LUKOIL-NEFTEKHIM STRATEGY FOR DEVELOPMENT V.M.Sokolsky LUKOIL-Neftekhim Общество с...

LUKOIL-NEFTEKHIMSTRATEGY FOR DEVELOPMENT

V.M.Sokolsky

LUKOIL-Neftekhim

Общество с ограниченной отвественностью

Third International Conference on the Chemical and Petrochemical Industries of Russia & the CIS16-17 May 2002, Amsterdam, the Netherlands

“ЛУКОЙЛ-Нефтехим”

Общество с ограниченной ответственностью “ЛУКОЙЛ-Нефтехим”

Involvement of the Russian oil and gas companies in the petrochemical sector

• LUKOIL LUKOIL-Neftekhim• Gazprom SIBUR• YuKOS Angarsk Petrochemical

Company• TNK Linos• Tatneft Nizhnekamskneftekhim• SurgutNG LAB/LABS plant at Kirishi

Main barriers for the entry of the Russian oil and gas companies into petrochemicals

> Highly complicated nature of the modern petchem industry and its insufficient knowledge by the top managers of oil and gas companies

> High investment requirements of the industry against unfavourable business climate in the country

> Continued failures of the pioneers within the Russian oil and gas industry to go downstream into petrochemicals


Main products

Total capacity

incl LUKOILNeftekhim

EthylenePropyleneBenzenePolyethyleneVCMAcrylonitrilePAN fibersMMA

1, 050 450 215 500 370 180 37 28

600250170400370 150

24 28


LUKOIL / LUKOIL- Neftekhim production potential, in 000 tpa


LUKOIL-Neftekhim range of main products

> Olefins, aromatics and other basic petrochemicals– ethylene– propylene– C4 stream– benzene

> Organic intermediaries and monomers – vinyl chloride monomer– acrylonitrile– MMA– phenol– acetone

> Polymers – HDPE– PAN fibers


LUKOIL-Neftekhim status and structure

LUKOIL-Neftekhim is a LUKOIL-owned petrochemical holding. Its affiliated companies are as follows:

> Stavrolen, Budyonnovsk - olefins, benzene and HDPE> Saratovorgsintez, Saratov - AN, PAN fibres, cumene, phenol,

acetone and MMA > LUKOR, Kalush - chlorine, caustic soda, olefins, aromatics,

VCM and HDPE > Stavroplast, Minvody - plastic goods> VARS, Ventspils - transportation services> Stavrochem, Budapest - trading in chemicals> Polychemical, British Virgin islands - trading in chemicals> LUKOIL Chemical BV, Antwerp - trading in chemicals


LUKOIL-Neftekhim size of operations

> Personnel - about 14,000 people

> Total annual sales: around $500 million (excluding chemical sales of Neftokhim and Petrotel)

> Annual total chemical production capacity: over 3 million tons

> Annual total production of chemicals intended for sales: 2 million tons

> Monthly shipments of chemicals: over 100,000 metric tons to more than 50 countries

LUKOIL-Neftekhim sales policy, structure and outlook

Domestic market is of primary importance due to:

1) better access, 2) higher prices, 3) fast demand growth

LUKOIL-Neftekhim share in the domestic market:

HDPE - 40%, AN - 95%, PAN fibres - 30%, phenol - 20%

Increasing role and prevalence of the export sales result from insufficient volume of the domestic market. Hence, more than 50 per cent of the output is sold externally.

In future, LUKOIL-Neftekhim will retain its high export orientation and exposure to global factors.


Key components of LUKOIL-Neftekhim strategy

Evolutionary type of development with a focus on:

> Developing interaction with LUKOIL> Modernisation and debottlenecking> Improvement of the feedstock supply system > Improvement of the marketing system> Expansion in existing and new product segments> Regard of environmental issues> Due regard of external factors


LUKOIL-Neftekhim interaction with LUKOIL

> Material flows. LUKOIL-Neftekhim draws most of its feedstocks from LUKOIL and ships some chemicals (e.g. HDPE and phenol) to the latter. With good feedstock supply, LUKOIL-Neftekhim has a strong competitive advantage over other companies. It also eases LUKOIL’s dependence on fuel markets.

> Financial flows. For development projects, LUKOIL-Neftekhim can use both its own resources and financial assistance from LUKOIL. Being a profitable company, it has been also continuously contributing to LUKOIL’s total profits.

> Corporate culture. LUKOIL-Neftekhim is a part of LUKOIL Group of companies developing a corporate culture similar to that of the largest vertically integrated Western companies.



