Crude Oil into Polymers
Against the background of quite vague prospects to increase the export capacity of crude oil, the Kazakh oil-gas petrochemical and gas chemical sectors, in contrast, have a good chance to break into the lead: profit from the sale of their products is at least four times the revenues generated from the sale of hydrocarbons. Moreover, the global demand for polystyrene, polyethylene, polypropylene, butadiene rubber, and other basic petrochemical products is increasing steadily.
In the capacity of a “stepdaughter”
Over the years of independence, oil production in Kazakhstan has increased by more than 4 times from 20 million tonnes in 1994 to 81.8 million tonnes in 2013. This made it possible that Kazakhstan declared itself as a key player in the global oil and gas market. With this, the extensive industry’s growth, focused on gaining a quick profit from the export of raw materials, hindered us for a long time from thinking about switching to production of hydrocarbon products with the higher added value.
Moreover, already in the mid-90s the operation of the Aktau plastics plant, Atyrau polypropylene plant, Shymkent tire plant, a number of Karaganda enterprises producing rubber products, and other production forming the basis of Kazakhstan's petrochemical industry, was practically stopped. This was caused mainly by the fact that the industry was created and developed as a chain of the common petrochemical production & technological complex of the USSR. Our enterprises engaged in additional processing of styrene, propylene and synthetic rubber supplied from Russia, and produced finished products of them in the form of tires and rubber products for consumers in other Soviet republics. The break of industrial and economic relations had led to a situation that of the 20 major chemical and petrochemical productions of the industry, operating in Kazakhstan before 1990, only a few remained in operation.
Some activity of public policy in this sector was recorded only in 2000. Since then, the government has repeatedly developed and approved programs of recovery and development of the chemical and petrochemical industries, international experts have been attracted to carry out various studies and make recommendations. The range of domestic petrochemical products had been for a long time limited to mainly distillates, liquefied gases and oil bitumen, produced by the Pavlodar Petrochemical Plant (PPCP) and Almaty JSC "Asphaltobeton."
The situation changed in September 2009, when the Pavlodar-based Company Neftehim LTD launched into operation the first production of methyl tertiary butyl ether (MTBE), as well as propylene and polypropylene. Liquefied gas supplied by PPCP became the raw material for the new production. The total annual capacity of the plant, 90% of products of which are exported today, amounted to 20 thousand tonnes of MTBE, 35 thousand tonnes of propylene, and 30 thousand tonnes of polypropylene. In 2013, Neftehim launched the production of finished goods – polypropylene bags for packing granular products.
PAIID gave some impetus to the development of the domestic petrochemical industry. Within its framework, in 2010 at the plant of the company High Industrial Lubricants & Liquids Corporation the production of high-quality lubricants, including those for the automotive industry, started. The production capacity of company’s Almaty-based enterprise amounted to 100 thousand tonnes of products per year.
At the very end of 2013 an enterprise was created on the basis of the Aktau plastics plant to carry out deep processing of heavy oil from the Karazhanbas oilfield in the amount of to 1 million tonnes. The project implemented with the participation of Kazakhstan Petrochemical Industries (KPI) and the Chinese corporation CITIC Group is designed for the production of 400 thousand tonnes of oxidized and 120 thousand tonnes of modified road bitumen, 15 thousand tonnes of gasoline fraction and 230 thousand tonnes of kerosene and diesel fraction, as well as 220 thousand tonnes of vacuum gas oil.
The finite processing of polymer raw material as a sector is actively developing. 46 large and medium-sized enterprises, operating in the sector of production of rubber and plastic products: plastic pipes, various types of insulation, sandwich panels, plastic packaging, and so on, were established in Kazakhstan. The largest manufacturers of processing lines in the former CIS countries are Saranrezinotechnika and Karagandarezinotekhnika.
The performance here is good: in the year 2012 alone, the share of Kazakhstan's petrochemical industry in the total output of chemical products reached 10.8%, an increase of 3.9% compared to 2008. With this, the gross value added rose from 3.5 billion to 14.6 billion tenge, while labor productivity increased by 5.8 times, and investment in fixed assets by 27 times, reaching 48.7 billion tenge.
Along with that, analysis of customs statistics shows that local processors still almost entirely depend on foreign supplies of polymers, in particular, polyethylene and polyvinylchloride. According to experts, the domestic consumption of basic petrochemical products amounts to about 72 billion tenge, and more than 70% of this volume is imported today.
It turns out that the Kazakh petrochemical sector, the same as in Soviet times, does not have its own key element – the raw produce. This is despite the fact that the polymer industry is currently the fastest growing sector of the global economy. Polymer consumption increases annually by 5%–6%, and the global trade in it (in terms of money circulation) is getting close to the performance of the iron and steel metallurgy. Volumes of production of plastics have already exceeded volumes of output of traditional construction materials such as steel, glass, ceramics and others.
