Dmitry Konov: 'The merger of existing assets and projects of TAIF and SIBUR provides a platform for creating one of the global leaders'

We will grow the global leader in petrochemistry

Mr Konov, such a large-scale, global, extraordinary transaction was announced for the market in April: TAIF Group and SIBUR Holding announced plans to combine petrochemical and energy assets. The deal was immediately called “the deal of the century”, as the largest holding company is being created, which will certainly influence both domestic and global markets.

Every significant transaction is called “deal of the century” (smiles).

It is just interesting to get your assessment of this statement. To what extent do you, as one of the initiators, organisers and direct participants of this deal, assess it as “the deal of the century” for the Russian petrochemical industry? What is this deal for you?

Is it “the deal of the century that we merge the assets? Is it “the deal of the century” that we join forces, including in the implementation of new projects? I don't really like such slogan names. On a global scale, there have certainly been bigger deals in our industry. Both in terms of cost and in terms of scale. For example, DuPont and Dow (in 2015, the two giants of global chemical industry and one of the oldest corporations in the United States, DuPont and Dow Chemicals, announced the merger, followed by a division into three parts with a narrow specialisation and public status — editor's note). But if we talk about the Russian market, the merger deal of the petrochemical and energy businesses of TAIF and SIBUR is of great significancy. The merger of our existing assets and projects creates a good platform for growing a Russian petrochemical company on it that would be one of the global leaders — one of the five largest petrochemical businesses.

What will be the impact of the merged company on the world market?

For some products, for example, synthetic rubbers, TAIF is one of the world leaders and confidently ranks among the top ten companies on a global scale. For some of the products, SIBUR is one of the largest manufacturers and is also among the top 10 world leaders. By combining assets and efforts, it seems to me that we should enter the top five. This will obviously be a company that is visible on a global scale. The fact that the merger helps such a company to take place is a good factor.

But, I will return to your previous question: I don't really like the wording “deal of the century”, especially since there are still 79 years of the 21st century ahead and a lot of things can happen (laughs).

We had been planning for decades, agreed in six months

How long and how actively were the negotiations and elaboration of the preliminary terms of the deal going on before the intentions to conclude it were announced?

The shareholders of both TAIF and SIBUR, I think, had kept this possibility in mind for decades. In 2020-early 2021, the parties reached an understanding of what exactly the association can bring in contrast to the independent development of each of the companies. This understanding helped to come to the configuration of the transaction and the terms that would suit both parties.

As for working out the conditions, on April 23, we signed intentions to carry out the deal. Shortly before that — on April 11 — the basic conditions were signed. And before that, about six months earlier, TAIF and SIBUR had worked in the mode of very frequent meetings and discussions of these basic conditions. Less than 10 people were involved in this work on both sides. But in the period from April 11 to April 23, about 50 people were already involved in the process from the companies, plus external specialists — lawyers who worked on the legally forming document.

TAIF Investment Programme — projects that you want to implement

One of the key terms of the transaction: the implementation of TAIF investment projects. The adopted large-scale development plan of TAIF Group for the period 2015-2030 includes 36 projects and is estimated at more than 2,2 trillion rubles, of which 1,5 trillion rubles fall within the perimeter of the deal of the merged company of SIBUR and TAIF. What are the guarantees that everything that has been planned for implementation until 2030 will be fulfilled? What is the guarantee mechanism from SIBUR?

Let's clearly define the obligations of the parties to implement the programmes. We (SIBUR) know and see TAIF's investment programme. Both those projects that are already being implemented and those which implementation is scheduled for the period 2027-2030. We note that TAIF's programme is the projects that we want to implement, and it will be strategically right to implement.

SIBUR's responsibility as a member of the merged company is to continue the projects that are already being implemented today. We are definitely interested in their implementation being completed and the production facilities put into operation. Moreover, I think that the implementation of these projects is one of the strong growth opportunities for the combined company. With the help of SIBUR's capacities and the expertise that TAIF has, these projects can be completed even more efficiently and faster.

The second part of SIBUR's duties is to provide the missing financing for the implementation of TAIF's investment projects, which remains an independent legal entity in the deal.

As for the investment projects that have not yet started — we are also planning them. But since they need to be started only in a few years, we will check together how much the market will change by that time, whether there are raw materials contracts, if third parties should supply raw materials, we will update the assessment of capital costs. After checking that the projects have achieved the performance indicators agreed between the shareholders of TAIF and SIBUR, we will begin their implementation as planned.

We will have to discuss each of them in more detail with the leadership of TAIF, to make sure that they fully meet the criteria we have jointly defined. And, if we together make sure of the feasibility and economic efficiency of the project, we will implement it. It is quite possible that given that the merged company has more opportunities, they can be implemented in a shorter time.

Let me sum up some results. There are three groups of SIBUR's responsibilities on this issue:

• to continue the implementation of existing projects;
• if for some reason TAIF will not be able to fully provide funding, this issue is taken over by SIBUR;
• to make a decision on those projects that are yet to be implemented, according to the criteria of objective need for them agreed by the parties.

