Dmitry Konov: 'More than with Tatarstan, I am familiar only with Tyumen and Moscow'

The petrochemical enterprises of TAIF, which are part of the perimeter of the deal of the merged company, produce a wide range (more than 500 types and brands) of products that promise to be in demand both in the domestic and foreign markets in the next at least 20-30 years. Tens of thousands of professionals — narrowly focused specialists — provide the functionality of these production facilities. Do you see opportunities for capacity growth in this range, and how will these plans affect the number of employees of existing production facilities?

The advantage of TAIF is its ability to work on other raw materials, with a much larger set of final products.

When ZapSibNeftekhim entered the market, we said that we could direct about 30% of finished products to the Russian market in the first year. This is both good and bad. We create a large production with low costs and globally competitive. The downside of the scale is that we understand that the Russian market, although it is priority for us, is not yet able to fully consume such volumes. The production of Nizhnekamskneftekhim is seriously different in this regard: it is largely focused on a close circle of consumers, earning extra money on the ability and willingness to give a more specialised product, to specific needs. The specialists of Nizhnekamskneftekhim are developing the material that the processor needs here — in Russia. This model is facilitated by that there is a very good school of technologists and chemical engineers in Tatarstan.

We produce mainly standard selling brands at, for example, ZapSibNeftekhim. Largely because of this, we rely on scale and global expansion, and TAIF, if we generalise, — on specialisation. Different raw material base and different geographical location and the resulting different customer base.

Automation and digitalisation are the areas in which we have worked a lot, but they entail another problem: the number of staff. Any automation while maintaining business volume leads to optimisation of the number of employees. A simple example: registration of a job order. Imagine that about 2,000 repairmen register a job permit for 2 hours every day, everyone must sign in 18 registers. This is a huge loss of efficiency. We have automated these processes, thanks to which labour productivity has increased, and the number of employees has decreased.

That is, a scenario is being considered that some of the employees of the enterprises will be dismissed?

This is a very sensitive topic. Any modernisation, as soon as additional automation appears, leads to a reduction of the personnel necessary for the maintenance of production. This is also true for our industry — the staff of specialists, conditionally, per tonne of serviced capacity, constantly decreases at all largest companies — our competitors in the world and Russian markets. At the same time, on the one hand, automation and optimisation of processes physically increases efficiency. On the other hand, these processes are irreversible and, in fact, also inevitable. The failure to implement new solutions definitely leads to a loss of leadership — if there was one, and a gradual loss of competitiveness. As a result, sooner or later the company risks becoming bankrupt, which leads to the loss of both production and jobs. Certainly, one can tolerate it for some time, but if you stop earning, you lose the opportunity to invest not only in production, but also in people. You can't raise the wages of employees, you don't force them to retrain relevant, in-demand knowledge, you don't give them opportunities for professional growth. A vicious circle.

Process optimisation is a necessity. This is an opportunity for economic development for the company and an incentive for the employees themselves. It is better to save the total wage fund, increase work efficiency and distribute this budget among those who are ready to grow professionally, who make a more effective contribution to the company while on the payroll, and not on outsourcing. This is what we have been doing in SIBUR for many years.

As an example: in Nizhnekamsk and Kazan — all services are within companies. There are very few of them left in the perimeter of SIBUR, many services are outsourced. Is it fair to call it downsizing… I am convinced that no, rather a flow that leads to increased efficiency and the creation of new opportunities, and for both sides. The staff of the services, even if the structure goes beyond the perimeter of the company, still actually remains and provides it with some services. But in addition to that, they get the opportunity to take third-party orders — to develop. Moreover, the markets of services in many areas are very developed in Tatarstan.

I am not saying that we will bring the same model of automation and efficiency improvement to TAIF as at SIBUR's production facilities — for example, ZapSibNeftekhim. We can't do that, we respect TAIF's production culture and consider it effective. But I think that we have positive groundwork in this direction that we can share. At the same time, the republic can get additional opportunities for further development.

Deal closes. What's next?

It has been stated several times that at the end of the third or beginning of the fourth quarter of 2021, a deal on the merger of the petrochemical and energy businesses of SIBUR Holding PJSC and TAIF Group takes place. What are the next steps for the merger of businesses, for the management of the merged company?

TAIF will remain a legal entity. But it will have a new shareholder — SIBUR, and, accordingly, the board of directors will change. Next, the heads of TAIF and SIBUR will look at what kind of managerial personnel there are in the first place, and how they can be used as effectively as possible both in SIBUR and in TAIF.

Is there a corporate plan to unite businesses and management structures?

We will look at it. On the one hand, here is a story about efficiency, but on the other — about emotions. This is not a takeover deal, which is sometimes unfairly written about in the media and social networks. I am sure that we have a lot of good and useful things for TAIF. There are many good and useful things for SIBUR in TAIF. Our task is to identify all opportunities that open up and use them.

