Petrochemistry is the Cornerstone of the Kazakh Economy
Sergey Smirnov, director of the Promising Projects Department, the KATEK limited liability partnership
World Trends and Kazakhstan's Potential
Almost all long-term forecasts show the growth rate of consumption petrochemical products outstripping production so it is not surprising that investors are now paying greater attention to this sector. According to expert estimates, up to 100 major petrochemical plants to produce ethylene, 400 plants to produce plastics and 200 plants to produce semi-products should be set up to meet world demand over the next 15 years. Current revenue from the global petrochemical industry is estimated at $1,600bn a year, whereas this figure is expected to grow to $15,000bn-$20,000bn by 2050. According to the USA's Chemical Market Associates Inc. company, which studies the global chemical market, the current global consumption of polystyrene alone is estimated at 14.4 million tonnes a year, of which 3.5 million tonnes is consumed by eastern and western Europe.
Forecasts made by the company Nexant Inc., have show that the world ethylene consumption is to grow from the current 100 million tonnes to 160 million tonnes a year over the next decade. Demand for polyethylene is to grow from 60 million tonnes to 100 million tonnes and for polypropylene from 40 million tonnes to 60 million tonnes a year. Thus, the average annual rate of increase in demand for ethylene (a basic petrochemical product) is expected to be 5-5.5%, whereas the growth rate of demand for oil, according to the EIA, is expected to be only 1.7% a year (including about 1% a year in rich countries).
Petrochemistry is developing rapidly in Persian Gulf countries. Some estimates suggest that exports of liquid petrochemical products from this region will grow from 17 million tonnes to 50 million tonnes between 2004 and 2009, i.e. by 200%. The region is expected to produce about 20% of the world's total ethylene by 2010. A leading petrochemical company in the Middle East, Sabic, which is the world's third largest producer of polyethylene and fourth largest producer of other polymers, intends to invest over $8bn in expanding its production, and this will enable it to increase its output to 60 million tonnes a year.
Our neighbours – China, Russia and Iran – are currently expanding production and building new petrochemical facilities. Thus, between 2005 and 2013 the Iranian petrochemical sector alone will attract about $7.5bn in investment. The country intends to build four plants to produce olefin, aromatics and methanol.
China has signed agreements with major foreign companies to build a number of petrochemical plants on its territory. A $2.8bn petrochemical plant is to be built in Xinjiang and a $4.3bn plant with a capacity of 2.3 million tonnes of ethylene a year in Guangdong; a $2.65bn integrated petrochemical plant is being commissioned in Yangtze province.
Russia's LUKoil intends to build a $1.5bn major plant to produce and process ethylene. The plant is to process associated gas from oil fields in the northern sector of the Caspian Sea. It should be noted that the Saratovorgsintez petrochemical enterprise (a subsidiary of the LUKoil-Neftekhim company) is already supplying 80% of its output to foreign countries, including Iran.
Uzbekistan is also upgrading its existing plants and building new enterprises to process and produce polymers. These are the Shurtan Polyethylene Plant, the Namagan Cellulose Ester Plant, the Fergana Cellulose Plant and Fergana Polyamide Plant, and the Navoi plant to produce the synthetic fibre of nitrone.
However, the rapid development of petrochemistry in neighbouring countries is not an obstacle to developing similar production lines in Kazakhstan because the global demand for polyethylene of low and high density, polypropylene, butadiene rubber, polyvinylchloride, high-quality lubricants, various aromatic hydrocarbons and other products is growing steadily. In addition, Kazakhstan borders with China, which is a major consumer of petrochemical products. Our northern neighbour's – Russia's – market is not yet fully saturated either.
Of course, at the moment our country does not have a very developed petrochemical industry so it is losing not only potential profits from selling finished products but the raw materials too. For example, a great amount of associated gas is being now flared off in Kazakhstan; this gas could be processed efficiently. At the same time, domestic petrochemical and chemical enterprises are only satisfying 20% of the domestic demand. And this is quite natural because until recently priority has been given to developing the oil sector, and that is why our oil refineries produced mainly fuel oil and diesel fuel but heavy oil that needs to undergo deep processing was supplied to foreign countries.
