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“We are creating a market for modern bituminous materials”

Dmitry Orlov Interview with Dmitry Orlov, head of the Gazprom Neft Bituminous Materials Department

Sibirskaya Neft Magazine (ссылка откроется в новом окне)

— Not too long ago, bitumen for oil companies was a byproduct of refining. Today, bitumen production is elevating to a fully-fledged market segment. What is the cause of this transformation?

— The main factor is the state’s growing attention to road construction. We are seeing the emergence of road funds and special programs, which result in major projects. Over the past four years, the Russian market has grown from 4 to 5 million tons, and about 5.6 million tons will be produced in 2012. Out of those 5.6 million tons, 5 million are for domestic consumption, while the rest are for export. Last year saw a 14 percent growth. This year, we are forecasting about 6 -7 percent growth.

— In other words, you’re saying that a market is being formed by administrative tools?

— About 90 percent of bitumen production is accounted for by road grades. The state is the main customer for roads. So, it all makes sense. Furthermore, the expansion of the Federal Highway Agency’s role as the originator of ideas in this field entails the development of a culture of road construction. We see a growing competition among contractors, including competition of technologies. Major corporations that are currently performing a rather large volume of work are seeking to take advantage of advanced methods and materials. This is also facilitated by a newly created partnership mechanism between the state and the private sector in the construction of toll roads on the basis of the Russian Highways State Company. In the same sense, we can speak about the introduction of lifecycle contracts under which builders undertake obligations to service roads over a period not of years, but of decades.

— How similar is the development of the Russian bitumen market to global patterns?

— It is, but we lag behind by about 20-30 years. The best practices in interaction between the road builders and oil industry can be seen in the example of Shell, which is scarcely involved in any ordinary sales of bitumen. With a powerful R & D capacity at its disposal, the company is creating new formulas not only for bitumen, but for asphalt concrete as well, offering road builders solutions for various external conditions.

— Are those principles applicable in Russia?

— Yes, as a whole. Maybe not quite yet, but pretty soon we’ll be putting on the table Strategy 2025 for approval, and we must already understand what our business is going to look like in five, ten, fifteen years from now. Getting scientists on board is very important to us, too. We must be able to show statistics to road builders on the application of cutting edge materials and persuade them to use them.

— You can’t just gather such statistics during the course of a year…

— Of course, we understand that we are at the beginning of the road, but we’ll have to traverse this road in any case. In 2011, we conducted our first experiment in applying polymer-modified bitumen binders to two road sections in Omsk Oblast and in Altai, and we can already make initial conclusions on the advantages of using modified bitumen over traditional bitumen. Of course, we need to collect more data, because it is extremely difficult just to digitize the data for a whole year. At the end of three years, we will already have powerful arguments.

— Do road constructors need those arguments and new technologies?

— Sales volumes are a good indicator of their interest. While we produced about a thousand tons of polymer-modified bitumen binders at the Omsk facility in 2011, we produced nearly ten times as much in 2012. We have reached our full capacity for production of polymer-modified bitumen binders. In Moscow, we are producing polymer-modified bitumen binders using our own components and following the processing procedure at the facilities of one of the asphalt concrete plants. This way, we are analyzing the Moscow market and preparing the Moscow Oil Refinery to begin production of modified bitumen.

— So, with the Omsk polymer-modified bitumen binder unit fully engaged, there isn’t any spare capacity left? That is, you are not planning any further development of this business in the region?

— During the 2012 season (i.e. from April to November—Sibirskaya Neft), we had to take it up to design capacity, which we did. However, it became clear from our talking to the consumers that even in the winter time there is a need for bituminous materials, which are traditionally seasonal products. Road builders are prepared to put aside reserves, and by using special 1-cubic-meter containers called clovertainers to package the bitumen, we can guarantee a longer storage life for our products. That’s why we are currently putting in heat insulation at the Omsk unit to make it year-round operational.

— We have only spoken about production facilities in Omsk and Moscow, but the company has one more plant, YANOS in Yaroslavl. Is a bitumen program under way there as well?

— В Ярославле есть битумная установка, и в этом году мы в регионе вместе с партнерами из ТНК-ВР достаточно серьезно продвинулись с точки зрения объема продаж. На этапе просчета и подбора технических решений находится и проект организации выпуска ПБВ на ЯНОСе.

There is a bitumen unit in Yaroslavl, and this year we and our partners from TNK-BP have made considerable progress in terms of sales volumes. A project to start production of polymer-modified bitumen binders at YANOS is currently in the analysis and engineering concept selection stage. In general, the creation of advanced materials production facilities is not an episode, but a system, a tendency for all of Russia. At present, there is a certain synergy between the state and business. The country needs good roads, and, wherever it can, Russian Highways indicates the state’s interest in applying advanced materials in road construction. And oil companies are essentially creating this market. At present, the share of polymer-modified bitumen binders does not exceed 2 percent of the total volume of bitumen sales on the domestic Russian market. In Europe, that figure averages around 10 percent, and it’s 15 percent in the United States, while in the coldest state, Alaska, polymer-modified bitumen binder application accounts for about 48 percent of sales.

— Has that lag arisen because the state was previously uninterested in using advanced materials?

— No, the opposite is true. The Russian Federal Highway Agency issued a decree mandating the use of polymer-modified bitumen binders in the upper layer of motor roads back in 1995. But there was no unity of efforts. The road builders simply said, “Yes, sir”, and began adding polymers to bitumen at their asphalt concrete plants as best they could. The roads did not get any better from that modification, and polymer-modified bitumen binders were largely discredited in Russia.

We are now releasing polymer-modified bitumen binders onto the market one after the other, with bitumen units at our refineries (which allows us to choose feedstock) and guaranteed stability of the products’ quality. At the same time, we are actively interacting with consumers. For example, last year, it took us three attempts to fully meet all the quality requirements for polymer-modified bitumen binders set by Altai road constructors, however, this year, with lessons learnt, we have already moved from experiments to real-life road building. We built our relationship with our Novosibirsk partners this year in the same way. In my view, there is nothing more important than long-term, well-founded relations with end consumers.

— New technologies are the future, but the basis of this business still lies in the production of standard bitumen, e.g., road, building, and roofing bitumen. Are new products appearing in this line? Or is the market pretty happy with what it’s getting now?

— As I already mentioned, about 90 percent of production volumes are accounted for by road bitumen. But, of course, we are making building and roofing grades as well. Over the past two years, we managed to reduce significantly the chain of middlemen between us and large-scale roofing enterprises, the end users of our products, by building direct, understandable relationships. I will not hide that the existing bitumen range does not always satisfy them, but since this is low-tonnage production, it is rather complicated to manufacture a product ideally suited to each individual consumer. But we are moving towards such a versatility, and are discussing the possibility of creating a base grade that will be common for all enterprises.

As for road bitumens, Gazprom Neft has taken part in the development of a new standard that will replace the obsolete GOST 222-45-90. A result of joint work between our company and the Russian Federal Highway Agency has been the issue of a preliminary standard. After the trial period of that standard is over, it will become effective as a fully-fledged new, advanced standard.

A year ago, the state company Russian Highways came up with an internal standard of its own with requirements for bitumens used in constructing toll roads. We plan to issue the first improved BNDU 60 and BNDU 85 grade bitumen under that standard in December. We will be the first oil company to do that.

Polymer-modified bitumen binders are essentially exclusive products produced for specific customers. Of course, it sells at a higher price. But once the road builders have finally realized that using advanced materials is expensive but efficient, the oil industry will be there to provide those materials. And Gazprom Neft is prepared to be the flagship in that process.