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 KAZAKHSTAN International Business Magazine №5, 2011
 Our petrochemical challenge. The help comes from abroad

Our petrochemical challenge. The help comes from abroad

Sergey Smirnov

Being one of the key sectors of the economy during the Soviet time, Kazakhstan's petrochemical industry lost its former positions in a short time. Yet by the mid-1990s, the production of polystyrene, synthetic fibers and other products was practically ceased in the country. Despite the fact that the production of hydrocarbons steadily increases, Kazakhstan has not yet succeeded in creating a modern petrochemical industry.

During the years of independence, the level of oil production in Kazakhstan grew by almost 4 times: from 20 million tenge in 1994 to 79.5 million tenge in 2010. Yet until 2020, the Republic plans to increase this figure up to 140 million tenge and to be a part of the top ten exporters of hydrocarbons. It would seem that in such circumstances, petrochemistry is where to be developed. However, there is still no full technological cycle of hydrocarbon deep processing to produce the products with high added value. About 90 % of the total crude oil production is exported and existing oil and gas refineries are working to produce the fuels only. In fact, not a single ton of product of the total raw material processed by refineries and gas treatment plants, is produced for petrochemical plants.

Orientation of existing refineries to produce the fuels only, results in the fact that the gas containing up to 30 % hydrogen and 1 % light olefins (ethylene, propylene, butylene and isobutylene) is burned in the flares and this gas can be used as a monomer feedstock for the petrochemical industry. As a result the needs of the Republic in plastics, rubber and other petrochemical products today are met mainly by imports, annual rate, according to expert estimates, more than $2 billion.

Until 1990 there were about 20 large enterprises of the chemical and petrochemical industry in Kazakhstan. The basis of the domestic petrochemical industry were Aktau plastics plant, Polypropylene plant in Atyrau, Kostanay chemical fiber  plant, Shymkent tire factory, Karaganda’s rubber production, etc. Today only some units of them are remained.

‘Paper’ petrochemistry

It seems that the issues associated with implementation of oil and gas projects in world markets are more important for the government today than the problems of deep processing of hydrocarbon in domestic enterprises. And despite the fact that access to new redistribution could provide greater economic stability for the country, as world prices for chemical products are not subject to such a dramatic fall, as in the case of hydrocarbons.

Surely, something has been done and is being done. Thus, in order to ensure the diversification of the economy and the introduction of high-tech industries by petrochemical international experts and companies Nexant, Exxon Mobil, Shell, and Basell in Kazakhstan in due time cost-efficiency studies of their creation were carried out. Polyethylene and polypropylene production of various grades, styrene and polystyrene, ethylene glycol and ethyl benzene, as well as other products (a total of over 20 items) was recognized most beneficial to our country from an economic point of view.

In this regard, the Government at different times developed and approved a number of different documents, including a program of reconstruction and development of the chemical and petrochemical industries for 2001–2002, the gas industry development program for 2004-2010, the program of development of petrochemical industry in 2004–2010 and 2008–2013. Specific areas of development of deep processing of hydrocarbon for the production of basics as well as products with high added value were identified in each case.

So, just as a result of the implementation of the development plan of the petrochemical industry in 2004–2010, the following results were expected to be obtained this year:

• a domestic base of raw materials for petrochemical plants on the basis of modernization and technological upgrading of existing oil and gas processing facilities with the creation of new petrochemical complexes as follow-up of targeted investment projects of construction was established;

• a complete infrastructure of the petrochemical industry was developed on the basis of modernization and technological upgrading of existing enterprises and creation of new industries, technologies, equipment and materials.

In turn, the Program on Scientific and Technological Development of petrochemical and oil and gas industry was implemented in order to create an innovative technology for complex processing of hydrocarbons, producing a new generation of catalysts and agents for the deep processing of heavy hydrocarbon and production of commodity petrochemicals, including ion exchange resins, membranes, synthetic fibers, and other new materials and composite formulas.

What is the situation today? In Kazakhstan, there are still no comprehensive facilities for deep processing of hydrocarbons, and the country is unable to supply itself with its own petrochemical products. Moreover, the country annually loses not only the potential profit from the sale of products with high added value, but also the raw material. For example, burningin TPP furnaces millions m3 of associated gas from the Tengiz field will not even earn $20 000, whereas the dehydrogenation of 200 tons of ethane, derived from the same volume of gas, with subsequent production of polyethylene and polystyrene plastics could bring $110 000.

