Russia embarks on petchems push
Moscow sets ambitious targets to capitalise on feedstock abundance
Russia has lagged behind other oil and gas producers in developing its petrochemical industry, despite its formidable oil and gas resources, commanding only a 1pc share of global petchems supply.
This is set to change, though, as Russia's largest firms prepare to launch a raft of new projects over the next few years, aiming to capitalise on the sector's projected rapid demand growth. Eager to provide the economy with a greater downstream hedge against volatile crude and gas prices, Moscow is also planning new measures to spur development, with a target of doubling production to around 20mn t/yr by 2030.
The centre piece in Russia's petchems drive is ZapSibNefteKhim, a $9.5bn project slated to start up later this year in the western Siberian town of Tobolsk. The plant, developed by Russian petchems giant Sibur, will turn out 1.5mn t/yr of ethylene, adding to Russia's 3mn t/yr of current supply, along with 500,000t/yr of propylene. Like many of Russia's upcoming petrochemical ventures, ZapSibNefteKhim will run on ethane feedstock, supplied by Russia's biggest independent gas producer, Novatek, whose majority shareholder Leonid Mikhelson also controls a 48.5pc stake in Sibur.
Sibur is yet to disclose the exact date of ZapSibNefteKhim's start-up, although its facilities are already complete and sales contracts have been finalised.
ZapSibNefteKhim's entry into the market will herald the beginning of a rapid expansion in Russia's petrochemical industry. Projects already greenlit include a 420,000t/yr ethylene plant in Novy Urengoy, also in western Siberia, which state-controlled gas firm Gazprom aims to commission next year. Downstream group Nizhnekamskneftekhim (NKNC) plans to bring on stream another 600,000t/yr of capacity in Tatarstan in 2022, the same year when mid-sized eastern Siberian oil producer Irkutsk Oil (INK) is preparing to launch a 500,000t/yr complex.
Several more plants are in the works but are yet to reach a final investment decision (FID). Sibur has another project in the eastern Amur region, slated to produce 1.5mn t/yr of ethylene starting in either 2021 or 2022, while Gazprom is targeting a 2022 launch for a 1mn t/yr facility in Salavat in Bashkortostan.
But not all of Russia's largest producers have made their petchems plans work. State-controlled oil firm Rosneft, which has traditionally focused on upstream activities, made petchems expansion a core aim in its five-year strategy outlined in 2017. In its latest earnings call, however, the company acknowledged that its flagship Eastern Petroleum project on Russia's Pacific Ocean shore had been shelved indefinitely. The group had searched for investment partners without success, and had difficulty working out a means of supplying the plant with raw materials.
Like other hydrocarbon-focused economies, Russia is looking to push into petchems amid uncertain prospects for global oil demand. In its latest world energy outlook, BP forecasts that global crude oil and condensate demand will rise by less than 3mn bl/d between now and 2040, due to a rapid growth in the use of electric cars, among other factors.
"You see a lot of oil and gas companies looking to focus more on the petrochemical side because the general belief is that this is where demand growth is going to be strongest in the next few years," says Kostantsa Rangelova, energy analyst at Austria-based consultancy JBC Energy.
In Russia's case, another immediate goal is import substitution, which Moscow has set out as a strategic priority amid strained international relations. Petrochemical products such as olefins, polyolefins, plastics and elastomers play a crucial role as raw materials in domestic manufacturing, but the bulk of these goods are currently brought in from overseas because of limited local supply.
Many of the upcoming projects in Russia's more densely populated western regions will initially cater for the domestic market. But, as more local demand is satisfied, they will begin shifting their focus towards exports.
ZapSibNefteKhim is different, however, and will export 60pc of its production right from the start. Similarly, ventures in more remote areas like eastern Siberia and the Far East are designed primarily to serve China, South Korea and other Asia-Pacific markets, as local demand is scarce.
Russia's cheap and ample supply of feedstock should give it an edge over competitors in export markets. The cash cost of ZapNefteKhim's ethylene will not only be lower than average costs in northeast Asia and western Europe—markets that lack their own raw materials—but also in major oil and gas producing countries like the Middle East and the US, according to consultancy IHS Markit.
Petrochemicals have taken a while to get off the ground in Russia, given the country's traditional problems with logistics. "The country is just too huge, and it needs infrastructure to carry these products to markets," says Dora Polgar, oil analyst at London-based consultancy FGE.
The government has sought to overcome this difficulty by focusing on the development of large so-called clusters for petchems production across the country, with each cluster having its own raw material base, processing capability and infrastructure to transport finished products to market.
Russia's testing investment climate has also been a hindrance in the past. "The administrative, political and economic environment has not been as favourable for petrochemical development in Russia as in the US," says Rangelova.
Hoping to improve matters, the Russian energy ministry in March approved a new roadmap for developing petchems up until 2025, aimed at unlocking an extra $40bn in investments and creating some 18,000 jobs. Russia is hoping to emulate Saudi Arabia's example, where petchems now generate 14pc of GDP thanks to decades of government support. In contrast, the sector only accounts for 1.5pc of Russian GDP.
Under the roadmap, petrochemical developers will receive various fiscal incentives as well as regulatory support. Among the key measures outlined is the introduction of negative excise duty on domestic use of ethane and liquefied petroleum gas (LPG), another petrochemical feedstock, effectively subsidising their cost. Moscow already applies the subsidy to local consumption of naphtha—the traditional feedstock of choice in Russia's petchems industry.
Russian petrochemical developers are increasingly favouring ethane, which serve as the primary raw material at all six of the projects slated to start up by 2022. Ethane, produced as a by-product of gas processing rather than the oil-derived naphtha, and LPG, is currently cheaper thanks to a rapid growth in gas production in western Siberia.
But concerns remain that Moscow could backtrack on this support at a later date, putting projects at risk.
"Russia has a history of changing its mind on policies at the last minute, or after they have implemented them, so there is still a lot of uncertainty on the political side that makes a lot of these projects uncertain," says Rangelova.
Source: Construction Boxscore Database
Moscow will need to stick to its commitments and do what it can to galvanise development, or Russian producers could find themselves arriving too late on the international market. "We do see demand in the petrochemical sector continuing to grow but Russia has definitely not managed to catch the big wave of initial growth as the US was able to do," says Rangelova. "There is potentially some further market share for Russia to gain, but it will get more and more difficult for them to find a decent place in the global market."
Petrochemical producers' margins in Asia are already under a lot of pressure because of a flood of cheap supplies coming out of the US, according to JBC. And the Chinese market—which several of Russia's new projects are geared towards—may not offer a lot of headroom for Russian imports.
China is looking to expand its own ethylene production to 46mn t/yr within the next decade, up from 18mn t/yr at present. As such, Chinese buyers have shown more interest in Russia's raw ethane rather than its ethylene.