It is exactly what the high export potential of the petrochemical sector is based on. According to marketing research, the most popular basic petrochemical products are polypropylene and polyethylene. According to experts, the global demand for polypropylene will increase in 2030 to 115 million tonnes, which is almost twice as much, compared with the forecast for 2015 (60 million tonnes). A similar pattern is expected for polyethylene – the demand for it will increase in 2025 to 137 million tonnes versus 71 million tonnes in 2011. With this, the highest market growth is expected in Asia, Eastern and Western Europe, the Middle East and China.
To increase reserves
The government promises to finally correct the misbalance while implementing the second five-year plan of the industrial and innovative development program. According to a recently approved program, the sector of basic petrochemical products production became one of the 14 priority sectors, and thus, its development will be monitored with a special predilection. The following indicators are outlined as targets for the industry for 2019: the growth of gross value added by over 19.1 times compared to 2012, the growth of employment by 2.6 thousand people, the growth of labor productivity by 6 times, and the growth of the export volume in terms of money by over 41 times. Over this period of time major investment projects have to be implemented with a total investment of more than $ 1.2 trillion tenge, aimed mainly at the production of polymer products, and items made of them.
First of all we are talking about completion of the project of construction of an integrated gas chemical complex (IGCC) in the Atyrau region which was first presented at the 3rd Kazakhstan Petrochemical Conference in Almaty in April 2005. At that time the project initiators stated that the construction of the complex will be completed in December 2010, and commissioning in June 2011. However, the said deadlines were not met. The shareholders and investors changed several times during the project implementation, and the deadlines of construction and financing were regularly delayed.
The structure of the project, as in the current form, is divided into two phases, with a different operator for each phase. The first phase, implemented by KPI, involves the setting up of a polypropylene production. Its controlling shareholder (51%) is LLP The United Chemical Company (UCC), the latter is 100% owned by Samruk-Kazyna. JSC Almeks Plus Firm acquired in December last year the remaining 49%, owned by Timur Kulibayev. The Karabatan station, located 40 km to the north-east of Atyrau, was selected as the one to place the future complex. This is the new industrial site that is being developed within the framework of the Kashagan offshore oilfield development project. It involves plants for treatment of oil, gas purification from sulfur, and gas injection into the reservoir. This will allow in the future using Kashagan gas as a raw material.
The first phase of IGCC involves the construction of installations for propane dehydrogenation and polypropylene production with a capacity of 500 thousand tonnes a year. Lummus Technology was chosen in April 2011 as the licensor of both installations. This company also received an order for basic engineering on these sites. In March of the same year, during the visit of Kazakhstan’s President to China, KPI and the Export-Import Bank of China signed an agreement to open a $1.38 billion credit line. In June last year, Sinopec Engineering won an EPC-contract for the creation of installations for dehydrogenation and polymerization. This company will also act as an off-taker of the major part of products of the plant.
TCO will provide the delivery of propane. KPI and TCO had agreed the basic commercial terms of its purchase as early back as in March 2011. Delivery of raw materials will be carried by rail from the Tengiz station to the Karabatan station; the distance between these is about 250 km. Total investments in the first phase will be $2.03 billion; of these, $500 million will be provided by the project shareholders.
At the moment, the laying out of the site, as well as the construction of major facilities of road and rail infrastructure, and the electric grid, are completed. The current stage of the project deals with the signing of contracts for the manufacture of basic equipment and the start of construction and installation work. Commissioning of facilities of the first phase is formally scheduled for 2015. Although, given the previous experience, the delay of the deadline will not be a surprise.
The second phase of the IGCC, involving the setting up of a polyethylene production with a capacity of 800 thousand tonnes a year, is also aimed at processing of dry gas from Tengiz. The project operator is LLP KLPE, the participating parties of which are Korean LG Chem (50%) that has been in from the very beginning of the project SAT & Company (25%), and UCC (25%). As part of this phase, it is supposed to build a number of facilities including a gas processing unit at Tengiz to separate ethane from the commodity dry gas, an ethane pipeline to Karabatan with length of about 200 km, a complex for pyrolysis with a capacity of 833 thousand tonnes of ethylene, as well as two units for polymerization, 400 thousand tonnes each, and installations for production of butene-1 with a capacity of 33 thousand tonnes a year.
