Everybody has his own priorities

Roman YemychevInterview with Roman Yemychev, Head of the Gazprom Neft Petrochemicals and LPG Department

Sibirskaya Neft Magazine

— What drives your plans to develop your petrochemicals business?

— First of all, we look at our resources and capabilities, our feedstock reserves that can be used for subsequent processing into petrochemicals products. There are two components: feedstock within the reach of our company but beyond the bounds of our refineries, and feedstock within the bounds of our refineries. The math is simple: if we have enough own feedstock to produce at least 60 percent of our oil products, then the project is rated as worthy of a detailed economic analysis.

Secondly, the project must be feasible and meet the company’s strategy.

In my view, any oil company must share similar principles. However, each company’s feedstock reserves are unique. Besides, each company must prioritize strategically in its own way.

However, if we look at the classic European configuration, refineries there mainly produce monomers, e.g. ethylene and propylene. Further refining is normally taken over by joint ventures. And a collection of such joint ventures producing polyethylene, polypropylene, polyurethane, etc. will grow up around a powerful pyrolysis production facility.

— You said that Gazprom Neft also has feedstock outside the bounds of its refining facilities. What exactly is this feedstock, and how is the company using it?

— It’s the products of processing associated petroleum gas, which includes natural gas liquids or gas, stable gas condensate, and, naturally, oil. We don’t have that much of feedstock beyond the bounds of our refineries. Associated petroleum gas is processed by joint ventures, primarily JV’s with Sibur. All of the natural gas liquids obtained are to be processed under those long-term contracts.

— What are the refineries’ petrochemical reserves?

— At present, all of the propane-propylene fraction obtained at the Moscow Refinery is fully processed into polypropylene. We have made the decision to invest in Poliom, LLC, of the Titan Group, a refinery in Omsk that processes propane-propylene fraction into polypropylene. Accordingly, the propane-propylene fraction obtained at the Omsk Refinery will be efficiently utilized. Additionally, we have made the decision to undertake a joint project with Sibur for the processing of paraxylene into terephthalic acid. We also intend to convert benzene into caprolactam. If all of these projects materialize, we will essentially have achieved the goals indicated in our strategy for the development of Gazprom Neft’s petrochemicals business.

— Will it be the end of your internal reserves for petrochemicals?

— Not entirely. All of our refineries are still making straight-run gasoline, however, not as much as before our isomerization facilities had come on stream. What is left at the Omsk Refinery is the refined oil which is not a certifiable product, nor a commodity item. It comes from the aromatics production complex, where there are quite a lot of fractions that could be used for further processing. But as a whole, that volume is insufficient to implement an efficient project on the basis of this feedstock only. That’s why we intend to involve the volumes of naphtha and liquefied petroleum gas produced by the Omsk Refinery in an MTBE production project at one of the sites in the Omsk area, which will also include utilization of feedstock from SeverEnergia. If the project is successful, then approximately 600,000 — 700,000 tons of feedstock will be generated at the Omsk hub, which can then be processed into products with a higher added value, specifically, for example, high-density polyethylene and polypropylene.

— What would the timeframe look like for such a complex?

— These are projects slated for 2013 — 2016. From our point of view, they will achieve the goal of efficient utilization and good investment of funds and resources, both external and internal to the company.

— How do these projects interrelate with the soon-to-be-commissioned large polypropylene production facility at Sibur’s Tobolsk site? Is there demand on the market for that much polypropylene?

— Here we need to look not only at the polypropylene market, but at the market for propane-propylene fraction. The reconstruction and construction of new catalytic cracking units currently underway at several Russian refineries will inevitably lead to the production of larger volumes of propane-propylene fraction. It’s clear that in the next couple of years, sales of propane-propylene fraction will be less profitable than they are now.

Although we are currently selling propane-propylene fraction at a premium relative to the netback from propane exports, it is not difficult to see that soon we won’t see this happening anymore. Moreover, it is possible that the sales price will turn out to be less than the netback. The question is how much less. There already have been such situations. As a whole, the propane-propylene fraction market is currently balanced, but as soon as there will be a slight surplus—as there was, for example, in January 2011—the value of propane-propylene fraction drops to the price level of technical propane/butane mix.

That is, as the production of propane-propylene fraction grows, we expect its price to drop to the level of netback from liquefied petroleum gas, and possibly even lower. But the production of liquefied petroleum gas in Russia will double by 2012, to about 18 — 20 million tons, and out of the 10 million tons we’re currently producing, we’re exporting about 2.5 million, while domestic processing is not really growing. So, the orienting of liquefied petroleum gas toward export will continue, while the overall netback from liquefied petroleum gas will drop, and we will inevitably find that the current sales price of propane-propylene fraction will drop.

As for polypropylene, the profit margin on the domestic market relative to export netback is 50 — 55 percent. That level has been reached over the past three or four years. We think that once the Tobolsk facility and other production facilities (e.g. Poliom) are commissioned, the profit margin on the domestic market will drop to a comfortable level of no more than 10 — 15 — 20 percent for general grades.

That is, we really expect that the sales prices of feedstock and finished products will drop. But, first of all, we calculate our investment projects based on conservative scenarios in terms of market conditions. Second, we expect that prices for polypropylene on world markets will grow.

Thus, the expected drop in propane-propylene fraction prices, and the growth of polypropylene prices on the world market will maintain our profit margin on the propane-propylene fraction — polypropylene production chain.

As a whole, based on the development of both feedstock markets and polypropylene markets, the outlook for the processing of propane-propylene fraction into polypropylene is optimistic, despite the pessimistic outlook for the size and profit margin of the domestic polypropylene market relative to export.

— That is, summing up and returning to the choice of priorities for the contemporary Russian oil industry, the development of petrochemicals means utilizing feedstock and obtaining additional income through partnering with related companies, and not having the company create its own fully-fledged production facilities, just as Lukoil and Tatneft did in their time?

— I will tell you that, for us, the answer is yes. Gazprom Neft sees opportunities to earn additional money on the petrochemicals market, but we do not wish to expand our competencies in areas where we can take advantage of our partners’ competencies. We provide the raw materials component, we conduct financial control, and we receive additional profits. I think that this is the tendency for all of Russia’s oil industry.