Meeting on strategic development of petrochemical industry 2020-12-01 18:00:00 Tobolsk The President held a meeting, via videoconference, on strategic development of the petrochemical industry. The speakers included deputy prime ministers Alexander Novak, Marat Khusnullin, Viktoria Abramchenko and Yury Borisov; Finance Minister Anton Siluanov, Industry and Trade Minister Denis Manturov; Chairman of the Board of SIBUR Holding Dmitry Konov, Gazprom Neft CEO Alexander Dyukov, Chairman of VEB.RF State Development Corporation Igor Shuvalov, LUKOIL President Vagit Alekperov, Chairman of Rosneft Management Board Igor Sechin, Chairman of the Board of Directors of Titan Group Mikhail Sutyaginsky, RDIF CEO Kirill Dmitriev, and Chairman of the Board of Directors of INK-Capital Nikolai Buynov. * * * President of Russia Vladimir Putin: Good afternoon, colleagues. We are holding this meeting in Tobolsk. Without exaggeration, this city has become a global petrochemical centre in recent years. It took seven years to build two large enterprises that, no doubt, have propelled this region and our country into positions of leadership. Today, we will discuss strategic plans for the petrochemical industry. I have just noted that we opened a state-of-the-art petrochemical complex here in 2013 and we also held a meeting back then, where we resolved that expanding the capacities of the petrochemical enterprises and supporting Russian producers in this industry were among the key industrial policy goals. That same year, SIBUR began work on creating the Western Siberian Petrochemical Plant. Also in 2014, I decided to use the National Wealth Fund to invest in that project (I have just discussed this matter with Chairman of the SIBUR Board Dmitry Konov). The deal was executed with the participation of the Russian Direct Investment Fund. This was $1.75 billion for 15 years, as I remember. We granted it – in 2030 all bonds must be paid off in one go. Projects are being carried out on time and effectively. We have just recalled that in 52 months we built one of the largest facilities in the country and the world. It will turn out two million tonnes of products. This meeting is attended by people who have been to such facilities more than once, and you know that they are impressive – a whole city, a grand project. The new complex will play a considerable role in the substitution of polyethylene and polypropylene imports. It will make it possible to increase the processing depth of raw materials and use them more rationally. This primarily applies to associated petroleum gas. It is common knowledge that reducing the share of this burned gas is a key goal of the environmental and climate agenda of this country. Let me recall that from 2010 to 2019 the share of flaring fell from 25.7 percent to 18.5 percent, which is, of course, a good result. I hope we will make further progress in this area. We have incentives for this, I will tell you about them. I am referring to tax benefits and, by all appearances, they are all working. Incidentally, in the production of plastics, carbon dioxide emissions per tonne of products – we have just spoken about this as well – is 13 times less than during the production of other materials: aluminium, copper, steel and iron. It is also important that the work of the plant fully complies with Russian and international environmental standards. The plant has established an eco-free production method – a closed water cycle without wastewater. Incidentally, this is particularly important for this region. I will meet with the governor separately once again today to discuss the region’s problems. One of them is the pollution of water reservoirs. But this production ensures zero waste, and this is a goal to strive for. I would like to take this opportunity to thank all construction participants without exception. I would like, of course, to wish success to the plant, and I certainly hope that the number of such promising projects will grow. In the past few years, the petrochemical industry has been showing strong results: new, modern production facilities are being launched; production output is growing; and dependence on imports is going down. As for import dependence – I will say more about this a bit later – there is certainly room for improvement in this respect. That said, Russia has vast growth potential. Our producers are capable not only of meeting the domestic demand for quality products but also of taking up more important positions in the global market. We have everything necessary for this: qualified personnel, advanced technology, and a powerful raw materials base. Of course, these competitive advantages must be used to the utmost. This is actually a very promising business, and everyone present at the meeting is well aware of this: the expected average annual growth rate of global demand is somewhere under four percent, while oil demand is projected within 1 percent over the next five years, and further on there will be a general decrease to 0.1. Again, we need to vigorously promote