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Chem Systems Seminars
Annual European Conference 2003
Positioning for Improvement: Exploiting Uncertainty
12-13 February 2003, London, U.K.
OPPORTUNITIES IN
RUSSIA AND CIS
V.M.Sokolsky
LUKOIL-Neftekhim
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Current size of the Russian chemical industry
Personnel – 842,000 people
Sales– about 380 billion rubles (2002)
Using official exchange rate, it is $12 billion worth of
chemicals, or 0.6 per cent of the global chemical output
(country rank 20)
Making allowance for purchasing power of currencies and
using a step-up factor, it is about $32 billion, or 1.8 per
cent of the global output (country rank 16)
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Index of chemical production in Russia,
1990-2002
1,10
1,00
0,90
0,80
0,70
0,60
0,50
0,40
0,30
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
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tons
Production of organic chemicals in Russia,
1990-2002
3500
3250
3000
2750
2500
2250
2000
1750
1500
1250
1000
750
500
250
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
methanol
ethylene
benzene
plastics
synthetic rubber
chemical fibres
paints
detergents
2001 *2002
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tons
Production of inorganic chemicals in Russia,
1990-2002
17000
16000
15000
14000
13000
12000
11000
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
1990 1991
soda ash
1992 1993
caustic soda
1994 1995
1996 1997 1998
sulphuric acid
1999 2000
ammonia
2001 *2002
fertilizers
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Sectoral breakdown of chemicals in Russia
Russia
Paints and varnishes
3%
Soaps and
detergents
3%
Dyestuf f s
2%
Other chemicals
1%
Inorganic chemicals
19%
Perf umery and
cosmetics
13%
Pharmaceuticals
10%
Synthetic rubber
12%
Chemical f ibers
3%
Organic chemicals
7%
Synthetic resins and
plastics
6%
Mineral f ertilisers
21%
Over 2/3 of the output is represented by basic chemicals, fertilisers
and commodity polymers. Russia’s chemical industry structurally
supplements that of West Europe, carrying a huge synergy potential
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Russia’s foreign trade in chemicals
• Main export items: methanol, ammonia, mineral fertilisers,
caprolactam, PVC, polyethylene, synthetic rubber
• Main import items: engineering plastics, fibers, dyestuffs, paints,
pharmaceuticals, perfumery and cosmetics
• Export share in production: large-tonnage polymers – 30-37,
methanol – 45, fertilisers – 81.
• Import share in consumption: all plastics – 19, paints – 20, dyestuffs
– 50, fibers – 56, drugs, perfumery and cosmetics – up to 60-70
• Russia’s positive balance of trade in chemicals stands at $2 billion a
year. With all products internationally classified as chemicals, the
balance is negative – from $1 billion to $3 billion (by various sources)
• Russia’s main foreign trade partners are West European countries
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Russia’s chemical exports, 1994-2002 (1)
800
700
tons
600
500
400
300
200
100
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
Soda ash
Caustic soda
Caprolactam
Synthetic resins and plastics
Synthetic rubber
Chemical fibers
Detergents
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Russia’s chemical exports, 1994-2002 (2)
12000
11000
tons
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
1994
1995
1996
1997
Mineral fertilisers
1998
1999
Ammonia
2000
2001
2002
Methanol
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tons
Russia’s chemical imports, 1994-2002
650
600
550
500
450
400
350
300
250
200
150
100
50
0
1994
1995
1996
1997
1998
1999
2000
Synthetic resins and plastics
Plastic goods
Paints
Detergents
Pesticides
Synthetic rubber
2001
2002
Chemical fibers
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Regional distribution of the Russian
chemical industry
The European Russia can be split into 4 regions of
chemical industry, I.e. Volga-Urals super-region
(56% of the national output) plus Central (21%),
Northern (6%) and Southern regions (2%)
The Asian Russia has 2 main chemical regions, i.e.
Western (10%) and Eastern Siberia (5%). Note, the
Russian Far East is almost void of chemicals.
Each of the above regions has a number of chemical
clusters within its borders.
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Major players in the industry
• Petrochemical subsidiaries of oil & gas companies –
SIBUR (Gazprom) and LUKOIL-Neftekhim (LUKOIL)
• Individual petrochemical plants within oil & gas
companies - YuKOS, Surgut, TNK, Tatneft, Itera, etc.
• Agrochemical cartels and associations –
Agrokhimholding, Fosagro, Evrokhim, etc.
• Individual producers of petchems, fertilisers and other
basic chemicals – Plastkard, TOAZ, etc.
• Individual producers of fine chemicals – incl
subsidiaries of foreign companies
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The role of state in the industry
Non-privatized enterprises account for only 1 per cent in the total
number of plants and less than 5 per cent in their output. However,
the role of the state in chemicals is much higher since:
• Dozens of chemical plants are controlled by the state as their main
shareholder (Dzerzhinsk Korund, Berezniki Soda, Sterlitamak
Kaustik, Volgograd Khimprom, Cherepovets Azot, etc.)
