Azerbaijan Petrochemicals Report Q1 2012

Progress is under way in establishing a world-scale petrochemicals complex in Azerbaijan, promising to turn around the country’s petrochemicals industry over the next decade, according to BMI’s latest Azerbaijan Petrochemicals Report.
Although the country has had many false starts in terms of expanding petrochemicals capacity from the current small base, BMI believes the current drive – in the context of restructuring and consolidating operations under State Oil Company of Azerbaijan Republic (SOCAR) – will achieve its objectives. SOCAR aims to begin construction of the gas-processing and petrochemical complex in the Garadag district of Baku in 2013 and should be completed in 2018-20. This should include a gas-processing facility with capacity for 10bcm, a 10mn tpa oil refinery and a petrochemical complex with capacities of 700,000tpa HDPE and LDPE, 130,000tpa PP, 40,000tpa benzene and 110,000tpa of styrene. The new complex could be integrated into the existing Azerkimya complex, which has capacities of 370,000tpa ethylene and 120,000tpa PE but has been operating at less than 20% capacity over the past decade.
Azerbaijan has the resources to become an efficient export-oriented petrochemicals producer, but has been let down by its poor business environment and the inefficiency of state-owned producer Azerkimya. Lack of infrastructure, in particular electricity supplies, has undermined production with frequent outages and low capacity utilisation. Having taken control of Azerkimya in 2010, SOCAR is also modernising the company’s operations, attracting interest from foreign investors.
The level of chemicals and petrochemicals output is currently very small-scale. Until production facilities are upgraded and expanded it is unlikely that Azerkimya will compete effectively against foreign rivals on both domestic and export markets. Rather, for the time being it owes its existence to state patronage and protection, while remaining plagued by major disruptions in output caused by periodic rapid rises in electricity and raw material costs. Azerkimya’s output has tended to be highly sensitive to changes in the non-oil economy with the rate of petrochemicals sales growth tending to be two or three times the rate of overall economic growth, amplifying the overall economic trends. While the strongly pro-cyclical nature of the industry is likely to result in high rates of growth, with real GDP growth forecast at 7.5% in 2011, with low level of capacity it will not add much value and Azerbaijan will remain dependent on imports of chemical products. Moreover, with economic growth set to decline after 2011, unless the industry is improved and restructured it will see yet further declines in the years ahead.
Azerbaijan is in 11th and last place in BMI’s proprietary Central And Eastern Europe Petrochemicals Business Environment Ratings, with a score of 33.2, down 0.1 point since the previous quarter due to a decline in country risk. Azerbaijan lies 6.8 points behind Ukraine in the regional ranking. The score could rise if plans for a new petrochemicals complex come to fruition, but this is unlikely to come onstream before 2018 at the earliest. Azerbaijan’s considerable energy reserves and rising gas output have been hampered from improving the petrochemicals capacity, largely due to the poor business environment which has deterred investors. However, there are signs that this is changing for the better as the government makes a concerted effort at restructuring the sector. We do not include proposed projects in our forecasts owing to a lack of information on capacity and the postponement and abandonment of previously announced projects. The situation could change if and when Azerkimya succeeds in creating partnerships for its mega project at Sumgait. However, the industry may find it difficult to secure financing for projects, at least in the short term. While no definite plans for increased cracker capacity have been announced, we are confident investors will announce new facilities over the coming months.
However, it could take at least three years for any extra capacity to come online. In addition, the role of SOCAR in the purchase of Turkish petrochemicals producer Petkim could reflect potential for developing downstream operations abroad as JVs, which may help overcome problems of infrastructure, somewhat ease financing concerns and perhaps provide better access to export markets.