Russian petrochemicals and gas chemicals industry is going through turbulent times. Urgent and effective measures are needed to give a new impetus to the development of this industry, to attract investment and feedstock suppliers, to stimulate demand in the local market.
The International «Oil and Gas Processing in Russia 2013» Forum was organized by CREON Energy in Moscow on December 9. The event was supported by the Analytical Centre under the Government of the Russian Federation, Kortes Information Center and VNII NP Institute.
In his welcome address, the Head of CREON Energy Fares Kilzie noted the importance of measures regarding the oil and gas processing industry that had been announced by the President of the Russian Federation Vladimir Putin at the dedicated meeting in Tobolsk on October 15, 2013. These action points were voiced in quite hard times for the market, and have the ‘emergency’ specifics. The global energy paradigm is undergoing change, and Russia is starting to seriously fall behind in oil refining and gas processing. However, for the action points to have effect on the economy, they need to be specially controlled to the point when they are completed in full. International energy markets are being reshaped. The main influencing factors are well-known shale gas and shale oil phenomena which have reached a global scale, and sooner or later will change the energy balance on the planet, as well as architecture of supply and demand for the refined products. For instance, producers in the U.S. will launch six pyrolysis units with the total ethylene capacity of 6,500 ktpa for further processing in the period 2015-2017.
Moreover, additional 6,500 ktpa capacities will be launched by 2020. Apart from this, there are 170 petrochemicals and gas chemicals projects that will increase the U.S. export by at least 30%. Overall investment volume in the sector will amount to USD 81 bln in 2014-2018. Russia is without exaggeration one of the largest gas producers in the world, while the price formation for gas processing products and aromatics will be decided in the U.S. for the nearest future. With the help of advanced technologies such as CPP, NHC, DCC Russia is able to regulate the balance of interests of the government and the private businesses in the new energy market reality. The unconventional shale gas phenomenon should be counterbalanced with an unconventional effort co-ordinated on all possible levels. Russia’s economy is currently facing stagnation due to mismanagement and monopolistic structure. As a result, investments and traditional technology partners are heading towards shale and other unconventional phenomena. «Unless the decisive and, let me stress this, short-term measures are taken by the executive power, the stagnation may be followed by a deep recession, with a dead-end ahead», said Mr. Kilzie.
The outlook for feedstock supply to the Russian petrochemicals industry was presented by Georgy Eliseev, Head of Strategic Development Department at United Petrochemical Company. Oil and gas processing is consuming a small part of hydrocarbon feedstock globally, about 6%, which is slightly over 600 mln tons oil equivalent. The main sources of feedstock supply are pyrolysis, ammonia and aromatics. The level of hydrocarbon feedstock processing in Russia remains low, at only 29 mln tons oil equivalent out of 1,277 mln tons oil equivalent production. Of this processing volume, about one-third goes to pyrolysis, and naphtha has the largest share in the feedstock structure. While Russia is a large oil and gas producer, its share in the global petrochemicals is only 2%. Local enterprises have to compete with export supplies for hydrocarbon feedstock (for instance, 75% of naphtha and 36% of LPG is being exported).
The shale revolution in the U.S. has created new trends in the world market resulting in further decrease of hydrocarbon feedstock prices (ethane, naphtha) and shortages of C4 fractions. This is beneficial for Russia, the outlook for construction of pyrolysis in our country is positive due to affordable feedstock (low netback) and high potential for facilities producing C4 (while American and Middle East markets are switching to light fractions and Europe is shutting down production). According to Mr. Eliseev, the necessity to develop petrochemical production in Russia is evident. Capacities in Russia cannot satisfy the local demand, with the share of imports from 28% to 84% in a majority of basic products. For instance, the potential volume of import substitution in plastics is estimated at USD 10.5 bln. However development in this sector is possible only if the affordable local feedstock is available (currently it is mostly being exported). The export volumes of LPG and naphtha have been growing steadily in the recent years, which may lead to problems in supplying pyrolysis with feedstock. Nevertheless, the 2030 forecast includes expansion of pyrolysis capacities, several new projects have been announced (in particular, ethylene capacities may grow up to 4 times and more). The Russian Petrochemicals Development Strategy is based on the cluster approach. At the moment, pyrolysis capacities (ethylene) are operational in the Volzhsky cluster only, but similar industrial facilities can be constructed in the North-West, near the Caspian Sea, in the Western and Eastern Siberia and in the Far East by 2020. In order to efficiently utilize crude produced in the Western Siberia, product pipelines to the European part of Russia are being designed. Construction is underway only in Sibur’s Pur-Tobolsk pipeline project, however it is geographically limited to the Western Siberian region. Product pipeline for LPG titled «North-Yamal-Povolzhye» is being discussed now, but faces strong opposition.
