Overview of Azerbaijan Petrochemical Projects
April 2017
Contents
• Prospects of global petrochemical sector growth
• Current projects of Azerbaijan petrochemical industry
o SOCAR GPC
o SOCAR Polymer
o Upgrade of Heydar Aliyev Refinery and Azerikimya Production Union
Prospect of Global Petrochemical
Sector Growth
Petrochemical agenda until 2030
▪ Petrochemical industry provides circa 100 kg of products per capita. These products are applied in every field of human
activities. Primarily, these are polymers (different sorts of plastics, rubbers and fibrous materials) covering almost 70% of the
product volumes.
▪ Since 2000 petrochemical industry has accumulated quite a potential: EBITDA annual growth is around 4% which is $45
bn
– Increment in profit at production stage coming from cheap feedstock from the Middle East and North America
– New market players should catch the profit coming from rapid development of the petrochemical industry.
▪ 2030 forecast says we can expect a number of serious problems and shortages market players will have to overcome
– Most likely the forecast will be based on the completion of the current cycle and slowing down of the market growth
associated with basic characteristics (GDP and market saturation)
– Tested cost factors will become inaccessible by many; and it’s not clear where the next batch of cheap feedstock will be
found, while the future growth will still be based on developing markets where, it seems, new players are in charge.
– Potential failures: the segment will experience a number of failures, in particular – the complications resulted from the
transition to cyclic economy.
In general, industry profitability level has been quite sustainable until now, in spite of the decrease of oil prices
Ethylene, USD/t
80
500
1,000
140
1,500
4020 16060 12000
100
1,353
1,500
140
500
1600
1,000
40 12060200 10080
975
Actual capacity1
Actual capacity 1
China - МВО
Europe - LG
China - LGM. East - Gas
Ch - LG
China - HC
Other
countriesN. America - Gas
$70 bn
(86%)
$ 71 bn
(90%)
Total profit
2013, oil at $103
2016, oil at $50
Profit pool has shifted from the producers of cheap feedstock away, from 70% (2013) to
around 50% (2016)
1. Accounting for 93% load 2. Without CIS
Historically, petrochemistry growth has been ahead of the global GDP growth, with the long-term growth rate of ~ 4%. This trend will hardly stay the same in the future.
Petrochemical sector growth compared to GDP growth, %
-4
0
4
8
12
20152000 201020051995
GDP Petrochemistry1
1 It includes weighted growth rates for the following link chains: methanol, ethylene, propylene, butadiene, benzene, toluene, xylene
▪ Petrochemical industry
growth is more unstable than
that of GDP
▪ GDP growth went down from
3.1% to 2.7%, whereas the
long-term forecast is circa
2.5%
▪ Growth rate of petrochemical
production is also decreasing
from 1.6% to 1,4%
Petrochemical production growth/ GDP growthx
1.6 1.4
GDP growth (CAGR)x
Petrochemical production growth (CAGR)x
3.1 2.7
~5.0 ~3.5
Petrochemical production growth will most likely slow down due to the combination of a slow GDP growth and petrochemical activity plateauing at 2.5-3.5%
Growth of petrochemical product market, % CAGR
▪ Historical growth of
around 4%
▪ Historical ratio
between
petrochemical
products and GDP
growth of around ~
1.5
▪ Let’s consider two
scenarios:
– Historical trend
remains
unchanged
– Relative growth
keeps going down
▪ Growth range will
decrease down to
2.5-3.5%
▪ A too low growth
cap?
▪ Will production
intensification be
enough?
etro1995-2005 2005-2015
2015-2030 upper limit
2015-2030 нижний
предел
▪ Same connection
▪ Demand doesn’t slow
down
4.5
Petrochemistry
3.1
GDP F
3.8
F PetrochemistryGDP
2.7
2.5
FGDP
2.5
Petrochemistry
2.5
FGDP
3.5
Petrochemistry
1.6 1.4
1.4
1.0
▪ Maturity of end
markets and decrease
of potential demand
The next wave of GDP growth will cover new developing markets, including India, Indonesia, and Africa; Iran as a potential demand source?