Russian petrochemical products domestically and abroad, to increase efficiency and production volumes. To do that, the industry must implement large-scale projects with total investment in the region of 5 trillion rubles. The two biggest ones, the Amur gas refinery and the facility to process ethane-containing natural gas near the seaport of Ust-Luga in Leningrad Region are already in the works with the support of Vnesheconombank. We actually have a total of 14 such projects, with 17,000 highly qualified and well-paid jobs to be offered at these facilities in the future. I would like to note that such large projects with a high multiplier effect are important for the national economy as a whole. And of course, the state supports and will continue to support such undertakings. As you know, the State Duma in October adopted a law establishing a reverse excise tax on ethane and liquefied hydrocarbon gases in exchange for investment in those hydrocarbon refining projects that would convert them into petrochemical products. I have signed that law. In general, we will undoubtedly continue to create comfortable conditions for the development of oil refining capacities and for investor activity in this industry. The Government is already working hard on this. For example, the construction efficiency of petrochemical facilities, the optimal timeframe and costs are the key success factors in such projects. With this in mind, we are abolishing outdated building regulations, simplifying sanitary standards and requirements, and encouraging the use of advanced building materials and digital technologies. This work certainly needs to continue in the future in order to create an optimal atmosphere, an optimal environment for further investment activities. Today I propose discussing other measures that can be taken to optimise capital costs for constructing petrochemical facilities – surely, without compromising the safety of their work, including from an environmental point of view. Next. In recent years, as we know well, production growth in the industry has mainly come from the development of large-tonnage petrochemicals. In this segment, thanks to the launch of new projects, import substitution is almost complete. We produce 5.3 million tonnes while importing 0.3 million tonnes. But it is a different situation with small-tonnage petrochemicals: we import 1.4 million tonnes while producing 3.7 million tonnes. Obviously, there is a lot of work to do. By the way, in European countries, in European economies, about 30–40 percent of all chemical products are low-tonnage chemical products, while that figure is only 15 percent for us. Of course, domestic demand significantly exceeds what we are currently producing and is covered by imports, as I said. For some items, depending on foreign suppliers, it reaches 100 percent. This situation certainly needs to change, and, in fact, we are doing this, but we need to increase these rates, to increase the share of low-tonnage chemical products in the total production volume. And today, colleagues, I would like to listen to specific proposals on this issue. Another urgent task is to create a stable demand for Russian petrochemical products. We need to create a market, to form our own market – primarily, an internal one. In Russia, like everywhere around the world, polymer materials are largely needed in construction, medicine, housing, the food industry and an entire range of other industries. Their use provides new, important and broad possibilities by significantly reducing manufacturing and operating costs, including due to the longer lifespan of polymer products. The benefits of their use compared with outdated materials are obvious. For example, in housing and utilities services, polymer pipes can save up to 50 percent of the cost of maintaining water supply and sewerage systems, while the share of polymer solutions in Russia’s housing and utilities services is 35 percent, against 85 percent in Europe, which I have mentioned. As I have said, the demand for such innovative materials will only grow. It is important to meet this demand by purchasing primarily from Russian manufacturers. At this meeting, we have to think about what we can and must do additionally. Of course, the environment is another topic I would like to raise. We have just said that, as a rule, chemical manufacturers are associated with greater environmental damage. But I have already given an example: atmospheric emissions during production are 13 times lower than when manufacturing steel, aluminium and so on. Yes, there is the problem of recycling, and we will elaborate on it, but it is also easy to solve if we do it professionally and from the very beginning. Care for the environment and nature must be an integral condition for this production. And it should be considered that compliance with environmental standards is becoming an important factor in products’ competitiveness. All over the world, serious attention is paid to reducing greenhouse gas emissions, and requirements for reducing