Mr Konov, why did particularly Nizhnekamskneftekhim PJSC, Kazanorgsintez PJSC, TGK-16 JSC enter into the deal, but TAIF-NK did not?

Because we don't understand anything about oil refining (laughs). TAIF-NK is important as a supplier of straight-run gasoline, but this can also be ensured through contracts. SIBUR went nowhere and did not buy oil fields to provide itself with the supply of associated petroleum gas. It's the same here. We do not have any other oil refining assets. And we don't want to grow in this direction.

New shareholders? Perhaps. New mergers? I don't think so.

Do you assume, Mr Konov, in the near or distant future, that other petrochemical companies in Russia and the world also merge under the brand of the merged company? Maybe, in the future, a scenario with the sale of a stake in the company to foreign investors, for example from China, is being considered?

We already have Chinese investors in SIBUR (Sinopec and Silk Road Fund — editor's note), who own shares of 10% each.

To be honest, we did not discuss this issue. Most likely, there will be changes when, I hope, the merged company will be public. Then some shareholders will appear. But not in the form of pooling the assets. Perhaps, the sale of some shares of SIBUR to additional financial investors.

Sale, but not exchange?

No, not an exchange. In the structure such as the deal with TAIF — I do not see the need to change anything.

You have already announced that, taking into account the implementation of the planned projects, the merged company will enter the top five petrochemical companies in the world. How much effort do you think will be required from the merged company to meet the status of the leader of global petrochemical industry? And what else will it require?

A lot. We have different corporate cultures, in SIBUR, and in TAIF. We need to find ways and create a joint company culture that will take the best and will meet the ambitions of the world's largest brands. This is a huge job. Cultural work, emotional, educational, organisational.

How long will it take?

Years.

How much do you estimate the value of the merged company after the completion of the merger procedure?

I don't like estimations.

It is necessary to implement investment programmes already adopted first

What other investment programmes, in addition to those already adopted and implemented, or planned for implementation by TAIF, does SIBUR intend to expand the development strategy of the merged company?

So far, we are still talking about overlapping and combining what TAIF and we already have, and that have already been announced. Certainly, SIBUR has a certain pool of projects under development, and we tell a wide audience only about a small fraction of our plans. But before we talk about the rest, we need to carefully work out these projects: calculate plus/minus 10% of the volume of capital expenditures, make a feasibility study, determine investment indicators, prepare final investment decisions and a basic project, get firm offers for equipment, supplies and design... in each case, this is a lot of preparatory work.

Over the years, TAIF Group has invested more than 30 billion US dollars (over 2,4 trillion rubles at today's exchange rate). Of these, more than 20 billion US dollars (about 1,6 trillion rubles) have been invested in production, and another 10 billion dollars (0,8 trillion rubles) are investments on a gratuitous basis in social and charitable projects. Do you know any other companies that invest so much in development, and will the scale of investments in social projects be maintained?

If you look at it together, then — yes, it is impressive. We will continue to support TAIF shareholders in responsible social policy both in the region and in the municipality.

Not everyone will decide on a large-scale project

In the recent history of Russia, with the exception of TAIF, which actually doubled its volumes from 600-700 thousand tonnes a year to 1,2 million tonnes, no one has introduced significant ethylene production capacities…

And of SIBUR (smiles).

Why do you think the production of ethylene in Russia has hardly developed for a long time?

The global polymer consumption market is growing. For example, the production and consumption of polyethylene of all types is 120 million tonnes a year. And it is growing at 4% a year. This means that every year we need to add 5 million tonnes. Additional space is created by the disposal of some of the old capacities: some become too expensive in terms of costs, somewhere raw materials are physically running out. The competitiveness of new capacities depends on how efficient you are. Naturally, there have always been many those who, having capital, want to invest it in the creation of new production facilities and believe that this will be a good project. Whether it succeeds or not is another question. Going back to what you've asked at the beginning — why do only TAIF and SIBUR implement this? Because not everyone can implement large investment projects. This is a rather specific competence.

If we talk about the overheating of the market, now China has its own import substitution programme. Including, aimed at replacing polyethylene. And just China is one of the most large-scale and largest markets…

China will not be able to reach full self-sufficiency in polyethylene.

Now SIBUR has launched ZapSibNeftekhim, TAIF is implementing the EP-600 project. The construction of Amur gas chemical complex is underway. In your opinion, to what extent will the scale of these projects have an impact on the domestic and global markets? What share of the growing market does the merged company intend to take?

We will bring 2,3 million tonnes of polyethylene to the market from the Amur Gas Processing Plant (GPP). Besides, the EP-600 is going to appear, then, I hope, a second EP-600 will appear. But this is a question not so much about the volumes, but about their competitiveness. If you think that you can't do something better than someone who is already doing it, if you estimate only the market volume, then it's better not to even start the project. It is also possible to say that the newcomer is best, knocks out someone the inferior. I am sure that the projects of SIBUR and TAIF can count on success. In an ever-growing market, they can be better than many and remove someone else from this market, not just look at what window is left for us.