GDP growth2015-30 CAGR
Demand for petrochemical products (polymers)2015, kg per capita
1 Japan, Korea, Taiwan (actual vol.: 2,000 kg per capita) 2 Strong petrochemical and oil production industries, in S. Arabia in particular
3 African states south of Sahara 4 SE Asia, w/o Indonesia
M. EastS. & N. Americas AfricaEuropeAsia CIS
▪ China and South-East Asia have reached a level of high saturation with
petrochemicals, in spite of export volume
growth.
▪ India and Indonesia are the next attractive regions, but time is needed to engage the full
potential.
▪ Iran is an unexplored map. Though 80 mn people live here, it’s rather a convenient
source of feedstock than a market opportunity.
▪ Africa has a longer-term potential, but it’s
not clear how it will develop its chemical market. Probablyб growing urban extension
will help.
▪ Established partnerships will become crucial, in getting access to all these markets.
25
0
125
50
75
100
8-25
6
0
42
JKT1
Indonesia India
N. America
China
M. East (w/o Iran)
Europe
SEA4
CIS
L. America
С.Африка
Iran
SSA3
Population
by 2030
Next wave of regional growth
Current Projects
of Azerbaijan Petrochemical Industry
GTP
LHPPE,LPPE
Refinery
Azeri-kimya
SOCAR Polymer
Chain 1
Chain 2. SOCAR GPC
LPPE: 120 th t/year
PP: 184 th t/year
2018
2021
PP: 300 th t/year
Production chain
Upgrade
6.5 mn t / year => 7.5 mn t / year
Upgrade
PE:
600 th t/year10 bn m3
Propylene
SOCAR GPC
SOCAR GPC: brief overview
• Location: Qaradag district, Azerbaijan (15 km south of Baku)
• Project configuration: GPP with the capacity of 10 bn m3; steam cracking unit with the capacity of 610 th t
of ethylene and 130 th t of propylene; LLDPE/HDPE production unit with the capacity of 600 th t a year.
• Commissioning in Q1 2022
• Feedstock supply: SOCAR supplies C2+ on the supply-or-pay basis
• Markets: 50% of products will be transported to Turkey. Other target markets are the states of Western and
Central Europe, China, Russia, and Azerbaijan.
• OTC: SOCAR guarantees further purchasing of the full volume of products
GPP GChP
Natural gas, 10 bn m3
CO2: 0.2 bn m3
PP: 120 th t annually
PE: 600 th t annually
Gas get treated and purified as per international standards:
9.2 bn m3
Potential financing options
• Credit availability, low debt cost
State guarantee
• Guarantee of feedstock supply and product off-take, high capital cost (at WACC* = 12% (ratio of
debt to equity 70%/30%), capital cost equals 26%)
Construction-operation-transfer
• Burden on SOCAR balance sheet
Corporate loan
• 30% - requirement to shareholder stock (~$1.2 bn)
Credit secured by ECA
• Guarantee of feedstock supply and product off-take, low weighted average finance cost
• *WACC – weighted average capital cost
Financing without debt guarantee (SOCAR GPC)
Advantages and drawbacks of project financing
Normally, it’s off-balance for sponsor(-s);
Risk is transferred to creditors;
Long term;
Applicable for several investors. Enables
management of financial needs of a partner with
a low credit rating.
Ensures confirmation of vitality of the Project by a
third party;
Mega-project can harm the activities of the
sponsor.
Higher transaction costs (higher risk / higher
leverage / consulting fees)
The longest transaction periods
Loss of project management flexibility
Complex documentation: a 15-page consolidated
statement → 1500 pages of financial documents
ADVANTAGES DRAWBACKS
In the course of Baku-Tbilisi-Ceyhan project, in 2002, BP had to deal with the rejection of the financing method by AMOCO
(project finance vs. corporate finance). Then BP made the following statement:
‘Project finance can become an efficient instrument in risk mitigation for those projects that will be implemented with
attractive economic characteristics, though the sponsor will have a long balance sheet and the ability to manage risks
within the country.’
