Gazprom Neft PR service:
Interview with CEO of Gazpromneft Bitumen Materials LLC, Dmitry Orlov
— Dmitry Viktorovich, why did you set up a separate subsidiary for the bitumen business?
— In fact, Gazprom Neft set up the bitumen business as an independent enterprise in 2008, when the appropriate management structure was put in place, and from which the bitumen materials department was formed in 2011. Results for 2011 through 2014 showed growth in production volumes, product range, and the geographic scope of our sales. We acquired two assets — in Ryazan and in Kazakhstan — and entered into a joint venture, Gazpromneft—TOTAL PMB, through which we began production of a premium product, PMB G-way Styrelf. By 2014 the bitumen business had become recognised as a serious standalone business, delivering on all key competencies. Rosneft had previously established a similar subsidiary, and now the same issue is being looked into at LUKoil.
— How is the Russian market developing, overall?
— The bitumen market has grown by between five and 12 percent a year since 2010, with production in 2014 reaching six million tonnes. Road building materials account for 80 percent of this, with the remainder accounted for by construction and roofing bitumens. There is a growing demand for quality materials. In this respect, our country is following experience in the European Union (EU) and the United States. Russia has specific requirements regarding bitumen for toll roads, to meet approved standards. New technical regulation introduced under the Customs Union on February 15 (“Road Safety”, TR TC 014/2011) has seen the development of a range of intergovernmental standards for bitumens. Realising the importance of these processes, we are proactive in staying ahead of the game here, in improving product quality.
The emergence of professional players in this market backed by oil companies was just a matter of time. The market is becoming more complex in management terms. Our company is currently developing new financial instruments which allow us to engage with clients more effectively. We have to stay one step ahead, to predict what the market is going to be like in 10 to 15 years’ time. We have adopted a development strategy to 2025 which is predicated upon us becoming a leader in technology.
— And how will you prove such technological leadership?
— The road construction market operates under a complex mechanism, in which it’s difficult for innovations to take root. Our company establishes relationships with market participants in such a way as to act as a facilitator for cutting-edge technologies. We use various industry forums to engage in dialogue with road builders, including conferences. One of these is “Bitumens and PMBs: Key Questions”, which we organise together with SIBUR, with the support of the Federal Highways Agency and The State Company Russian Highways (Avtodor). Delegates include representatives from government agencies, contracting agents, design centres, contractors, and oil refineries. The conference provides a forum for discussion of the key issues and current challenges facing the industry.
Our company makes products, and collates data, which confirm the expediency and economic viability of using cutting-edge materials. For example, in using PMBs to build several sections of road in Omsk in 2011. Now, three years on, we can compare the performance of those sections built with modified vis-à-vis traditional bitumens.
— And how did it turn out?
— Well, for example, after three years of usage the average tread depth on those sections built with traditional bitumen was 7 mm, whereas on those sections built with modified bitumens it was 4.5 mm — from which we can deduce that the use of modern binders can, at a minimum, increase the useful life of road coverings by at least 30 percent. Which is, probably, the most significant indicator as far as motorists are concerned. And this information is passed on to potential partners.
Modified bitumens are now being used in the construction of a new highway between Moscow and St Petersburg. We are working closely with several major contractors working on the construction of this road.
— You mentioned that Russia produces six million tonnes of bitumens per year: what’s your market share?
— Our market share in 2013 was 29 percent, and in 2014 — 30 percent. In absolute terms, 1.8 million tonnes. We increased production of polymer-modified bitumens (PMBs) by 60 percent in 2014, to 42,000 tonnes. Five years ago the proportion of PMBs was negligible, whereas now it accounts for three percent of total consumption. In Europe this figure is 15 percent, and in Alaska — more than 50 percent. That’s something to aim for.
— For 50 percent, as in Alaska?
— A great many roads are not subject to high traffic loads, and if a road isn’t subject to heavy traffic then there’s not much point in using a more expensive and complex modified bitumen. Traditional bitumens are good enough. The use of PMBs is justified on roads subject to high-intensity traffic, and to severe climatic conditions.
— What is currently holding back market development in PMBs?
— I can understand the caution shown by road builders. Five years ago there was no market in PMBs whereas now, if anything, there’s a problem with an abundance of manufacturers. The total number of factories in Russia is about 50, but the quality of the finished products from these varies considerably. Mixing bitumen (asphalt) with a polymer and a plasticizer doesn’t, necessarily, always result in a good quality PMB. In order for the mix to be absolutely right you have to make the polymer work. Producers with sufficient experience, who undertake ongoing quality control — there’s not more than five or six in Russia. I have to stress, the market in modified bitumens is pretty new, and the rules are only just starting to be developed.