In September last year, KLPE and an international consortium of contractors, consisting of companies Petrofac (UK), Linde AG (Germany), and GS Engineering & Construction Corporation (South Korea), concluded an EPC-contract. The licensor of installation for dimerization of ethylene to get butane-1 will be the company Axens (France), and for polymerization of ethylene – Univation Technologies (USA). According to estimates of Fund Samruk-Kazyna, the cost of the second phase of the IGCC is $4.15 billion. Of these, $1.24 billion will be provided by the shareholders. It is expected that the rest of the amount will be raised under the project financing scheme involving the South Korean export credit agencies K-SURE and K-EXIM. Commissioning of facilities of the second phase is scheduled for 2017.
It should be noted that the integrated gas chemical complex is the anchor project of the special economic zone SEZ National Industrial Petrochemical Technology Park, created in Atyrau region in December 2007. The SEZ participants are fully exempt from CIT, land tax and property tax. Besides, they are granted the right to use customs privileges, including imports free from customs duties and fees, as well as a simplified procedure for execution of export-import operations.
Apart from the IGCC, the construction of a plant for production of butadiene with a capacity of 250 thousand tonnes a year and of polybutadiene rubber with a capacity of 125 thousand tonnes a year is planned within the framework of SEZ. At the moment, the United Chemical Company is carrying on talks with potential strategic partners from Poland, Germany and South Korea.
The project of one more "resident" of the special economic zone – LLC Polymer Production – was originally targeted at further processing of basic products produced by the gas chemical complex. Founded in 2012, the company is seen to be the first major manufacturer of plastic packaging (48 million bags a year), polypropylene biaxially-oriented film (14.7 thousand tonnes) and polyethylene film (4.1 thousand tonnes). This project is implemented relatively fast, explicitly outrunning the deadlines for commissioning of the IGCC. There the major equipment is already being mounted, and at the end of this year, Polymer Production will be ready to commission production. For the near future, the raw material will be imported from Russia, Uzbekistan, Turkmenistan, and South Korea. This will certainly affect the cost of production. But the company has already signed letters of intent with Europe, Turkey, China, Southeast Asia and CIS countries to sell products.
Generally, permanent delays in implementation of the largest and most important industrial projects are the Achilles' heel of the industry of Kazakhstan. Neither the direct participation of the state, nor the attraction of foreign contractors and investors, which are very experienced in implementation of mega-projects, helps the situation.
The project of reconstruction and modernization of the Atyrau oil refinery has not managed to avoid the same problems. The said facility as the second backbone project of the petrochemical and gas chemical sector is focused on the deep processing of oil. Within its framework, in addition to improving the quality of petroleum products (the transition to Euro 4 standards), it is provided to set up a complex for the production of aromatic hydrocarbons, which produces benzene (133 000 tonnes a year), and p-xylene (496 000 tonnes a year). These compounds are in demand in the market as a raw material for the production of a wide range of petrochemical products, including dyes, pesticides, and phenol-formaldehyde resins. The first phase of the project involves the construction of a catalytic reforming unit with an extractive distillation block to separate benzene. The second phase involves the construction of a complex for the production of aromatic hydrocarbons with the installations Eluxyl (for paraxylene), XyMax (for xylene isomerization), and TransPlus (for transalkylation of toluene).
It is worthy of noting that the selection alone of the general contractor of the project by Kazakhstan took about two years. However, there are quite objective reasons for that, because benzene and paraxylene are dangerous carcinogens. According to experts, one third to half of the price of the equipment used for the production is the costs for pollution prevention. Japanese company Marubeni participated at the initial stage in the tender, but finally Chinese Sinopec that offered the price of $1.04 million, won the tender.
Bookmarking the "first stone" at the site of KPA took place on September 4, 2010. Although the Chinese promised to deliver the project "on a turnkey basis" at the end of December last year, three months before that date, they appealed to the government of Kazakhstan with a request to extend the implementation of the project for the period until July 2014. Among the main reasons they listed the lack of experience in adapting the design estimates to the local standards, the delays in granting permits to attract foreign labor force, and the failure to meet deadlines to supply the equipment through fault of the logistics company. Then Chairman of the Board of Samruk-Kazyna Fund, Umirzak Shukeyev, demanded to apply penalties to the Chinese company, and warned that he would personally look after the progress of the project. Whatever it was, in August this year, all the technological equipment at the Atyrau Oil Refinery was supplied and installed, and construction and installation work has been completed by almost 90%. It seems that Sinopec will be able to deliver the project in operation with only a one-year delay. This, compared to other long-term construction projects, does not look so bad.
Summarizing the above, it should be noted that despite all the troubles, the domestic petrochemical and gas chemical sector today has never been so close to a fundamental breakthrough in its development. According to the chief "industrializer" of Kazakhstan, Asset Issekeshev, in 2019 this sector will already export products worth $2.5 billion, and its share in total output of the manufacturing industry will increase from the current 0.3% to 5%. Agree with me, this is a very serious challenge.