WRA Refining and Petrochemicals in Russia and the CIS 14th Annual Roundtable

Lessons the Russian Industry can Learn from the Middle East
November 2010

Agenda Part 1 Petrochemical Opportunities

Gas Production in Russia and the CIS Middle East and CIS Compared Russia and CIS Competitiveness issues Petrochemicals from associated gas Conclusions

Part 2 Project Development

Project Development Challenges ME model Russian model Conclusions

Gas Production/Reserves in Russia/CIS

Enormous!

Most Russian gas is very dry (98%

Methane) Limited opportunity to extract Ethane for Ethylene or other petrochemicals

23% World Total Reserves

18% Global Gas Production 3% Global Ethylene Production

7% World Total Reserves 5% Global Gas Production 0.2% Global Ethylene Production

Presently there is limited petrochemicals production in Russia / CIS

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Russian Oil and Gas Production Areas are Geographically Separate

Gas Production Centre

Oil Production Centres

It will require new infrastructure to capture wet gas

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Russia/CIS compared to Middle East

GAS Production (Reserves)
Mn toe

OIL Production (Reserves)

Mn toe

% Production (Reserves) as GAS

Russia

475 (40,000)

494 (10,200)

49% (80%)

CIS
Saudi Arabia Kuwait

150 (13,000)
70 (7,100) 11 (1,600)

143 (6,400)
460 (36,000) 121 (14,000)

51% (66%)
13% (16%) 9% (10%)

Qatar
United Arab Emirates

80 (23,000)
44 (6,000)

58 (2,800)
121 (13,000)

58% (89%)
27% (31%)

Russia/CIS gas production is 3 x of combined ME!

Russia oil production is similar to Saudi Arabia

Russia/CIS resemble Qatar as most hydrocarbon reserves are in gas

Russia Competitiveness Issues

Feedstock
Potential cost is low for associated gas derived feedstocks. This might be the major source of competitive advantage

Logistics

are poor, controlled access to domestic pipelines, otherwise exports by rail.

Distances are large for exports either WE (~2000km), or East to China (~7000km). logistics create a $100-200/ton cost disadvantage compared with ME However with current high oil prices this cost disadvantage is diluted

Refinery integration

presently very limited.

Opportunities for Refinery-PC integration are theoretically achievable. However the focus of refinery upgrades has been to add value to exports of atmospheric gas oil and long residue rather than petrochemicals opportunities

Feedstock availability, feedstock pricing and product logistics are major issues for Russia to address to build a competitive export industry
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Could Russian Future Gas be More Productive?

Yamal:
11 gas fields 5 oil and gas condensate fields
BCM

Gazproms Gas is too Dry to Support Petrochemicals

Will Yamal gas yield sufficient ethane to make extraction for Petrochemicals 7 economic?

CIS activities in Petrochemicals

While Russia invests very little in petrochemicals, Central Asia is becoming active Kazakhstan and Uzbekistan have new plans for ethane based petrochemicals projects

Kazakhstan is proposing to use the wet gas from Tenghiz oil

Uzbekistan considers a new Ethane Cracker using wet gas from Aral Sea gas fields

Kazakhstan is also looking at propane based PP production Turkmenistan is presently doing relatively little despite its very large reserves

Global Petrochemicals Long Term Trends

Market Growth: driven by Asia, especially China and India New Investments: centred around ME, Asia, LA Future Trade flow: largely ME to Asia and Rest-of-World
ME will be the main net exporter of basic Petrochemicals Asia will continue to grow as net importer due to high regional demand

N. America will remain more or less in balance with shale gas/tight gas providing a new source of cost competitive feedstock
Europe will experience significant onslaught of surplus exports from ME ME ethane supply will be limited Producers with feedstock flexibility and ability to process heavier, but low cost, feeds will have competitive advantage

Feedstock:
Increased use of mixed feed and heavier feeds such as LPG and naphtha

Can Russia develop a role for itself in the global Petrochemicals business same as ME?
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Extensive Associated Gas Flaring in Russia

Gas Flaring Volumes in bcm Russia Nigeria Iran Iraq Algeria Kazakhstan Libya Saudi Arabia Angola Qatar
Source: World Bank

2008 40.2 = 8% of Russian gas sales 14.9 10.3 = 31 bcm 7 5.5 5.2 3.7 3.5 used to be same as Russia 3.1 3

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Associated Gas Flaring ME approach

In 1980s, Saudi Arabia constructed the Master Gas System (MGS)
Gathered and processed associated gas Sales gas used for power and industrial uses Recovered LPG and condensate was exported Ethane was recovered for use in petrochemicals Developed a world class Petrochemicals industry!