Baku-Tbilisi-Ceyhan project was successfully implemented though project financing.
SOCAR GPC: target financial structure
• 70% of all funds come from the loan
• Guarantee of С2+ feedstock supply
70%
30%
Source of finance
Principal debt Capital investment
Indispensable characteristic of a project is an EPC LSTK contract
• Minimum financial risks for the customer;
• Cost and advantages of the project are known before the decision to finance it is made (the one that
seems most fit to Creditors);
• Customer performs minimum supervision over the contractor, compared to open-price contracts
(except for QC/QA and schedule discipline);
• Improved control over scope of work (ЕРС LSTK scope is normally more detailed, compared to
reimbursable contracts);
• Contractor prefers more qualified staff;
• Financially, it’s in the contractor’s interests to complete the project as early as possible.
Open-book Cost Estimate
OBCE approach saves 10 months,
the opportunity cost of which can be circa $400-600$
Project schedule
Activity 2016 2017 2018 2019-2022
PMCservice
PMC before FID PMC after FID
GPP, steam cracking unit, co-monomer
techExtended PDD
PE unit tech Extended PDD
FEED for Eng., Constr.
Extended PDD
EPC contract LSTK cost sheet
Finance-related negotiations
Capital investment-related negotiations
• All serious risks will be eliminated before FID:
• CapEx number will be fixed
• Precise OpEx number will be known
• Finance issue will be resolved
• Expenses before FID are 1% of TIC
SOCAR Polymer: Success Story
SOCAR Polymer: brief overview
4
• Location: Sumgait Chemical Industrial Park; the project is released form the obligation to pay main
taxes and customs duties for 7 years;
• Project configuration: HDPE – 120 th t/year; PP - 184 th t/year;
• Feedstock supply: ethylene, propylene and hydrogen will be supplied by SOCAR on the supply-or-pay
basis;
• Markets: at the local market, around 25% of products will be sold, the rest will be exported to Turkey,
Europe and CIS states;
• OTC: SOCAR guarantees further purchasing of the products;
• Work progress: PP – 70.9%, HDPE – 26.3%
• Commissioning dates: PP unit in Q1 2018, HDPE unit in Q3 2018;
Financial structure
• Debt/equity ratio is 60/40 ($489 mn from Gazprombank);
• Being principal shareholder, SOCAR provides a limited guarantee to assign extra funding;
• No project completion guarantee required;
• No debt guarantee required;
• 10 months from the start of negotiations to takedown;
• Creation of a project funding precedent in Azerbaijan
Financing terms
4
The following documents were signed (overall number of documents: 35 )
Financial documents:
o Credit agreement;
o Loan subordination agreement;
o Paid-up capital agreement
Design documents:
o Feedstock supply agreement;
o OTC;
o EPC agreement;
Transaction security agreements:
o Share pledge agreement;
o Assignment agreements
o Direct contracts
Upgrade of existing facilities
Upgrade of Heydar Aliyev Refinery and Azerikima Production Union
Upgrade results in the increase of the refinery profitability:
Objectives of Azerikimya union upgrade
• Refining capacity goes up from 6 to 7.5 mn t annually
• Products will meet Euro 5 quality standards
• Significant increase of light product yield and extra refining
margin
• OpEx optimization
• To produce at least 110 th tons of ethylene and 150 th tons of propylene due to SOCAR Polymer supply obligations
• To switch from naphtha to gas
o Improves production efficiency
o Optimizes costs based on the difference between naphtha and gas
• To improve operational safety of the refinery
Products
2016 ,
actual,
tons
After upgrade,
tons
Gasoline 1,140,000 2,168,000
➢ AI-92 (regular) 1,140,000 1,224,000
➢ AI-95 (premium) 944,000
Diesel fuel 1,882,000 2,916,000
Jet fuel 627,000 984,000
Bitumen 179,000 400,000
C3 fraction (Azerikimya) 181,000
C4 fraction (Azerikimya) 112,500 138,000