In the first place, the companies located in Povolzhye region are interested in this project. While enterprises outside Povolzhye show no support to the pipeline. The source of feedstock supply and finance are also unsettled. In case the project is completed, the LPG supplied from the Western Siberia will be consumed by United Petrochemical Company itself, which plans to construct a large 1,000 ktpa pyrolysis unit in Ufa in 2018. In general, launching of new plants should be accompanied by modernization of technologies (processing of heavy fractions and increase of gasoline production, use of fuel gases in petrochemical processes, and also possible shutdown of mini oil refineries). In 2012-2020, global pyrolysis capacities will grow by 43,000 ktpa, and ethylene production will increase by 46,000 ktpa. Thus possible surplus of capacities in Russia (up to 20% of global growth) corresponds to global supply/demand growth in 1-1.5 years.
Future changes of existing customs tariff regulations in oil and gas industry were reviewed by Anton Zharinov, Head of Coordination, Development and Regulation of Foreign Economic Activity Department at the Ministry of Economic Development of the Russian Federation. The structure of Russian petrochemicals industry has a large share of oil-based feedstock, naphtha accounts for 60% of demand of the petrochemical production, LPG share is only 7%, and wet gas share is about 24%. Thus two-thirds of demand is met by oil refining industry and one-third by gas processing.
Production of LPG grew by 4% to 9 mln tons, production of straight-run gasoline grew by 6% to 10 mln tons in the 9 months of 2013. LPG export growth is even higher, exports reaching 3.8 mln tons in the 9 months of 2013, and estimated at 5.1 mln tons by the year end (+11% compared to 2012). The export quota has reached its maximum for the past five years and stands at almost 43%. Meanwhile, domestic consumptions stays below the ‘crisis’ level of 2008-2009. The situation is that the valuable petrochemical feedstock is mainly supplied to the export markets.
Currently the Russian economy is following quite a flat trend, and in given circumstances the petrochemical production is providing a significant support on the macroeconomic level. Russian oil refining development is defined by two processes. The first is that its volumes are growing annually; over 54% of produced oil is being refined now. The other is that the quality of oil refining does not correspond to Russia’s objectives so far. The depth of refining is falling by 0.5% annually, at 67% in 2013. Semi-finished products are being increasingly produced and exported, the domestic market is not always balanced in terms of finished high-quality fuel products. Fuel oil output in Russian oil refining was at 27% in 2013. Export o fuel oil has been growing at an annual rate of 8% since 2006 (which is faster than the growth of local oil refining).
In general, further development of oil refining industry in Russia will depend on the pace of modernizing the enterprises. According to the Ministry’s forecast, the volume of oil refining in Russia will reach 334 mln ton by 2020, the capital investment will amount to 1.4 trillion rubles (63% attributed to Rosneft, 21% to LUKoil, and 9% to Gazprom neft).
The current stage of petrochemical industry development in Russia is characterized by the situation when refining capacities are falling behind the growing feedstock base. The oversupply of petrochemical feedstock was about 26 mln tons in 2012. Substantial growth of domestic consumption is expected in 2017-2018. Feedstock producers are forced to sell non-demanded raw materials in the overseas markets. Following the results of the governmental meeting in Tobolsk on October 15, the customs tariff regulation of petrochemical feedstock exports is among the issues under consideration. Existing tariff rates for LPG are fixed at their maximum under WTO obligations. In medium-term, it is logical to keep the existing rates of customs tariffs for LPG, and to correct them along with the growth of the domestic demand.