It is clear why the implementation of the development strategy is important for Tatarstan and TAIF Group: these are new jobs, tax deductions, and so on. Why would SIBUR do that? Why is this interesting to you?

SIBUR's interest is to work together with TAIF to grow a petrochemical company of international level and global scale. The products that will be produced at the jointly created facilities are a powerful tool for strengthening these positions. We have not yet discussed the expansion of the joint investment programme.

TAIF is a non-public company (shares are not traded on stock exchanges)…

Neither we are (smiles).

Did this complicate the asset valuation procedure, the preliminary preparation for the deal? And do you see any risks for which the deal may fail?

Both we and TAIF are non-public companies. Non-public in the sense that our shares are not traded on public platforms. But at the same time, the data on our financial statements, on the main indicators, are open and understandable to the world. In this sense, we are quite open companies.

We know each other well. TAIF knows our production, we know their's. The deal itself was structured rather not on the basis of financial estimates, but on the capacities of production facilities: there are such-and-such production facilities that have such-and-such economy with one partner, and such-and-such production facilities that have such-and-such economy with another partner. And if we put all this together, then who gets what share and what share. We immediately modelled the merged company and looked at the ratio. Hence the structure of the deal. As for the overall assessment... only the market can give it. But since we are non-public companies, there is no such assessment for us or for TAIF today.

Any deal, until it is completed, may fail

Do you see any risks for the deal now? Can it fall through?

Indeed, there are regulatory risks, and the probability of some decisions of shareholders... let's say they may change their minds at some point, and we will not close this deal. To be honest, I doubt this development of events. But any deal, until it is completed, may fail.

The probability of SIBUR shareholders' decisions?

And the shareholders of TAIF, too.

Two projects of global capacity on the Russian market are too many

What is the synergy of this deal? What do companies get? What does the Russian petrochemical industry get?

I suggest that we first look at what customers get from this transaction. TAIF enterprises and SIBUR enterprises strongly complement each other in terms of product range. What can we definitely give the client after the merger? We can provide more sustainable supplies. We can provide better service. Faster response to the improvement of brands for specific customers. Extensive guarantees of supplies. There are times when clients can not quickly get the product they need. The merged company will be able to solve such issues more quickly and efficiently. This is the synergy of the deal in terms of providing the market with the products that it needs.

What about the companies themselves?

For both of our companies, in my opinion, there is quite a big synergy in improving efficiency. This is both a more efficient distribution of intermediates and raw materials flows, and an optimal organisation of production processes. For example, to provide the market with the necessary products.

What exactly?

Let me give an example: today, for example, SIBUR produces 10 brands of polymers at home, and TAIF produces eight at Nizhnekamskneftekhim. They are produced on the same equipment. To ensure the production of the entire range of these brands, depending on the needs of the market, both we and TAIF need to reconfigure the technology for each specific brand, taking into account its features. It takes time. Besides, in the process of reconfiguration, the line produces a new so-called “transitional brand”, which differs in technical characteristics from the necessary one. After the merger, we will be able to make a redistribution: some brands are constantly produced by TAIF, some brands are constantly produced by SIBUR. In this case, the reconfiguration procedure will take less time. There will be fewer transition brands.

There are quite a lot of such operational things that allow optimising processes. This applies to raw materials, the distribution of intermediates, the organisation of technological process, production planning, and the organisation of logistics to better provide customers with the necessary products... There are quite a lot of synergies.

There is also one synergy, which is not talked about much, but which is quite close to me. TAIF and I have different types of production sites. The Nizhnekamsk site is quite closely integrated with oil refining. ZapSibNeftekhim is the entire Tobolsk cluster, which is larger than the entire Nizhnekamskneftekhim, is focused on light raw materials and is represented by larger units. And there are products that we [as SIBUR], for example, can and would like to enter and start producing them, but they can be produced at the TAIF site with much greater efficiency. It's exactly because the production facilities have different raw materials and different infrastructure of the sites. The range of products that can be made on the basis of oil refining is wider than the potential range of chemicals based on gas processing. Such a correct, optimal distribution, including future projects, between a large set of production sites in the perimeter of one company is also a synergy. I am talking about the possibility of implementing more effective projects in the right place and conditions for them. This is another important reason why we are interested in TAIF's investment plan.

A certain part of the projects of this investment programme echoes what SIBUR wanted to implement in its perimeter. But when the companies worked separately from each other, there was a great risk of an artificial oversaturation of the market: one can implement a project of global capacity, and it will be effective. But two projects of global capacity on the Russian market are too many. The market will simply be insufficient. Now we are choosing where it is optimal to implement such a project. The one that economically and technologically tends more to the integrated site of Nizhnekamskneftekhim should be implemented there.

Has this plan for the redistribution of the branded load of production facilities already been worked out?

So far, we cannot engage in such a deep study, since the fact of the merger has not yet taken place legally. Currently, a set of ideas is being developed from both sides. Their physical implementation will be possible after the creation of the merged company.