• Over 100 chemical plants are controlled by the state-owned holdings
– SIBUR, Mezhregiongas, etc. (Tomsk, Tobolsk and other plants)
• Almost all petrochemical plants in Tatarstan and Bashkiria are
controlled by the governments of these republics
The share of the state controlled enterprises in the Russian chemicals
is probably 35-40 per cent
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Investment activity of Russian and foreign
companies, 1990-2002
Since 1990, the Russian companies have built about 20 new petchem
plants with a combined capacity of over 2 million tpa (incl benzene,
methanol, MTBE, LABS, VCM and PP units)
Foreign companies preferred purchasing existing facilities in marketoriented sectors with a quick payback - such as detergents,
pharmaceuticals, perfumery and cosmetics, tyres, etc.
As a result, the Russian detergent industry is now dominated by
Procter & Gamble, Henkel and Unilever with plants in Tula (30% of
the national output), Saratov, St Petersburg and Perm regions
Pharma, cosmetic and perfumery industries also abound in foreign
firms - Searle, ICN, Gedeon Richter, Unilever and others with plants
in Moscow, St Petersburg, Chelyabinsk, Kursk and other regions
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Some new petrochemical projects
Projects to be completed until 2005 - EB (230), styrene
(200), PS (150), PTA (230), PET (80), polyester fibers (162)
Projects to be completed after 2005 include methanol
(1,400), MTBE (132), styrene (160), ethylene and PE (each
up to over 1,000) and PP (around 1,000)
To make the list of projects longer and more realistic, the
country badly needs foreign direct investments,
particularly from the West
Funds in the West are known to be more readily available
and cheaper than in Russia. Also, these often bring in
advanced technology and high managerial skills.
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Russia’s strengths and opportunities –
feedstocks, energy and labour (2002)
Crude oil reserves – from 7 to 14 billion tons, production –
379 million tons, prices - $100-120 per ton
Refined products capacity – 282 million tpa, production 178
million ton, naphtha price - $160-190 per ton
Natural gas reserves – 60 trillion m3 (1/3 of the world total),
production – 588 billion m3, prices – $23.5 per 1,000 m3
Electricity: capacity – 215,000 MWt, production – 890 billion
kwt-h, price - 2 US cents per kwt-h
Labour: monthly salary in chemicals of about $100 (vs $250
in fuel industry)
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Russia’s strengths and opportunities –
market size and potential
• Population of about 150 million people, with GDP
amounting to $400-450 billion
• Economic growth in 1999-2002 - above global average (in
2002 – 4.2%) with good outlook for further growth
• Chemical consumption of up to $35-40 billion with high
growth potential - due to low per capita consumption
• Good links with other FSU countries (with population of
150 million people and GDP of $300 billion)
• Old-established links with CEE countries (with
population of 130 million people and GDP of $750 billion)
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Russia’s strengths and opportunities –
political and economic factors
• Increased political stability
• Market character of the national economy
• Prevalence of private sector and high level of
competiton in chemicals and other industries
• Continued commitment to the policy of reforms (tax,
banking, etc.)
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Russia’s strengths and opportunities –
taxes and customs
Russia’s taxes are among world’s lowest:
•
•
•
•
•
•
•
Corporate income tax – 24% (reduced from 35%)
Personal income tax – 13% (cut from 12-35%)
Social security tax - 16-36% (cut from 38%)
Transport tax - insignificance (cut from 1%)
Sales tax of 5% - to be axed soon
Property tax – 2% (unchanged)
VAT – 20% (unchanged)
Russia’s admission to WTO will remove custom barriers
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Russia’s weaknesses & threats
• Low technical level of the existing plants - old processes,
small and highly worn units, overmanning
• Capital mobilization problems - expensive loans, import
duties on equipment, etc.
• Institutional problems – state monopolies, regulated
prices, customs and duties, etc.
• Limited size of the domestic market at present
• Long distances separating key producing areas from the
main feedstock sources and markets
• Poor infrastructure for delivery of feedstocks & products
• The lack of information about the plants and markets
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What to develop?
• Aromatic chain. Exportable surplus of 250-300
ktpa. High domestic demand and growing
import of derivatives incl PET, PS, etc.
• Olefin chain. Cheap feedstocks (NGL and
naphtha). High demand and growing import of
derivatives incl PE, PP and PS.
• Methanol chain. High demand for derivatives
(MTBE potential stands at 3 million tpa). New
promising outlets incl MTO.
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Where to develop?
Non-freezing seaports - particularly oil and gas terminals (St
Petersburg, Kaliningrad, Novorossiysk, Odessa)
Major petro- and gas-chemical centres in Russia
(Budyonnovsk, Saratov, Volgograd, Perm, Nizhnekamsk),
Ukraine (Kalush, Gorlovka) and Belarus (Novopolotsk)
Existing and potential gas processing centres in the
European Russia (Astrakhan, Budyonnovsk, Cherepovets,
Murmansk) and in Western Siberia (Surgut, Tobolsk, etc.)
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With whom to develop?