Foreign companies, which were active in privatising the Kazakh extractive sector, have not shown an interest in petrochemistry, and that is why the bulk of direct foreign investment was placed in extracting oil (46%). However, this situation is changing radically: growth in oil and gas output and the forthcoming development of fields in the Caspian shelf are creating the conditions to set up powerful oil refineries and petrochemical plants which will be able not only to fully satisfy domestic demand but also export their products.
The Domestic Petrochemistry Reality…
In the mid-1990s, the Kazakh petrochemical sector, which was made up of the Aktau Plastics Plant, the Atyrau Polypropylene Plant, the Shymkent Tyre Plant, Karaganda technical rubber enterprises and others, had practically suspended operations. This was mainly due to the fact that it had been set up and developed as an intermediate link in the integrated petrochemical sector of the Soviet Union. Our enterprises received raw materials such as styrene, propylene and synthetic rubber from Russia and processed it to produce finished products (tyres, technical rubber products) which were designed for former Soviet republics.
The break-up of economic relations produced the result that only a few out of the 20 major enterprises in the chemical and petrochemical sectors operating in Kazakhstan until 1990 remained operational. This means that the bulk of the country's demand for chemical products, plastics and rubber is covered by imports which are estimated to total over $2bn. Thus, we can say that privatisation led not to a revival in petrochemical production lines but produced the opposite result.
Some form of revival in the sector only started in 2002-2003 when a number of petrochemical enterprises such as Saranrezinotekhnika, Karagandarezinotekhnika and InterKomShina (the Shymkent Tyre Plant) resumed their operations. The Kostanay Chemical Fibre Plant, bought by Kazneftekhim in 2004, should also be mentioned here. After the plant has been equipped with hi-tech equipment, Kazkhimvolokno, which was set up as a result of this, will produce competitive products which meet international standards in order to provide a substitute for imports.
The main causes which hamper the development of petrochemistry in our country are that the existing oil refineries, gas-processing plants and petrochemical enterprises are worn out and their technologies are obsolete; the transport infrastructure is not developed to supply raw materials and ship finished products; significant investment is needed for projects and production lines need large capacities to ensure profitability; payback periods are long and the domestic market is small.
At the moment, creating an integrated technological chain to produce value-added petrochemical products mainly depends on resuming the Aktau Plastics Plant and the Atyrau Polypropylene Plant. Domestic investor ATOLL became the owner of these enterprises in 2004; the company was set up by SAT&Co and KazMunaiGaz Exploration and Production on a parity basis (the world's major producer of polypropylene and modified polyolefin, the European company Basell International Holdings BV, is also to become a shareholder soon). About 1.5 billion tenge has already been invested in these enterprises.
In September 2005, the Aktau plant commissioned its first production line to produce general-purpose polystyrene with a capacity of about 55 tonnes a day. This enterprise is expected to produce over 100,000 tonnes of polystyrene a year, of which 12% is to be supplied to the domestic market (in particular, to little plants to produce disposable crockery), about 30-40% is to be exported to Russia and other CIS countries and the rest to China. However, at the moment, the plant is again idle. The reason is that its polymer output does not make it feasible. The owners of the enterprise see the solution as setting up additional production lines to make value-added products.
As for the polypropylene plant in Atyrau, the investor decided not to revive obsolete technological lines, but instead to set up an integrated petrochemical plant with an annual capacity of 800,000 tonnes of polyethylene and 400,000 tonnes of polypropylene from the enterprise. This project was presented at the third Kazakh Petrochemical Conference held in Almaty on 26 April 2006. The plant is estimated to cost $3.5bn, of which 70% is to be attracted from a syndicate of international banks and 30% is to be funded by SAT&Co, Basell and KazMunaiGaz Exploration and Production in line with their shares in the project. The plant is designed to carry out the deep processing of hydrocarbon gas from the Tengiz and Kashagan fields. Ethane is to be extracted from marketable gas from these fields and it will be pumped through special gas pipelines from Kulsary and Karabatan to the plant. A wide range of polyethylene and polystyrene products are to be produced from this raw material. The plant will be designed in 2006 and its construction will start in the third quarter of 2007. Under a memorandum, Basell will sell the entire output.