Other ME countries adopted similar gas recovery schemes

Gas Use in the GCC - 2008
100,000 90,000 80,000 70,000
Mscm

60,000 50,000 40,000 30,000 20,000 10,000 0

Kuwait Sales Gas

KSA Flaring

Qatar

UAE Shrinkage

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Reinjection

Saudi Arabian Master Gas System

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Saudi Arabian Petrochemicals Production is based on Associated Gas

Hydrocarbon reserves mainly as oil
Associated gas has high liquids content (up to 20vol%) Government fixes the value of gas at a low level ($0.75/mmBtu) due to historic use for flaring Low gas price has encouraged maximum ethane and LPG recovery, with use of ethane in petrochemicals Sales gas is typically ~1vol% ethane
4% World Total Gas Reserves 2.6% Global Gas Production 10% Global Ethylene Production
Yemen Saudi Arabia Syria Iraq

UAE

Oma

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Qatar Petrochemicals is based on Moderately Wet Gas

Hydrocarbon reserves mainly as gas North Field Gas is non-associated with a low liquids content (~6vol% ethane, ~3vol%
LPG).

Syria

13.5% World Total Reserves 3% Global Gas Production 1.3% Global Ethylene Production
Saudi Arabia

Qatar Government actively encourages ethane extraction for petrochemicals A new 1.6Mt/yr Ethane cracker is in plan

Oman

Yemen

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What Price Russian Ethane?

Ethane from Associated Gas - Russia is in a similar position to Saudi Arabia.
Associated gas is being flared This gas is also remote from the existing gas export infrastructure Associated gas yields a relatively large amount of liquids (LPG and condensate) Recovered dry gas and ethane can therefore have a negative cost Ethane is not a fungible commodity and cannot be readily exported

Wet Gas

Gas Processing Plant

NGLs (by pipeline)

NGL Fractionation Plant

Dry Pipeline Gas

Ethane, Propane, Butanes, Condensate

Upgrading and monetisation of ethane from flared associated Russian gas represents a valuable opportunity
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Part 1 Conclusions
Associated gas in Russia
Flaring is at the scale of Saudi Arabia in 1970s Putin set a deadline for 95% utilization by 2011(seemingly now extended to 2014) International agreements create pressure to reduce flaring Presents a huge opportunity for petrochemical developments mirroring the success of the ME over the last 3 decades Optimally gas should be processed for liquids recovery, ethane, LPG and C5+

Ethane from associated gas

has a net negative recovery cost due to the high value of LPG and condensate coproducts. Can then be valued at a nominal value as petrochemical feedstock Potential value of $6-7bn/year from 40bcm of presently flared gas

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Part 2 Project Development

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Project Development Challenges

Investing in Petrochemicals requires consideration of:
Feedstock issues Process Technology often this will be proprietary technology which is not readily licensed Product Marketing marketing issues are more complex than for commodities as customers are more specialised and technical service requirements may be higher Project Execution execution of large multi-billion dollar Petrochemicals projects with numerous process technologies requires skills and experience which may be lacking in Russia today

Traditionally Middle East investors have found solutions to these problems via JV partnerships with established Western (or Eastern) operating companies

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The JV Bargain in the Middle East

ME Partner Provides:
Investment Incentives Land and Infrastructure Cheap Utilities Cheap Feedstock

JV Partner Provides:
Marketing and Offtake O&M Know how Project Execution Know how Technology License

Though now looking dated in the Middle East, this bargain helped kick-start the Middle East Petrochemical boom
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Project Execution model in the Middle East

Competitive LSTK EPC has been the normal contracting strategy

+ For cautious, risk averse owners (ME government backed entities) this
structure provides price transparency, fixed price and fixed schedule for the owner, with transference of price risk to the contractor

+ For Lenders this contracting structure is suitable for project finance, as

schedule and overrun risk is transferred from the project and there is single point responsibility

Requires detailed front end work to define the ITB, thus longer project schedule

In tight EPC markets ME has experimented with other contract structures but returned to competitive LSTK as preferred strategy
ARAMCO has recently bid two $10bn+ refineries on this basis

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Project Execution Model in Russia/CIS

Russian project execution retains heritage from the Soviet era:
Conceptual Evaluation Stage is not necessarily based on forecasts and robust business case Disciplined staged approach for pre-feasibility, feasibility and engineering is not always applied State approval is very prescriptive EPC is unbundled into fixed cost Engineering, Procurement and Construction no single point of responsibility, no cost control, no schedule certainty Project finance is difficult due to lack of single point of responsibility

Western contractors do not help due to the following barriers:

Russian work permits (to allow import of construction labour standard practice in ME)

Language, Culture, Bureaucracy

Russian engineering codes and standards Lack of project definition so LSTK EPC is not practically achievable

Russian project execution methods are no longer appropriate and should be brought into line with global best practice
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Part 2 - Conclusions
A programme to process and monetise 40bcm of presently flared associated gas will require considerable investment Petrochemicals produced from Russian ethane at nominal value will be as competitive as Saudi ethane based petrochemicals in Western markets Russia may consider the JV partnership approach adopted by the ME Russian project planning and execution model is not in line with best practice in the West and will hinder the timely project development Help Western companies to help you by removing the barriers Mobilizing limited recourse Project finance will also be difficult with Russias present EPC strategies

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