It should also be noted that all petrochemical processes are based on the use of catalysts. Therefore, along with the organization of petrochemical plants, it is necessary to create enterprises for the production of catalysts, especially considering that Kazakhstan has its own school of catalysis, as well as the appropriate basis for their production: huge deposits of natural clays and zeolites, intermediate products, produced at a number of existing enterprises. However, domestic catalysts are not to be relied on.

Meanwhile, all those years in other countries, especially Asian (China, Iran, Malaysia, Singapore), there was a strong growth in construction and commissioning of petrochemical plants. Even those countries which don’t have enough resources and modern technology, managed to develop the petrochemical industry.

We emphasize that the active development of the petrochemical industry, observed in other countries, has not been an obstacle to the establishment of such industries in Kazakhstan since the global demand for low density and high density polyethylene, polypropylene, butadiene rubber, polyvinyl chloride, high-quality lubricants, various complexes of aromatic hydrocarbons and other similar products is constantly growing. The country also borders such large consumers of petrochemical products, such as China and Russia.

Forced break-though

In 2010, the baton from previous programs and plans was picked up by the governmental program of forced industrial and innovative development (FIID). Its implementation should (once again) to radically change the situation in the oil refining industry of the country.

For example, the FIID program runs the project of reconstruction and modernization of the Atyrau oil refinery, where, in addition to improvement of the quality of petroleum products (passing to production of Euro-4 gasoline), the construction of a complex for production of aromatic hydrocarbons (CAH): benzene (133 000 t/y) and para-xylene (496 000 t/year) was planned. These connections has the market demand as a raw material for production of a wide range of petrochemical products, including colorants, pesticides and phenol-formaldehyde resin. The first phase of the project involves construction of catalytic reforming unit with a block for the extractive distillation with benzene release. The second stageprovides the construction of a complex for production of aromatic hydrocarbons by Eluxyl (release of paraxylene), XyMax (isomerization of xylenes) and TransPlus (transalkylation of toluene) units.

Selecting a contractor for this project from Kazakhstan took about two years. This is understandable: after all, benzene and paraxylene are dangerous carcinogens. According to experts, the equipment for this production by one third to half price is the cost of pollution prevention. However, our officials seem to decide to make the economies  on the environmental issues with the price of $3.4 billion proposed by Marubeni consortium from Japan (previously carried out the reconstruction on Atyrau oil refinery), seemed too high to the tender  organizers. As a result, the Chinese company won with three times cheaper price estimated for the project: first amount proposed was $1.099 billion, and after the relevant negotiations it was eventually reduced to $1.04 billion. But the problem with the old operating plant with outdated technical equipment create the additional risks for the environment.

The project is financed by the loans of credit line from the Export Import Bank of China. Contract for its construction on the "turnkey" basis was obtained by a Chinese company – Sinopec Engineering. In April of this year, the Caspian Construction Company Ltd, which is a subcontractor for Sinopec Engineering, has started to work on the piling for foundations of process equipment installations for the complex of aromatic hydrocarbon production.

Regarding the participation of Kazakh companies in the project, it is planned to purchase the equipment worth $58.155 million (16 % of the total cost of purchased equipment), materials – at $52.342 million (18 %) and works (services) – to $111.865 million (29 %) from the local enterprises. Putting the complex into operation is expected by 2013. All products will be send by the Chinese partners, to their homeland, until the costs are recovered.

Chinese investors will participate in the project of road asphalt production plant in Aktau plastics plant. Today, the main producers of bitumen in the country are Pavlodar Petrochemical Plant and JSC Asphalt, but the capacity of these enterprises is not enough and a significant amount of the products have to be imported from outside. In particular, the import comes from neighboring Russia to Kazakhstan with annual volume exceeding 300 thousand tonnes of bitumen.