Price formation issues for gas in Russia were in the spotlight of the presentation by Akhmed Gurbanov, Chief Manager of Coordinating Department for Gas Energy Activities and Petrochemicals and Gas Refining Product Sales at LUKoil. Russian gas market is characterized by a high level of government regulation, and the mechanisms are applied mainly in the interests of Gazprom as a dominating company in terms of production volume (about 78% share) and sales in Russia (about 69% share). The share of independent gas producers in sales is growing annually and has reached 31% in 2013, which has a substantial effect on the gas balance in the country. The leading independent gas producer is Novatek with 60.5 bln cub. m volume of production and the share of 45.5% (the share in total gas sales in Russia was 14.2% in 2012). LUKoil is selling 11.1 bln cub. m of gas and hold the fourth position among independent gas producers with the share of 8.5% (the share in total gas sales in Russia was 2.7% in 2012). The balance of gas production over sales in Russia is positive as the gas consumption with annual volume 420-430 bln cub. m is expected to stagnate until 2016, which is caused by the decreasing economy growth rates (from 4.3% in 2010 to 1.7% in 2013). Another factor is slowdown of gas exports to Europe due to lower consumption growth rates (1.1% for the period 2013-2016). The discount applied by the independent gas producers to the rate approved by the Federal Tariff Service of the Russian Federation has increased from 5% to 15%. This is happening as the competition in the market has increased with the independent producer’s larger share in the overall volume of gas sales in Russia, and also because Gazprom has the right to sell gas to industrial consumers with a 10% discount to the official rate. The net price of gas sales is going down due to the new government policy in gas price formation, which implies cancelling the concept of ‘equal profitability’ for local and export sales. Another reason is a revised readjustment of wholesale gas prices in Russia (there is readjustment in 2014, with an adjustment limit equal to inflation rate in 2015 and 2016). Consumption of gas inside Russia was almost unchanged in 2010-2012. The largest consumption sector is power generation (40% share). When reviewing growth points for gas consumption, Mr. Gurbanov mentioned agrochemicals industry. It consumed 22.1 bln cub. m of gas in 2012 (6% of overall in Russia, the fourth place among other industrial sectors). Stimulating agrochemical companies will allow to increase gas demand in the long term. The speaker proposes that an adjustable rate of mineral extraction tax be introduced for feedstock supplied to industrial enterprises, thus providing the investors with fixed margins in gas processing projects and improving the investment attractiveness of the new construction projects for production of mineral fertilizers in Russia.
The use of compressed natural gas as a motor fuel will also increase gas consumption. To achieve the balanced structure in consumption of gasoline, CNG consumption stands at about 4 mln tons per year. To grow the consumption from existing levels to 3-5 bln cub. m per year, or 10-20 times, at least 8-10 years of intensive development of the sector is needed with active support from the government.
Mr. Gurbanov also explained that the distribution of market shares between the independent gas producers and Gazprom is linked with price formation: Gazprom’s prices are administered by the state, while independent gas producers are flexible in prices and conditions, and therefore they managed to win the one-third of the market from the gas monopoly.
Dmitry Gusev, General Director of ICON Trading, Deputy Chairman of the Board of «Petroleum products» Section at SPIMEX, presented the paper devoted to the role of commodity exchange in trading oil and petroleum products in the domestic market in Russia. There are economic instruments used in commodity exchange trading that contribute to formation of prices for oil and gas. Trading at commodity exchange started in Russia about 5 years ago, and has successfully developed since that. There are sustainable transparent indices for petroleum products. The main and indispensable indices are Diesel fuel and AI-92 gasoline indices, according to Mr. Gusev. The commodity exchange has united all the market participants – traders and vertically integrated oil companies. The commodity exchange has also provided an opportunity to introduce new derivative contracts based on price indices.