In petrochemicals,
LUKOIL-Neftekhim is a partner
of the first choice
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LUKOIL-Neftekhim status and structure
LUKOIL-Neftekhim is LUKOIL’s petrochemical subsidiary which
currently operates the following companies:
• Stavrolen (Budyonnovsk) – a producer of olefins, benzene, VAM
and HDPE
• Saratovorgsintez (Saratov) – a producer of ACN, PAN fibres,
phenol, acetone and MMA
• LUKOR (Kalush) – a producer of chlorine, caustic soda, olefins,
aromatics, VCM and HDPE
• VARS (Ventspils) – ACN terminal
• Stavrochem (Budapest) and LUKOIL Chemical (Antwerp) - trading
companies
Petrochemical part of Neftokhim (Burgas) is also expected to be
operated by LUKOIL-Neftekhim
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Some LUKOIL-Neftekhim locations
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LUKOIL-Neftekhim’s range of products
• Olefins, aromatics and other basic
petrochemicals - ethylene, propylene, C4
stream, benzene, phenol, acetone
• Monomers - VCM, acrylonitrile, MMA, VAM
• Polymers - HDPE, PAN fibers
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LUKOIL-Neftekhim capacities for
some products, 000 tpa
Ethylene
Propylene
Benzene
Polyethylene
VCM
ACN
PAN fibers
MMA
1,050
450
215
500
370
180
37
28
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LUKOIL-Neftekhim size of operations
• Total annual sales: over $500 million (excluding
chemical sales of Neftokhim)
• Annual total chemical production capacity: around
•
3 million tons
• Annual total sales of chemicals: 2 million tons
• Monthly shipments of chemicals: over 100,000
metric tons to more than 50 countries
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LUKOIL-Neftekhim sales policy
Domestic market is of primary importance due to:
1) better access, 2) higher prices, 3) faster growth
LUKOIL-Neftekhim share in the domestic market:
HDPE - 40%, ACN - 95%, PAN fibres - 30%, phenol - 20%
Yet, because of limitations of the domestic market, about
50 per cent of the output is exported
In future, LUKOIL-Neftekhim will retain its primary
orientation to the domestic market coupled with high
export sales and exposure to global factors
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LUKOIL-Neftekhim strategy
Its core is an evolutionary development with a
focus on:
• Close linkage with LUKOIL
• Modernisation and debottlenecking
• Improving feedstock supply and marketing
systems
• Expansion in existing and new product
segments
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Linkage with LUKOIL
• Material flows. LUKOIL-Neftekhim draws most of its feedstocks
from LUKOIL and ships some chemicals to the latter. With good
feedstock supply, LUKOIL-Neftekhim has a strong competitive
advantage over other companies. It also eases LUKOIL’s
dependence on fuel markets.
• Financial flows. For development projects, LUKOIL-Neftekhim can
use both its own resources and financial assistance from LUKOIL.
Being a profitable company, it has been continuously contributing
to LUKOIL’s total profits.
• Corporate culture. LUKOIL-Neftekhim is a part of LUKOIL Group of
companies developing a corporate culture similar to that of the
largest vertically integrated Western companies.
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Improvements in feedstock supply system
Introducing lighter feedstocks at Budyonnovsk and Kalush
Using new sources of crude oil and refined products :
• CPC oil pipeline running from the Northern Caspian - with a
possibility of building a new refinery in the south of Russia.
• LUKOIL’s sources of supply in the Black Sea & Mediterranean
area incl Romania, Iraq, Egypt, etc.
Using own sources of natural gas making allowance for:
• Availability of ethane-rich gas reserves in the Northern
Caspian, in proximity to Budyonnovsk site and export markets
• Expected gas production of up to 10 billion m3 a year
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Improvements in the marketing system
Better market research
Broader trading practice
• developing a system incorporating existing and planned
storage and distribution centres in Europe
• trading through dealers and own trading companies
• getting direct access to customers
Improvements in quality and transportation of products
• improving range of products and grades
• certifying products and quality control systems by
international standards
• elaborating new efficient delivery schemes
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Expansion in existing and new segments
Expansion in existing product segments - by building/acquiring new
assets. Projects under study include new crackers and polyolefin
plants at Budyonnovsk, Kalush and Saratov.
The aim is to consolidate LUKOIL-Neftekhim’s market share and
exploit its competitive advantages in feedstocks.
Expansion in new product segments, aimed at increasing vertical
integration with a focus on the following projects:
At Budyonnovsk – polypropylene (100 ktpa) and HDPE gas pipes
At Saratov – sodium cyanide (20 ktpa) and PMMA (25 ktpa)
At Kalush – PVC (150 ktpa) and polypropylene (100 ktpa)
The aim is to add value to chemicals produced and increase flexibility
under the changing market conditions
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Summary
LUKOIL-Neftekhim accounts for 3% of LUKOIL total sales with
petchems share in sales of world oil majors varying from 10% to
25%. Hence, the company has a high growth potential.
LUKOIL-Neftekhim is a company intending to operate on a global
scale abiding by international standards of corporate
management.
LUKOIL-Neftekhim intends to cooperate with other companies,
particularly with leaders in technology and other areas
Possible areas of cooperation are joint production of chemicals,
feedstock supply and marketing arrangements.
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THANK YOU
FOR
YOUR ATTENTION!
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