… and the Component of Optimism
At a government meeting in 2005, Kazakh Prime Minister Danial Akhmetov promised the state's "direct and indirect" assistance to investors that develop petrochemistry. In September 2005, the government adopted the General Plan to Develop the Petrochemical Industry and a “roadmap” to set up world-class petrochemical plants in the country over the next eight to 10 years. These ambitious plans are based on a study carried out by Nexant Ltd. and KATEK. These projects are expected to turn Kazakhstan from a supplier of raw materials to a self-sufficient petrochemical power. Launching production lines will create about 50,000-60,000 new jobs and make it possible to receive $1bn in revenue a year. In addition, according to estimates made by Nexant, about $7bn is expected to be invested under this programme over the next 15 years. Such long terms and large investment are determined by the many old problems which exist in the sector. In particular, the construction of only one ethylene facility without creating the necessary infrastructure needs about $700m-800m. That is why developing the national petrochemical industry is not an easy investment mission.
Of 12 contracts concluded in the petrochemical sector in Kazakhstan, six projects worth $7.9m were completed by 1 November 2005. The rest, totalling $81.5m, are still being carried out. The Kazakh government believes that "Kazakh content in petrochemical projects should not be less than 50%".
The Law On Investment envisages a number of tax incentives to attract investment in developing non-extractive sectors. In addition, the country's Tax Code was amended by Article 119-1 which eases corporate tax on investment projects to set up petrochemical enterprises. This provision is in force within five years of commissioning a facility. In particular, foreign investors are to be exempted from corporate tax if within no more than four years they build "a petrochemical facility" worth no less than 5 million monthly calculation indicators set by the Law On Central Budget in a given fiscal year (about $30m) in Kazakhstan.
Projects should correspond to the priority activities specified by a government resolution in order to receive investment incentives. In the petrochemical sector this includes producing petroleum products such as lubricants, fuel bitumen and paraffin. In the chemical sector this includes producing polyethylene, polypropylene, polystyrene, silicon products, paints, lacquers and rubber products.
Creating comprehensive infrastructure in the petrochemical sector will be carried out by attracting foreign and domestic investment, private loans received under government guarantees and enterprises' own funds. In issuing licences to explore and extract hydrocarbons, priority is to be given to those local and foreign companies that are also expected to invest in the deep processing of hydrocarbons. Changes have taken place in the system of monitoring too. In the past investors that received incentives had to submit up to five types of reporting forms a year: this figure has since been cut to two. In addition, in the past an auditing report had to be submitted every year, but now this should only be done when an investment project is completed.
Where to Build and What to Produce
An analysis of the world demand for petrochemical products shows that setting up basic petrochemical production lines to produce polyethylene, polypropylene, styrene and polystyrene, ethylene glycol and benzene will be the most feasible for Kazakhstan; moreover, a consumer is literally nearby – today China's petrochemical plants only satisfy 50% of the domestic demand for polystyrene and propylene. This was possibly, one of the reasons that the Chinese CNPC company, which bought PetroKazakhstan Inc., to announce in late March that it had launched a long-term development plan for the Shymkent oil refinery. The first stage of upgrading the refinery envisages increasing the share of “light” petroleum products from the current 60% to over 80%. The second stage is to start producing polypropylene, benzene and other petrochemical products. In general, the plan envisages setting up an up-to-date enterprise from the refinery to produce a wide range of petrochemical products.
Many experts agree that the most promising aspect for developing the sector is to process gas. However, local specialists draw attention to the fact that setting up a number of petrochemical plants in the country may significantly damage the environment, which is why they intend to defend national interests by choosing technology that will meet the maximum environmental requirements. At the same time, stress should not be placed on the large-scale production of certain components but on the fully comprehensive processing of oil and gas.