Member of the Board of Experts of CREON Energy Mikhail Levinbuk spoke on certain strategic development problems in the oil and gas complex of Russia and the U.S.A. Production and processing of unconventional hydrocarbons in the U.S. is able of changing the geostrategy of the energy resource market completely and may lead to lower prices for oil and gas, which will affect the resource-based economy in Russia and the country’s budget. Switching to new types of energy resources is not in the plans of Russian oil companies. Economic situation and legislation in Russia do not stimulate the management of oil companies to comprehensively compete in modernization with the Western countries. At present, Russia lacks economic, technological or other mechanisms to influence the world prices for oil and natural gas. All Russian oil and gas projects must be revised and ranked based on profitability in the scenario of possible decline of oil and gas prices (by 30% and by 50%). It is also necessary to review the option of accelerated development of domestic fuel market (as it happened in China) in case the competitive situation causes lower exports of hydrocarbon crude. Taking this into consideration, the share of petrochemical products in the export should be increased.
The motor gasoline production was overviewed by Vyacheslav Emelyanov, Head of Automobile and Aviation Gasoline Department at VNII NP. Russian oil refining industry has to be significantly modernized, but the risk of shortage in motor gasoline remains in place. There is a steady trend of lower fuel consumption by passenger cars due to technological improvements. There will be regular reduction of carbon dioxide emission, with European Union being the leader in tighter environmental regulations for automotive transport. Currently 17% of global CO2 emission is accounted to fossil fuels. Reduction of this emission is possible only through renovation of the vehicle fleet (switching to hybrid and electric cars, and improving traditional automotive engines).
According to Shell’s experts, the fastest way to reduce CO2 emission is switching to biofuel. At present, the consumption volume of bioethanol comprises 6% of overall global gasoline consumption. E-85 fuel with 75-85% ethanol content is actively consumed in the U.S., Canada and Nordic countries. Ethanol blending in gasoline is officially permitted in Russia, but is not widely applied due to high excise duties on alcohol-containing products. Speaking about the future of biofuel, Mr. Emelyanov noted that its application may grow to cover the shortage of high-octane gasoline. Production of bioethanol is also a solution for utilization of wastes in wood processing industry.
Vehicles working on fuel class Euro 2 and Euro 3 continue to compose the majority share in the Russian passenger car fleet. This means that switching to gasoline class Euro 5 will not be possible until the vehicle fleet is renewed completely, which requires plenty of years. Consequently, as Mr. Emelyanov resumed, production of gasoline class Euro 3 must be continued in Russia to the moment when the car fleet is renewed. It is more practical to produce and export AI-95 and AI-98 gasoline class Euro 6 which is introduced in Europe since 2014, and to stimulate production through decreasing excise duties. The average global share of gasoline class Euro 6 is under 25% so far, and Russian refineries are quite able of producing such amount of fuel without harm to the country’s budget. Moreover, it is easier for Russian oil refineries to switch production from class Euro 3 to class Euro 6, omitting class Euro 5, because the latter specification prohibits use of N-methylaniline and limits oxygenated compounds to 2.7%. While class Euro 6 may contain oxygen up to 3.7% which would allow blending of MTBE at 22% instead of 15%. However, the existing regulations and the Tax Code which forces to pay higher excise duty for gasoline class Euro 2 and Euro 6 at about 11 thousand rubles per ton, leave the producers no choice in deciding as for which class of gasoline is more profitable to produce.
Application of technology aimed at achieving maximum processing depth for Russian oil and improving economics of oil refineries was presented by Pavel Zhelvis, Regional Director for Russia and CIS at Foster Wheeler. At present, the market puts forward special requirements to processing heavy oil residues. The challenge lies in finding economically viable ways to improve processing depth based on proven technologies. Options include selective reduction of the share of heavy components thermal cracking reactions; reduction and suppression of feedstock coking; selective application of existing technologies and their components at proper points. Based on this concept, Foster Wheeler has developed new solutions. There are several ways to select oil residue processing technology. In every specific case, the choice depends on the particular circumstances such as possibility to sell fuel oil, market demand for bitumen, possibility of further processing, and affordability of electric power. The coking process provides for a full conversion, and it can be integrated with other oil refining processes. Combination of coking and selective deasphaltizing provides for a higher yield.