The new project costing about $300 million is in process of fulfillment by the NC KazMunayGas together with the CITIC Group, Chinese investment company. Upon the completion, it is expected to ensure the deep processing of up to 1 million tons per year of heavy oil from Karazhanbas with production of minimum 400 tons of bitumen of BND 60/90, BND 90/130 grades and polymer-modified bitumen. Under the loan agreement, 80 % of the project shall be financed by the Bank of China. The first production is planned for the first quarter of 2012. It should be noted out that the development of oil refining project for Karazhanbas oil and bitumen production was started in Aktau by the Kazakhstan's national oil company back in 2005.

Today, within the frameworks of the FIID, the country's only plant for production of motor oils – HILL Corporation LLP was built in Shymkent. However, the capacities of this company (70 000 tons per year) cover the needs in lubricants in the Republic only for 17 %. Actually, given all these conditions, we continue to finance the foreign producers. The same situation is not only with the motor oils.

Help will come from Celestial Empire?

In Atyrau region the saga with construction of integrated chemical complex for production of basic petrochemical products continues. For the first time this project was presented during III Kazakhstan Petrochemical Conference, held in Almaty in April 2005. The complex consists of two gas processing plants, three plants for production of olefins and two polymerization plants and it will become the most powerful enterprise for production of the polymers in the CIS. Annually, it will produce 800 000 tonnes of polyethylene and 500,000 tonnes of polypropylene.

Back in 2005, it was planned that the Kazakh products will go to the markets of the CIS, China, Western Europe, Turkey and South Asia. For every dollar invested the expected revenue was at least $300. The overall amount of capital investment planned at the level of $6 billion. The famous Western firms developed the feasibility study and in 2007 a special economic zone "National industrial petrochemical technology park" with a 787.4 hectare area was organized near Atyrau under the presidential decree. The initiators of the project proponents announced that the construction of complex will be completed by December 2010 and its start-up is expected in June 2011. Unfortunately it never came true. The project has a difficult story: changes in structure of investors, frustrated by the terms of construction. The money was the problem too – the Development Bank of Kazakhstan caused the difficulties with financing the construction of gas and chemical complex, which is extremely important for the country.

Now its start-up is postponed until 2014. Construction of infrastructure facilities and production plants of the first phase of the project is financed by a credit line from the Export-Import Bank of China in amount of $1.3 billion. The contract for construction of the first phase of the project on the "turnkey" basis, was concluded with the same Sinopec Engineering. In addition to investing, the arrival of the Chinese investor shall resolve the problem of sales. According to the contract with Sinopec Engineering, this company agrees to buy the entire output of the plant.

We have to admit that the Chinese investment revived remarkably the domestic petrochemistry. In this connection it is worth to remind about the project of renovation of the Kostanay chemical fiber plant (which produced heavy-duty thread for the needs of aerospace and nuclear industries of the USSR), which in 2004 was purchased by JSC Kazneftekhim. It was declared that after equipping the plant with modern high-technology equipment, the Kazkhimvolokno LLP, established in the plant,  will launch a competitive import-substituting products – ARNIKX, the meta-armid thread (brand new product produced by the plant during the Soviet times), which complies with the international quality standards.

In 2007, Karim Massimov, Prime Minister said that the project of Kazkhimvolokno is one of the priority and promised the governmental support for its implementation. The Development Bank of Kazakhstan "pumped" hundreds of millions of tenge into the project. More than 3 billion tenge was borrowed through the bonds. It was reported that by September 1, 2008, the company invested nearly 2.8 billion tenge or 94.7 % of the total project price. In 2009, the Kazkhimvolokno LLP had to reach the full capacity. However, the results of such activity were sad: in the last days of May 2011, the inter-district specialized economic court of Kostanay region declared as a bankrupt the Kazkhimvolokno LLP, a heir of the giant chemical industry of the USSR.

The judicial final of the ambitious project to revive the unique chemical production is another example of how to spend billions and skip any liability. For example the same size chemical plant was initiated by Chinese starting almost from scratch and it was launched in only 9 months! Maybe they should be called to Kostanay? It seems that without them, the local petrochemical industry, will remain lifeless and too challenging, despite the efforts to create various development programs shown by the officials.  

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More Oil Soon  Editorial 
Kazakhstani Сontent in Procurement of Subsoil Users  Yerbolat Yerkebulanov, Dariya Saginova 
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· 2001 №1/2  №3/4  №5/6
· 2000 №1  №2  №3

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