An analysis of all the aspects of logistics, marketing and the resource base shows that it is feasible to set up oil and gas-processing plants near the Tengiz, Karachaganak and Kashagan fields. This solves the problem of transporting raw material long distances. In addition, significant amounts of processed gas can meet the energy and household needs of consumers in western Kazakhstan.
KazMunaiGaz Exploration and Production and Agip KCO have already signed a memorandum. The document says that dry gas (a minimum of 3 billion cu m) will be supplied for processing into polymer products at a petrochemical plant in West Kazakhstan Oblast. A similar document on supplying 6 billion cu m of gas was signed by Tengizchevroil and ATOLL (the latter was renamed Kazakhstan Petrochemical Industries on 17 April 2006).
LUKoil and KazMunaiGaz have set up a joint group to develop the Caspian Gas and Chemical Plant at an estimated cost of $3.5bn and with a capacity of 14 billion cu m of gas a year. They intend to use 5.5 billion cu m of the total gas processed in gas chemistry and the rest to produce marketable methane. The Caspian Gas and Chemical Plant is expected to consist of three independent facilities, in particular a gas-processing plant worth about $500m that LUKoil plans to set up in Russia and an olefin plant (worth $1bn) and methanol-olefin facility (about $2bn) that are to be built in Kazakhstan.
Talks have also been held with LG, Shell and Basell. The Koreans, for example, offered to develop aromatics which does not exist in Kazakhstan at the moment.
Another project is the National Industrial Petrochemical Park special economic zone which is expected to be set up from the Atyrau Polypropylene Plant to host gas chemistry plants producing products that need a high degree of processing.
Common Sense Advice
The best prospect for developing the Kazakh petrochemistry is the country's own production lines to produce synthetic rubber for technical rubber and tyre industries, chemical fibres, various composites and polymer materials. Creating a system of technologically-linked production lines will make it possible to produce hi-tech and knowledge-intensive products, and this will accelerate the development of other real sectors of the economy. Moreover, KazMunaiGaz's involvement is to help set up an integrated technological chain – exploration-extraction-transporting-processing-petrochemistry-trade.
Of course, it is hard to enter global markets, and that is why it makes no sense to give preference to particular companies. However, the state should ensure that the raw-material base is developed and it supplies necessary amounts of ethane, and that it preserves affordable prices for gas. This is clear: the price for gas will predetermine the level of profitability of future plants. In addition, domestic oil refineries and petrochemical enterprises need not only technological modernisation but their own logistics chains too. For example, transporting through the Caspian Sea to Iran increased the costs of products by a third and by rail to Novorossiysk by almost a half. A set of tax measures should also be adopted to boost attractiveness of processing gas and oil through transferring tax burden from the production sphere to the trading of petroleum products and offering tax incentives to Kazakh technologists and scientists involved in modernising oil refineries and developing petrochemistry and so on.
We should bear in mind that the time factor plays a significant role in reviving the domestic petrochemistry. We could simply miss the chance if we continue with the current pace of its development. Kazakhstan has to define a strategy (diversification or specialisation) and within the short term start eliminating the growing gap between hydrocarbon output and the output of petroleum products produced by the oil refining, chemical and petrochemical sectors in the country.
As mentioned above, revenue grows rapidly by increasing the degree of processing hydrocarbons. For example, burning 1 million cu m of associated gas from the Tengiz field in furnaces of thermal and heating plants will produce power and heat worth no more than $20,000, whereas degrading 200 tonnes of ethane from it to produce polyethylene and polystyrene plastics is worth $110,000. Thus, petrochemistry, if developed rapidly, may significantly increase the volume of GDP. However, doing this involves demanding that the extracting companies should be "deprived" of part of their hydrocarbons exports.
Finally, the priority in developing the Kazakh petrochemical sector should not be building a "web" of export pipelines but the structural overhaul of the existing oil refineries and the setting up of petrochemical enterprises to replace hydrocarbons exports with high-quality products from the deep processing of hydrocarbons.
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