Dmitry Fetisov, Leading Engineer at Environment Protection Department of Gazprom Pererabotka Company, spoke about processing of oil wastes into fuel bricks at Surgut Condensate Stabilization Plant owned by the company. The resource-saving technology of producing fuel bricks with binder based on oil wastes has been developed, and recommendations have been issued for its application in waste management system in petrochemical production. The method and installation for producing wood-oilwaste fuel bricks from hardwood dust and asphalt-resin-paraffin deposits have been accomplished.
The technology topics were continued in a joint presentation by Dmitry Borisanov, Head of Central Research Laboratory at Slavneft-Yanos, and Aleksey Emelyanov, Head of Technology Department at Promkhimproekt. The paper was devoted to design and operation of the unit for hydrogen sulfide removal from fuel oils. The project was aimed at meeting the requirements of Technical Regulation adopted by the Decree #118 of the Government of the Russian Federation dated 27.02.2008, and also European requirements. The unit has been successfully operated at Slavneft-Yanos refinery since summer 2011, and it has saved significant expenditure for hydrogen sulfide scavengers. The productivity index of the project is 4.1. The unit has paid off in 1.5 year and destroyed the risks related to fuel oil quality. The process is environmentally friendly: the hydrogen sulfide goes to units of sulfur and sulfuric acid production; there is no sour water by-product etc. The operation diagram is simple to implement, and can realized at any modern oil refinery in Russia with the help of existing equipment.
Deputy General Director for Science at VNII NP Vsevolod Khavkin spoke about hydrocracking process of heavy crude oil as a main reserve for increasing petroleum refining in the Russian Federation. The structure of global oil refining by types of technological processes was as follows in 2010: catalytic dehydration (51.6%) and vacuum distillation (33.3%) had the dominating share, while hydrocracking accounted for about 6% share. By 2020, Russia plans to launch several processes that will improve the processing depth (60 units) and the quality of petroleum products (62 units).
Head of Energy Department at Greenpeace Russia Vladimir Chuprov presented the estimates of oil losses during production and transportation by oil & gas companies. There is no official data on this topic, so Greenpeace bases its estimates on the statistics by CDU TEK which reflects data directly submitted by oil companies. According to this statistics, 14.4 thousand facts of breaching were recorded in 2011. Rosneft, TNK-BP, Gazprom Neft and Surgutneftegaz, together producing about 60% of oil in Russia, reported oil spills affecting both soil and marine ecosystems of our country at under 4.5 thousand tons annually. However, even this information (which does not reflect reality, according to Greenpeace) is not reported by all oil companies. The ecologists estimate that the real volume of oil spills is much larger, – several million tons of oil is spilled into environment in Russia annually. These estimates are to a large extent supported by the data of petroleum products flowing via Northern rivers to the ocean, – up to 500 thousand tons per year. Mr. Chuprov noted that the number of oil spills does not depend on the volume of oil production, but is rather connected with worn-out oil pipelines. While normal working service of the pipelines is 10-15 years, many of them have been operated for over 30 years. Replacement rates are evidently insufficient to ensure timely renewal and no-failure operation of the infrastructure.
The main problem lies in the fact that oil companies are not accountable for concealing information about oil spills (as well as other environmentally important information). Therefore Greenpeace proposes that the open access to pipeline breach information be formalized in legislation, and criminal sanction for concealing such information be introduced. Vladimir Chuprov noted that Greenpeace had already held negotiations with public authorities at all levels, including the President of the Russian Federation and the Prime Minister. The government says it understands the situation, however practical measures have not been taken so far.
When asked about financial evaluation of oil spills, the speaker said that every million tons of oil that could have been exported is worth 1 billion USD. This is revenue that could have been collected by the producer. Also, one can approximately estimate taxes and duties that could have been paid to the federal budget for the oil that is being lost instead. According to Greenpeace estimates, this makes about 80-100 billion rubles per year. There is yet another financial issue – the penalty for spilling oil into environment. The amount of fines is estimated by the ecologists at 1 trillion rubles.