But something is already being done?

From what we are already trying to do together, we can note the steps to provide Kazanorgsintez with additional raw materials in the first half of 2021. Already preparing for the deal, we found an opportunity to redistribute the raw material flows: SIBUR refused some part of its supplies and the sale of intermediates to third-party customers — in favour of Kazanorgsintez. Thus, the volume of Kazanorgsintez's commodities basket has been increased. An example of how we worked outside the framework of the merged company and what allowed us to understand a certain horizon of opportunities in terms of figures and dynamics.

We will rebuild the redistribution chains

Does it turn out that it will work on a full scale immediately after the merger? Do you already have a certain plan for Kazanorgsintez?

Yes. And not only for Kazanorgsintez. This will affect all sites: both Kazan and Nizhnekamsk, it will also concern changes at the SIBUR sites.

SIBUR has many sites, many units, many products and intermediates. Depending on the needs, we build a chain of redistribution. For example, (he sketches a diagramme in a notebook) we made it here, we pass it here, we get the next product here, and it goes either to the market, or it can be sent for further redevelopment. Before the beginning of each month, we look at the utilisation of each unit, the economy of selling each tonne of raw materials and product, we look at all logistics and plan the capacity utilisation and sales channels. We calculate everything so that it is the most optimal.

TAIF has a slightly different scheme and a different approach. It works dependiog of the utilisation of the units. This is neither good nor bad — it's just a different approach. We can send something for further processing to Nizhny Novgorod or Perm, producing a different final product from the same semi-product there. Or we can sell it as a semi-product, losing some marginality, but without incurring additional costs for logistics and processing. TAIF make plans basing on that it is necessary to load the unit to the maximum with raw materials and sell the final product.

Intuitively, I see it this way: if our similar planning is extended to Nizhnekamsk and Kazan... — due to the peculiarities of production, to a greater extent to Nizhnekamsk — then this will bring additional benefits to the merged company. To some extent, this is exactly what we did in the story of Kazanorgsintez in the first half of the year for raw materials, when we began to work out the general perimeter of the company.

But when building such a chain, where at a certain moment not the final product is sold, but a semi-product, isn't there no shortage of raw materials? The finished product is more expensive — isn't it?

Sometimes there is underutilisation. This is normal if it is not systematic. But sometimes it is more profitable to sell a semi-product.

Over 15 years, SIBUR has invested 1,5 trillion rubles in new production facilities

Let me go back to the work schemes of the companies that, as you noted, are different. SIBUR is focused on maintaining technological relevance in the long-term horizon with a deep level of automation in the production of a fairly small range of products. TAIF has more than 500 types and brands of manufactured products, which requires a significant staff of rather narrow specialists. Why did SIBUR choose this approach? How justified is it?

We chose the course for automation because we fought for minimising the cost. At the same time, we started from that we had raw materials in remote areas that could become chemical products. We had a lot of such raw materials, and we could create world-class production facilities both in terms of maximum capacity and the level of automation. Thus reducing the unit cost. This has been SIBUR's path over the past years through new investments.

Over 15 years, SIBUR has invested 1,5 trillion rubles in new production facilities. The level of automation in these production facilities was getting higher and higher with each implemented project. It is radically different from what was available before.

So to speak, at first we had the following: 10 people were sitting in the control room, and 990 were engaged in repairs and switching valves.

Then, with the help of automation, we came to that we no longer need 1,000 people in our production, but 500. Of them, 200 work in the control room, 100 are engaged in repairs... We are not talking about repairs as such, but about monitoring the condition of equipment for its timely withdrawal from the production chain for prevention and routine repairs. Another 200 people at the sites switch the valves. As a result, there are more and more people in our production facilities in the control rooms, and there are fewer and fewer people who are engaged in mechanical control at the sites. On the other hand, the higher the level of automation, the greater the flow of information that needs to be processed and decisions based on it. Accordingly, the higher the need for the organisation of professional development of our operators. This creates the need to have a completely different level of training compared to earlier periods.

Such course to increase labour productivity for many years is an opportunity for us to provide new production facilities with highly qualified personnel. Those of our employees who wanted career growth, aspired to new knowledge, had the opportunity to undergo serious training and become specialists of a new formation — production operators who are able and ready to analyse information, be able to use it and manage processes. This is not a story about the absolute number of employees, but about that the skills and knowledge that these employees need are very different from what may be available today.

How did automation prove itself in the pandemic?

Automation and digitalisation in the pandemic allowed us in some cases to change the operating mode from physical presence at the facility to remote one. On the one hand, this gave some advantages. For example, not to stop the production and continue working in the conditions of the pandemic.

On the other hand, a specialist of modern petrochemical production has to constantly develop professionally. The COVID-19 epidemic has undermined the processes of training existing employees and selecting and adapting new employees. In remote mode, it is impossible to provide either a high-quality interview or a proper level of retraining. At least a mixed approach is needed: partly in a remote format, partly in person (offline).

The continuation of the interview is being prepared for publication in the near future.