Kazakhstan likely to partner with LyondellBasell in construction of new petrochemical plant

energy

Kazakhstan likely to partner with LyondellBasell in construction of new petrochemical plant

By SRI ⋅ July 8, 2008 ⋅

Kazakhstan is likely to partner with LyondellBasell Industries, a global petrochemical manufacturer, to build an integrated petrochemical complex in Atyrau, said Dauren Yerdebai, president of Kazakhstan Petrochemical Industries.

Kazakhstan Petrochemical Industries (KPI), the operator of the project jointly owned by KazMunaiGas and SAT Petrochemicals, is expected to begin construction of the petrochemical complex in December 2008, more than a year after the original projected start date. This delay was caused mainly by a lack of agreement on future supply of raw materials, said Yerdebai in an interview with Kazakh weekly Biznes i Vlast.

An agreement on natural gas deliveries was finally with Tengizchevroil (TCO) in March of this year. “This contract basically makes the project. Now, that it is signed, we can start talking to banks about financing,” Yerdebai told Biznes i Vlast. Every year, the complex will buy about 7 billion cubic meters of natural gas from TCO at a price calculated based on the market value of Brent crude oil.

The main markets for the the plant will be China and Europe, which are expected to buy 400 thousand and 300 thousand tons annually, respectively. The remainder of the annual projected capacity of 1.2 million ton will be divided mainly among Kazakhstan, Russia, Turkey, India and Ukraine.

Preliminary phase

On May 28, the board of directors of KazMunaiGas Exploration and Production (KMG EP has a 50 percent stake in KPI) designated 4.8 billion tenge ($40 million) for the preparatory phase of the project. The phase will focus on creating a financial and operation structure of the project and conducting preliminary studies for the lending banks and contractors.

At the same time, KPI is in negotiations with commercial banks to secure financing for the $6 billion project. The initial structure anticipates KPI to provide 30 percent of the capital; the rest will be covered with loans from commercial banks.

“Immediately, I will say that we did not negotiate with Kazakh banks because their approach to project finance did not work for us. Interest rates are very high and the repayment periods are short. Therefore, we turned to foreign banks with more favorable terms - a repayment period of 15 years and a low interest rate,” said Yerdebai.

Potential partners

IPIC, the investment arm of the government of Abu Dhabi specializing in investments in the energy and chemical sectors, showed interest the project during President Nazarbayev’s visit to the UAE last year. “For us, the attractiveness in having the Abu-Dhabi-based company as a partner in the project was its access to raw materials - at fixed prices, in guaranteed volumes and at long-term agreements,” explained Yerdebai. This would provide welcome diversity to TCO as the only source of raw materials. “However, IPIC, having considered our project, announced it was unlikely to be of interest to them. We still maintain contact with the company, but it is unlikely that it will participate in the construction of the Kazakhstan plant.”

KPI has also worked with LyondellBassell, one of the leading global producers of petrochemical products, and has long seen the company as the preferred partner for the project. However, its participation is far from certain, mainly due to KPI’s lack of access to raw materials. The project itself seems promising enough to attract the interest of a company like Lyondell Bassell, one of the leaders in the field of petrochemicals. However, as it depends entirely on one supplier of raw materials, there is no certainty that LyondellBassell will join the project, Alexei Kokin of Moscow-based Metropol Investment Group told Biznes i Vlast.

Ensuring supplies of raw materials, particularly natural gas, is the biggest problem for producers of petrochemical products, stressed Mr. Kokin. In his view, LyondellBassell is likely to require guarantees from KPI before it joins the project. And it will not as much be financial guarantees (LyondellBassell has worked in the field for many years and knows how to make profit from petrochemicals), as raw materials supplies guarantees. “Negotiations on this issue could further delay the construction of the plant,” warned Kokin.

Mikhail Muromsky, analyst at Rus-Capital, a Russian investment company, stressed that was difficult to predict LyondellBassell’s investment plans in Kazakhstan, as the privately held company is quite tight-lipped. “However, today, there is a deficit of refined products both in Kazakhstan and Russia, so the viability of the project beyond doubt.”