory take the country from the 12th to the 8th position in the world in polyethylene production and from the 14th position to the 9th in propylene. And we get another position in the world,” Mikhail Karisalov noted ambitiously. According to him, these projects have an accumulative effect: $1 of investments in petrochemistry provides about $4,5 of income in related sectors.
“In other words, ZapSib gives a chance to companies from other spheres to develop. Our colleagues from Tatarstan have similar projects, too. It can be a significant breakthrough for the whole sector,” Mikhail Karisalov said and added that as a market player he didn’t support feedstock stimulation. “There was created an imbalance when supporting different kinds of feedstock with identical processing methods. One should find a balance and do it quite quickly.”
Problems and solutions
Sergey Donskoy, board member at INK-Capital JSC, which is one of the biggest independent crude hydrocarbon manufacturers in Russia, talked about supporting measures the sector needs. Today the Irkutsk Oil Company uses the first unite to produce ethylene from ethane in Eastern Siberia within INK’s gas project.
The factory, which will be built in Ust-Kutsky District in Irkutsk Oblast until 2023, will be designed to produce low- and high-density linear polyethylene. The total production volume will amount to at least 650,000 tonnes a year. The value of the polymer plant’s construction project is about 175,000bn rubles.
In Sergey Donskoy’s opinion, one of the major problems in the sector is the difficulty with obtaining project financing and high interest rates for long-term loans for 10-15 years. In this respect, the interest rate should be subsidised in the National Well-Being Fund of Russia in programmes of the Industrial Development Fund.
He also stressed the absence of necessary production, transport and social infrastructure. A solution here is a mechanism of repayable financing and co-financing programmes.
Unlike Mikhail Karisalov, Sergey Donskoy backed up the negative ethane excise talking about the high value of feedstock for petrochemistry. The vice energy minister of Russia summed up the discussion:
“Yes, we did oversleep. Thanks to those who didn’t allow us to oversleep it completely, it is the leading companies that invested no matter what. It is Sibur, TAIF and other gas and oil companies that worked to create factories. We have a very long list of good projects that can become the core of the sector,” Pavel Sorokin concluded.