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DOWNSTREAM CASPIAN AND CENTRAL ASIA

04 – 05 December   |   Almaty, Kazakhstan

REFINING AND PETROCHEMICAL PROJECTS' FUTURE IN CENTRAL ASIA

The huge potential of the downstream sector in Central Asia has long been recognised around the world but has not yet been truly realised.
What are the main barriers to the development of the refining, petrochemical and gas-to-chemicals sectors in the region? Why has it not yet reached global standards?
The Downstream Caspian and Central Asia conference team asked experts and regional sector representatives to share their views on what the potential barriers are and how they can be overcome.
Region-specific issues will be discussed during the Downstream Caspian and Central Asia conference on 4-5 December in Almaty, where the senior representatives of local refineries and petrochemical plants will once again gather to discuss their current challenges and plans.

Prakash Kejriwal, Director, Indorama Corporation
While Central Asia is blessed with rich energy resources, the downstream petrochemical industry has seen very limited growth. There are three key reasons for this.
First, being a landlocked region, the project cost becomes higher as the project logistics cost becomes significant. Despite competitive energy pricing the high project cost is not mitigated.
Second, the domestic/regional market for end product is relatively small compared to the global scale plants’ output, which requires the product to access global markets. The cost of bringing the products to global markets is very high and it makes the net back to producers’ netback relatively low to justify the high project cost economics.
Finally, the transit time to global market is very long due to both distance and logistics infrastructure bottlenecks. This means that the end buyer cannot price in the price volatility or will require a much lower price to hedge the price volatility for products shipped from this region.

Timur Ilyasov, Vice President of the Caspian Region and Central Asia, Argus Media
Indeed, the potential is very good, given the amount of resources and production volumes of oil in Kazakhstan and gas in Turkmenistan. In my personal view, one of the main obstacles for the development is the low price of petroleum products in Kazakhstan, compared to the rest of the world, and remote location from the sea, which results in increased transportation costs.
In Uzbekistan, the main barrier is limited crude oil resources (Kyrgyzstan and Tajikistan, have a similar situation – lack of own crude oil resources). To succeed in the development of large-scale downstream projects, crude oil imports at market prices will be required. At the same time, taking into account transportation costs to Uzbek plants the end oil products will be more expensive than in Kazakhstan and Russia. Despite all the mentioned factors, oil refining is vastly developing. Evenmore, in Kazakhstan and Uzbekistan, there are active initiatives for the new greenfield refinery projects.

Umid Aripjanov, Partner, Centil Law
It is well recognised that regional downstream projects serve as drivers for most Central Asian countries’ economies. It allows them to export not just crude hydrocarbons but end products with added value. However, the other side of this is that normally these projects are large-scale, complex and costly, requiring financing (mainly project financing) for their development. This finance can’t be corporate loans (which are not endorsed by the government), nor can it be equity, which project sponsors are not willing to risk.
Additionally, the regulatory environment in the region in general is not flexible enough to level out the risks and provide the creditors with guarantees while financing large-scale projects. The issue is not only in the particular regime (tax, customs and currency issues, in principle, can be removed by concluding investment agreements with the Governments) and nor is it with referring matters to international arbitration. The fact is that the legislation system of the region does not meet the expectations of creditors when it comes to internationally recognised principles that allow them to control the project.

Patrick Kirby, Principal Analyst, Wood Mackenzie
In the global petrochemical industry there are two main forces that drive investments. Access to feedstock advantage and access to demand. The Central Asian region has a relatively small demand for petrochemical products, but does hold a relatively good position with respect to feedstock advantage.
Wood Mackenzie sees further development of petrochemical projects in the medium-longer term beyond the ones that are developing today. A good feedstock advantage is needed to transport some of the finished products out of the region, noting that many of the Central Asian countries are landlocked.
The challenge (for the region) in recent years has been the very attractive investment profile of regions like the United States (feedstock advantage) and China (demand) for building new petrochemical capacity. Wood Mackenzie does see that the Central Asia region will be a bigger player in the future petrochemical markets.