Modernisation and debottlenecking

> Budyonnovsk: completed modernisation of a steam cracker with its conversion to lighter feedstocks and an increase in ethylene yield from 28.5 per cent to 32.8 per cent

> Saratov: completed modernisation of a phenol plant with a reduction in benzene consumption by 2 per cent, plus improvements in the waste disposal system

> Kalush: completed repair of pyrolysis furnaces with the conversion of olefins production to lighter feedstocks and an increase in ethylene yield from 23.8 per cent to 28.2 per cent; planned modernisation of chlorine production

Improvement of the feedstock supply system in the short and medium term

> Introducing lighter and more efficient feedstocks to olefins production (e.g. naphtha and LPG instead of gasoil). Examples: Budyonnovsk and Kalush.

> Rationalisation of feedstock supplies with reliance on own resources. Example: AN and cumene production at Saratov using propylene from Budyonnovsk.

> Cooperation with LUKOIL in working out a mutually acceptable pricing system for feedstocks


Improvement of the feedstock supply system in the longer term

Using new sources of crude oil and refined products supply:

> CPC oil pipeline running from the Northern Caspian (in which LUKOIL has a stake) - with a possibility of building a new refinery in the south of Russia.

> LUKOIL’s existing and future sources of supply in the Black Sea and Mediterranean area incl Bulgaria, Romania, Greece, Iraq, Egypt, etc.

Using own natural gas reserves making allowance for:

> Big planned gas production volumes with a high proportion of ethane - LUKOIL is to become Russia’s 2nd biggest gas producer following Gazprom.

> High concentration of gas reserves in the Northern Caspian, in close proximity to LUKOIL-Neftekhim’s petrochemical plant at Budyonnovsk.

> High concentration of gas reserves on the periphery of the European Russia, that is close to its borders and to export markets


Improvement of the domestic marketing system

Better market research

Broader trading practice

> trading through dealers, subsidiaries and own trading companies

Improvements in transportation, range and quality of products

> elaborating new efficient delivery schemes> enlarging range of products, introducing new grades of products> certifying products and quality control systems in accordance

with international standards


Improvement of the export marketing system

Better market research

Broader trading practice> operating a liquid chemicals terminal at Ventspils> developing an independent marketing system incorporating existing

and planned storage and distribution centres in Europe > getting direct access to customers, reducing dependence on traders

Improvements in transportation, range and quality of products> elaborating new efficient transportation schemes> enlarging range of grades and products> certification of products and quality control systems in accordance

with international standards


Expansion in existing product segments

LUKOIL-Neftekhim intends to develop in old and new product segments - by acquiring/building up new assets

Development in existing product segments implies expansion primarily in:

> olefins and aromatics > intermediary products and monomers > large-tonnage polymers, in particular - polyolefins

The aim is to consolidate LUKOIL-Neftekhim market share and exploit its competitive advantages in feedstocks


Expansion in new product segments

Expansion in new product segments is to be focused on going downstream, implying LUKOIL-Neftekhim’s vertical integration with implementation of the following projects:

At Budyonnovsk – butadiene (100 ktpa), MTBE (100 ktpa), VAM (50 ktpa), polypropylene (100 ktpa) and HDPE gas pipes

At Saratov – sodium cyanide (20 ktpa), PMMA (25 ktpa), ABS resins (25-50 ktpa)

At Kalush – PVC (180 ktpa) and polypropylene (100 ktpa)

The aim is to add value to chemicals produced and increase flexibility under the changing market conditions


Regard of environmental issues

Environmental issues are a key component of LUKOIL-Neftekhim strategy, which increased role is embodied in the following:

> Growing impact on the corporate development plans

– planned construction of the sodium cyanide plant at Saratov as a solution of the problem of utilizing by-product hydrocyanic acid

– planned construction of PVC and ABS resins plants as a response to a problem of VCM and AN transportation in Europe

– planned modernization of the chlorine and caustic soda plant at Kalush to solve the problem of minimizing hazardous emissions

> Introduction of ecological monitoring at all production sites> Modernisation and construction of new waste disposal systems


Due regard of external factors

> Expected accession of Russia to the World Trade Organisation

> Changes in national investment, tax and custom legislature towards closer compliance with international norms

> Growing interaction with third corporate structures and need to set up alliances with foreign companies and banks

This implies higher commitment to international standards of management, financial transparency, protection of shareholders’ rights, ethical principles of running business


Summary

LUKOIL-Neftekhim accounts for 3% of LUKOIL total sales with petchems share in sales of world oil majors varying from 10% to 25%. No doubt, the company has a high growth potential.

LUKOIL-Neftekhim is a company intending to operate on a global scale as a civilized player abiding by international standards of corporate management.

LUKOIL-Neftekhim intends to develop cooperation with other companies, particularly with those possessing competitive advantages in technology, marketing and management.

Possible areas of cooperation are joint production of chemicals, feedstock supply and marketing arrangements.


THANK YOU

FOR

YOUR ATTENTION!


LUKOIL-NEFTEKHIM STRATEGY FOR DEVELOPMENT V.M.Sokolsky LUKOIL-Neftekhim Общество с...

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