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Home / Issue Archive / 2008 / January #1 / LUKOIL Chemical Group Develops a Leadership Strategy

№ 1 (January 2008)

LUKOIL Chemical Group Develops a Leadership Strategy

Today, LUKOIL Chemical Group is involved in the deeper conversion of hydrocarbons produced by LUKOIL in Russia, and itself produces a wide range of petrochemicals in demand in the Russian and international markets.

By Yagmur Kurbanov

In 1997, LUKOIL set up a company to manage its petrochemical assets – LUKOIL Chemical Group. 

From Hard Times to Top Positions

LUKOIL Chemical Group’s fixed productive assets include the following companies: Stavrolen (Budennovsk, Stavropol Region), Karpatneftekhim (Kalush, Ivano-Frankovsk Region, Ukraine), Saratovorgsintez (Saratov), and the sea terminal VARS (Ventspils, Latvia). The economic condition of nearly all of these companies used to be submarginal or on the verge of bankruptcy.
LUKOIL Chemical Group’s General Director Alexei Smirnov said: “We managed not only to recover idle enterprises that were near bankruptcy in the 1990s, but also to implement new investment projects. Today all our assets are in perfect condition”.

Heavy investment in repairs and engineering upgrades, construction of new facilities, and the arrangement of a steady supply of raw materials enabled the Group to ensure uniform process flows in each of its enterprises and to take the lead in the industry.

Since 1997, Stavrolen has been operating practically at a full load capacity. Its share of the domestic high-density polyethylene market exceeds 40 percent (Editor’s note: 2006 consumption in the Russian market was 650,000 tons).  
In 2005, Karpatneftekhim commissioned a plant for С4-С5 hydrogenation. In 2006, because of the new plant, the enterprise managed to increase ethylene output by 17 percent. Propylene and benzene output levels increased by 15 percent and 13 percent respectively over 2005 levels, whereas the quantity of pirolized raw material processed in 2006 was the same as in 2005. At present, the enterprise is constructing a chlorine and caustic soda production plant as well as a polyvinylchloride resin plant which will be one of the largest in Europe with a capacity of 300,000 tons per year; both are scheduled for commissioning in 2008–2009.

Introducing new technologies and production processes enabled enterprises of LUKOIL Chemical Group to reduce production costs and environmental impact and to improve output quality.

The corporate management systems of all LUKOIL Chemical Group’s companies have been certified as meeting international requirements of quality, environmental protection, and industrial and labor safety. Implementing comprehensive investment and social programs has transformed the company into a leader in the post-Soviet petrochemical market.

From the Urals to Western Europe

Geographically, the Group’s area of interest covers Europe from Belgium to the Urals. Its products are supplied to more than 50 countries worldwide. Today, the company is a leader in the production of polyethylene, vinyl acetate, acrylonitrile, and monochloroethylene.

After the commissioning of a new plant at Saratovorgsintez, which will produce 15,000 tons of sodium cyanide briquettes per year, LUKOIL Chemical Group will be able to fully satisfy Russia’s sodium cyanide demand and eliminate the need to import it. Alexei Smirnov highlighted that “now we produce a unique product, which was mainly imported by Russia before.”

Another investment project of LUKOIL Chemical Group worth mentioning is POLYEF, (Blagoveshchensk, Bashkortostan), the only polyester production complex in Russia, which can produce 230,000 tons of terephthalic acid (TPA) per year. Since March 2007,  LUKOIL Chemical Group and SIBUR Holding have co-owned the majority interest in this complex.

The story of the two companies’ cooperation began in 2005, when their joint enterprise completed a polyethyleneterephthalate (PET) plant with a capacity of 120,000 tons per year. The enterprise currently plans to invest in expanding TPA and PET capacities by 2011.

Cooperation with German companies such as UHDE and VINNOLIT helps introduce modern technologies and optimal engineering solutions in polyvinylchloride resin (PVC) production. PVC production at Karpatneftekhim will be fully integrated with the existing ethylene plant and a new chlorine plant will be commissioned in the second half of 2008. The new PVC plant will help meet the growing PVC demand in the region. At present, Ukraine and Russia import PVC; meanwhile, the average per capita consumption of this plastic is growing faster here compared to other European countries, due to dynamic development in the construction sector. Commercial operation of the PVC production plant is scheduled for 2009.

Leadership Strategy

According to Smirnov, “the company’s overall development strategy until 2017 includes, on the one hand, maximizing the efficiency of the existing plants, and on the other, launching new production operations in existing facilities.” The company is set to invest over $4 billion in this program over the next 10 years.
There is one more project worth mentioning: the construction of a large petrochemical complex to produce ethylene and its derivatives in the Stavropol region. LUKOIL itself will supply the hydrocarbon materials from its fields in the North Caspian basin. The complex’s annual output will be at least 600,000 tons of ethylene. The plan includes polyethylene production plants with capacities of at least 450,000 tons per year, and provides for the expansion of current Stavrolen facilities to produce up to 300,000 tons of polypropylene per year. The complex will be completed simultaneously with the start of operation of the North Caspian fields in 2013.

According to marketing research conducted by Nexant, in recent years the growth of polyethylene and polypropylene consumption in Russia has significantly exceeded the world growth rate. For instance, the world’s average growth rate of polyethylene consumption was 4.3 percent, and in Russia 12 percent; for polypropylene, these figures were 6 percent and 17 percent respectively.

Therefore, the economic efficiency of the planned complex depends on the high domestic demand for modern plastics and by a number of other important competitive advantages, such as the low cost of delivering raw materials via a product pipeline direct from onshore facilities in the North Caspian fields, proximity to target markets which consume the final products and to export routes (ports on the Black Sea and the Sea of Azov), reduction in the raw-material processing cost due to innovative petrochemical and process chemistry technologies, and recent developments in industrial automation. In addition, constructing the new facilities near Stavrolen’s existing assets will make it possible to achieve synergy between the available infrastructure and Stavrolen’s qualified and experienced staff.

Domestic design institutes VNIPIneft and VNIPIgazpererabotka are collaborating with foreign engineering and consulting companies to implement the project. According to analysts, this project is set to become not only the largest polymer production complex in Russia, but also Europe’s most efficient petrochemical producer.

Successful implementation of LUKOIL Chemical Group’s investment program, which includes launching a number of modern productions, will promote the company’s strategic goal – joining the world leaders in the petrochemical industry.

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