—And are there any problems with government regulation?
— There are, but the main problem arises in project evaluation, which is undertaken with the aim of reducing costs. Reviews are undertaken on the basis of construction costs, not on the subsequent costs of using the road. At which point, cutting-edge, modern materials are not included in a project — and these, while increasing costs initially, significantly reduce them over the course of the lifecycle. Added to which, mistakes are made in calculating project costs when there’s a chance to reduce the cost of materials. In which case a contractor, having won the tender, might agree to use cheaper materials, thereby introducing changes to project specifications. Now, under a cooperation agreement between the Federal Highways Agency, SIBUR and Gazprom Neft, a working group has been established, the main objective of which is to ensure systematic problem solving in the application of economically viable materials and technical specifications. It is essential that we move over to lifecycle contracts, and prioritise ownership costs.
— You already have bitumen production facilities (including modified-bitumen facilities) in Moscow and Omsk. So why did you buy assets in Ryazan and Kazakhstan?
— The Ryazan factory is a very interesting asset, with a longstanding history, a professional workforce, and smooth manufacturing operations; it was one of the first in the country to begin production of polymer-bitumen binders. In acquiring this factory we have further strengthened our own production capacity, and will now develop a research and development (R&D) centre there. This year we plan to start refitting the laboratory at the Ryazan plant with equipment for testing not just bitumens and PMBs, but also asphalt. We’ll be able to assess the impact of our binders on the final product — asphalt — allowing us to support our partners in making recommendations to road building companies on the application of binders and in the selection of asphalt formulations, taking into account the specific conditions under which they will be used. On which basis, we are working with TOTAL at our Moscow Factory to utilise our partners’ scientific capabilities to gain an insight into cutting-edge international experience in PMBs.
— Do you plan to integrate the Ryazan R&D centre into any internal structure within the company?
— We plan to use this as a platform on which to establish a centre of excellence, bringing together all R&D within the bitumen business. This new competency centre will handle all kinds of bitumen materials — polymers, traditional bitumens, bitumen emulsions, derivatives (adhesives, sealants, primers), and the by-products obtained in using these. We’re starting work this year, and will be increasing staffing levels.
— And will you be increasing your collaboration with SIBUR?
— Of course. Only last year we found several new opportunities for engagement. We’re currently looking at supplying components for the production of corrosion-resistant materials to protect steel pipelines (of various diameters and under various degrees of pressure) to be used in the oil and gas industry.
— And are you going to increase production volumes?
—By 2025 our enterprise should increase total bitumen production to 2.5 million tonnes per year, of which about
— What’s your involvement in import substitution?
— We’ve now almost completely transferred to domestic production of SBS polymers. Similarly, for emulsifiers. Domestic components are cheaper than their foreign equivalents, and logistically it’s far more convenient. We’ve made good progress in exporting. We’ve got serious plans. The Ryazan factory is focused on European markets (predominantly in Eastern Europe), the Omsk Refinery on China, Mongolia, India and Vietnam. Earlier this year we supplied products to the Czech Republic and Italy. In February — to Mongolia. We expect to conclude contracts with China and Turkey in the first half of this year.
And we’re not talking just about the premium market — we haven’t forgotten about traditional bitumens. The production costs of complex products from our facilities are lower, making them more competitive on international markets. And what’s important is that there’s demand for them. We see export potential for polymer-bitumens in 2015 in the order of tens of thousands of tonnes. As regards traditional bitumens, take note: the majority of all transportation in Russia is done by road. A restraining factor in exporting products arises from the absence of the necessary fleet.
— Why was the Kazakhstan facility acquired?
— We have our Omsk facility, of course, which has an excellent raw materials base; the bitumens facility at this factory is overloaded (it has capacity to produce 500,000 tonnes per year). But we have an excess of asphaltum oil (“tar oil”) that could be processed for consumption, locally. So — the entire market in Kazakhstan is 600,000 tonnes. And road construction is in active development there. So we decided to localise production. In early 2013 Gazprom Neft acquired LLP Bitumniy Zavod, which has a production capacity of 180,000 per year. It is located in southern Kazakhstan, close to Shymkent. Today Gazpromneft Bitumen Materials is the only Russian company selling bitumen materials on the Kazakh market. On the basis of this year’s results, we’d like to have a
— Do you plan to buy more capacity?
— We have a range of projects — in Russia. Our main market is here. I hope that, as a result of the joint efforts of our company and Russia’s road builders, Russia will have good, high-quality roads. And that the road-building industry will get the modern construction materials it deserves.
Interview by Alexander Frolvov