waste are becoming more stringent. Of course, we also need to increase the reuse of plastic as well as the share of secondary raw materials in the composition of goods and packaging, and develop such a sustainable approach to resources. Let us discuss all of this. I would like to give the floor to Deputy Prime Minister Alexander Novak. Mr Novak, please. Deputy Prime Minister Alexander Novak: Thank you very much. Mr President, As you have noted, petrochemicals are indeed one of the fastest growing sectors of the global economy. In the next 15 years, the demand will be high and will outstrip the average growth in oil consumption – as you said, almost 4 percent annually. So of course, we will see some changes in the structure of oil consumption: the share of its use as a motor fuel will decrease while the share that goes into refining, to be converted into petrochemical products, will increase. This is obvious because the modern global economy is showing a stable trend to develop the polymer materials science, which will continue to evolve. The widespread use of polymer materials and composites based on them are crucial for creating new generations of technology in aviation and space, in the defence industry, the automotive industry, construction, and 3D technologies. In any industry, the introduction of new materials is going to be one of the main factors of growth, and development of petrochemical plants should make the topmost contribution to that process. The total capacity of ethylene production in the world is about 175 million tonnes today. By country, the United States has the largest capacity at 36 million, China at 20 million tonnes, and Saudi Arabia at 18 million tonnes. Russia accounts for 4.8 million tonnes. Monetisation of light oil and heavy gas fractions in countries that have this kind of crude product is definitely the main, the leading trend of the last decade. Our key priority is the complex processing of raw hydrocarbons using a technological chain from raw commodity to a high value-added product – such as organic chemistry products, polymers, rubbers and end products based on them. Each tonne of raw materials (naphtha, LPG [liquefied petroleum gases], and ethane) provides an increase in added value up to four times of the primary raw material. This is much higher than the added value of processing. Priority attention is also being given in Russia to the development of the petrochemical sector. Mr President, I would like to thank you for your special attention to this sector. The meeting held in 2013 gave an extra impetus to its development. A development plan for the gas and petrochemical sectors has been approved until 2030, under which in the past seven years, we implemented 17 large petrochemical investment projects worth a total of 830 billion rubles. This has nearly completely eliminated our dependence on imported goods in the sphere of large tonnage polymers. As a result, the domestic production of large tonnage polymers and synthetic rubber amounted to 6.8 million tonnes last year, or almost 50 percent more than seven years before. The development of the national petrochemical sector will be greatly boosted by SIBUR’s construction project at its ZapSibNeftekhim facility in Tobolsk, Tyumen Region. ZapSibNeftekhim is the largest petrochemical complex in Russia and one of the world’s top 10 ethylene producers. It will also be the world’s largest company for the production of liquefied petroleum gas. As much as $8.8 billion has been invested in the project, including $4.5 billion of private funds and $2.5 billion of borrowed resources. As you have pointed out, $1.8 billion have been attracted from the National Welfare Fund via the Russian Direct Investment Fund, on condition of repayment and with a higher profitability than returns from investment in foreign securities. As a result of the joint implementation of this project, the company has not only created a large-scale facility of great importance for the country, but has also attracted foreign investment into the Russian economy. I would like to add that SIBUR has done a great deal to create an infrastructure for the collection, transportation and processing of associated petroleum gas. As you have said, this has allowed it to reduce emissions and associated gas flaring, as well as to accumulate raw materials for the manufacturing of higher value-added products, which is very important. Mr President, I would like to note that despite significant progress, Russia’s share in the global petrochemical production is still quite small – only about 2.5 percent of the market, although, as you know, Russia is one of the leaders among global hydrocarbon producers and exporters, with a far greater share at 12 to 19 percent. So of course, we have a huge untapped reserve as regards raw stuff. Russia produces over 17 million tonnes of liquefied petroleum gas, and only 5 of those 17 million are used to make petrochemicals. Of the 11 million tonnes of ethane contained in the extracted natural gas, only about 700,000 tonnes go