What are the plans for the merged company?

To enter the top five world leaders. Not only in terms of tonnes, but also in terms of efficiency, work culture and other key metrics for a sustainable business.

Raw materials and logistics

How will the issue of raw materials supply to Nizhnekamskneftekhim and Kazanorgsintez be resolved after the merger of SIBUR and TAIF? What will this require? How will the logistics of supplies be built? How much time and money will it take to create and launch a supply chain?

We are definitely not the only supplier of raw materials to Nizhnekamskneftekhim and Kazanorgsintez. And if we take the perimeter of TAIF, then I would break these processes into three large blocks.

The first is the maximum possibilities of the ethylene pipeline between Nizhnekamsk and Kazan (Volga Ethylene Loop is a system of pipelines for the transportation of ethylene between the enterprises of Nizhnekamskneftekhim PJSC (Nizhnekamsk), Ufaorgsintez JSC (Ufa), Bashkir Soda Company JSC (Sterlitamak), Gazprom Neftekhim Salavat JSC (Salavat), Kazanorgsintez JSC (Kazan) — editor's note). The EP-600 project, currently being implemented as part of the TAIF investment programme, involves directing a significant part of the ethylene produced to Kazanorgsintez. I understand that we perceive the possibilities of the ethylene pipeline as they are. It will be transported more than today, but there is such an opportunity without much investments. The processes are regulated by the choice of processing capacities at Kazanorgsintez and Nizhnekamskneftekhim. Everything that is not directed to the ethylene pipeline must be processed in Nizhnekamsk.

The second block is the Orenburg-Kazan ethane pipeline. To date, the capacity of the pipeline is sufficient for the implementation of the plans to expand the volume of supplies to Kazanorgsintez. If these opportunities are exhausted, the question of reconstruction will arise. Here we need to look at whose balance the system is on.

The third block is oil and oil refining, the possibility of oil transportation, oil refining, and the supply of straight-run gasoline from TAIF-NK, which is not in the perimeter of the deal, to Nizhnekamskneftekhim. Most of the pyrolysis raw materials supplied to Nizhnekamskneftekhim come from TAIF-NK. Today, this volume is enough. There is no ready-made solution on how to increase it if necessary. It may be necessary to expand railway supplies, among other things.

One more logistical task is the shipment of finished products from Nizhnekamskneftekhim and Kazanorgsintez, which will be getting more with an increase in production volumes. This topic is related to the need to develop both public railways and highways and a certain part of the infrastructure in the form of bridges. I think that both TAIF and SIBUR will work together in this direction.

We need to agree on a reasonable damping tax policy on synthetic rubber markets

Do you consider the state's measures to support investors in the oil and gas sector sufficient? What tools might be missing or would you like to get to reduce the risks of investors and increase the investment attractiveness of the industry?

I see two things. First. We need to agree on a reasonable damping state tax policy for synthetic rubber markets that have their own specifics. This issue is being actively addressed.

And second, most important thing for the petrochemical industry — a thorough study and search for reasonable investment solutions when implementing state projects. Conditionally: there is a road. If we look at its life cycle, it consists of the cost of construction, cost of subsequent maintenance and repair. In my opinion, it is necessary to stimulate projects that consume modern petrochemical products that increase the reliability and durability of roadway. You can build a road by putting sand and crushed stone and laying ordinary asphalt. Yes, it will be 10% cheaper than a road built using biosynthetics, but it will be less durable. And you can make a more stable coating, and with the help of polymer-bitumen binders, you can get asphalt that does not crack when the temperature crosses zero. Yes, it will be 10% more expensive, but you will have to repair such road less often and less. If we look at the overall economy as a cycle of ownership, which consists of the cost of construction, repair and maintenance, then greater consumption of petrochemical products will allow us to achieve a greater economic effect for the state. And this is just one example. The largest and most significant amount of state support for the petrochemical industry and for the state as a whole is a more rational approach to decision-making.

Participating in dozens of Sabantuys

To conclude our meeting, what are your impressions of Tatarstan? What do you know about it?

I have been to the republic many times. I know different Tatarstan and have participated in dozens of Sabantuys (laughs). I think that this is one of the subjects of the Russian Federation that I understand very well. I probably know better only Tyumen Oblast — taking into account that I am registered in the city of Tobolsk — and, of course, Moscow.

How comfortable is Tatarstan for the development of the petrochemical industry?

I think that Tatarstan is one of the best regions in the country for the development of any industry. The achievements of TAIF, the petrochemical and oil refining complexes of the republic are a very vivid example of this.