into processing. Given that ethane content will grow every year as reserves with higher wet gas content will be involved in production, this potential will be even higher in Russia. And of course, we need to use this potential in order to produce more added value. Because, for example, in ethane processing, the ‘exit basket’ cost is four times greater than that of raw stuff. A fuller use of the petrochemical industry’s potential can play a role in achieving other goals, not only in attracting investment, but also in boosting non-energy exports in accordance with your Executive Order. Taking into account the specifics of the petrochemical industry, we believe it advisable to use a cluster approach to expand its refining capacity. This way the available reserves will be used more efficiently, and the following tasks will be solved: to create competitive industries through optimising capital and operating expenses; to develop the infrastructure to supply raw stuff to petrochemical facilities with minimal transport costs; to boost demand for Russian companies’ products through stimulating internal demand by establishing small and medium-sized enterprises for processing of petrochemical products. At present, there are six petrochemical clusters in Russia: the Volga, the Northwestern, Caspian, West Siberian, East Siberian and Far Eastern clusters. All of them have solid resource bases for increasing the output of petrochemical products. Also, Russia’s Arctic zone can become another promising region for the further development of processing facilities in the Russian Federation. To develop gas chemical and production facilities on the Yamal Peninsula, the Energy Ministry, together with other federal authorities and companies concerned, has set up a special working group. An investment project to develop an integrated gas chemical plant on the Yamal Peninsula envisages the construction of new gas refining and gas chemical facilities. The impressive resources of the Yamal Peninsula will be used to extract ethane and LPG as feedstock for the new plant. The total reserves and resources in all deposits on the Yamal Peninsula amount to 26.5 trillion cubic metres of natural gas, 1.6 billion tonnes of gas condensate and about 300 million tonnes of oil. Petrochemistry is definitely an option for monetising Yamal’s enormous resources. Another equally important monetisation option is liquefied natural gas: Yamal’s potential can be used to achieve production of 120–140 million tonnes of LNG by 2035 and a market share of 15–20 percent, in accordance with Russia’s Energy Strategy until 2035. It is especially important that the region already has basic infrastructure in place, developed as part of the previous LNG projects there: a seaport and two airports, as well as a railway project now under consideration. The proximity to the Northern Sea Route will enable exports to the fast-growing markets of the Asia-Pacific region, as well as ensure greater traffic load for the Northern Sea Route. The project will help attract a total of over 2 trillion rubles in investment and create 20,000 new jobs. Non-commodity and non-energy exports will grow by more than 125 billion rubles a year. The implementation of additional LNG projects can fetch at least another 3 trillion rubles in investment. The Government will continue to coordinate and implement these projects. I would also like to note that our main competitors in the global petrochemical arena – China, Iran, and Saudi Arabia, which have achieved impressive progress in petrochemical development – are vigorously using state support instruments to develop their petrochemical industries. To compete successfully, we also need to use both resources and raw materials as efficiently as possible so that our country could benefit from creating the maximum added value. Mr President, in accordance with the strategic goal of increasing investment in fixed assets, which you set, and in order to more fully use the potential of the petrochemical industry by creating attractive conditions, the Finance Ministry and the Energy Ministry together drafted a Federal Law On Amendments to Tax Code of the Russian Federation. You mentioned it in your opening remarks. I would like to thank you, on behalf of the industry, for supporting that law, which you signed on October 19, 2020. The law is aimed at stimulating the development of the Russian petrochemical industry by creating tax incentives for using liquefied petroleum gas, as well as for ethane separation and conversion into petroleum products. A reverse excise duty of 9,000 rubles per tonne of ethane used as feedstock for petrochemicals and 4,500 rubles per tonne of LPG used in the petrochemical industry will become effective on January 1, 2022. It will be issued against the minimum investment commitments ranging between 65 and 110 billion rubles depending on the class of goods. This will make up for a higher cost of implementing the project in Russia compared to the main competitor nations. The high profitability involved will allow us to attract the necessary investment. The largest projects to be implemented in the petrochemical industry in the next few years are SIBUR’s Amur Gas Chemical Complex, the Ust-Luga complex to process ethane-containing gas and produce LNG, which is being implemented by Gazprom and project operator RusKhimAlyans, the Irkutsk Polymer Plant construction project of the Irkutsk Oil Company, and the construction of a new olefin complex for Nizhnekamskneftekhim, TAIF Group. Mr President, in conclusion I would like to point out that the Government’s coordinated efforts will help us implement these projects together with the concerned companies, attract investment, become the world’s fourth largest ethylene producer by 2030, and ensure the growth of output in the petrochemical industry by 12 million tonnes per year from the current level, or more than twice the current figure – these are our strategic goals. This will not only provide feedstock for small- and medium-scale chemicals, but also create conditions for exporting $10 billion worth of non-raw materials and non-energy goods a year, or more than five times the current figure. We expect some 5 trillion rubles to be invested in the industry and will create over 10,000 high-skilled jobs. Thank you. This concludes my report. <…> Vladimir Putin: Colleagues, I would like to say a few words in conclusion. Of course, we still have much to do so that the industry we are discussing today can fully meet the growing demand for innovative materials inside the country and so that our producers occupy important positions in the global market. It is necessary to take vigorous action in many areas – today we have spoken practically about each of them. Proceeding from your proposals, we will note the following in the list of instructions. First, it is necessary to draft a package of measures on developing the production of low- and medium-tonnage chemicals in Russia until 2030. It is necessary to increase – this was also mentioned today – the manufacture of these products by 70 percent as compared with this year’s figures. In addition, it is essential to compile a list of priority projects in low- and medium-tonnage chemistry that have a comprehensive impact on the development of product chains and have a broad multiplier effect. Let me repeat that considering their importance for the national economy, such projects must enjoy special support of the state. They create new jobs and are points of growth for whole regions. Secondly, I am instructing the Government to draft a package of measures, including tax benefits, with a view to stimulating the production of artificial rubber. There is indeed a big demand for it, and the forecast shows it is unlikely to decrease. We need it for the dynamic development of the motor industry (there is no doubt that it will also grow when the pandemic is over), aircraft building and the production of many types of combat hardware, and in many other areas. We have good experience in applying the so-called “damping mechanism” in taxation, as mentioned by the Finance Minister. It could be used to support artificial rubber manufacturing. I would like you to study this issue. Third. A number of steps need to be taken to increase the use of polymers in water and sanitation networks. Otherwise it will be very difficult for us to create production if we do not have our own market. And we see how effectively they are used in a number of countries and economies. This will boost demand for innovative products in the petrochemical industry. In addition, the service life will also increase, and the costs of network operation will decrease. Fourth. I ask the Government to conduct a comprehensive audit of industrial construction regulation, including drafting a set of rules to introduce new, advanced materials and technologies produced by the petrochemical sector. I support the Deputy Prime Minister’s proposal that heads of industry enterprises should also get actively involved in this work and not just wait around idly – they should get involved in this work, propose these solutions and point out problems that interfere with work, and thus, working together, we would quickly come to the regulation we need. Fifth. To minimise the negative impact on the climate and the environment, as well as to increase the competitive advantages of our oil and gas chemical products – and I agree with my colleagues that we should not overlook the oil sector either – I would ask the Government to develop tax and non-tax incentives for the use and production of recycled polymers. I hope that all these decisions will have a positive effect on the industry and will give an additional impetus to the development of the entire Russian economy. The draft instruction, which, as I understand it, everyone has, will be finalised taking into account today's proposals. Once again I would like to thank all the participants for our joint work today, and once again I congratulate SIBUR on the successful implementation of its large-scale project here in Tobolsk. Thank you.