Global partnerships. ZapSibNeftekhim project

Thanks to its new competencies and industry leadership, the company was able to start on ZapSibNeftekhim investment project, the largest of its kind not only for SIBUR, but for the entire Russian petrochemical industry. The project investments are estimated at USD 9.5 bn, with the share of domestic contractors and suppliers accounting for at least RUB 220 bn.

ZapSibNeftekhim to be launched on the basis of Tobolsk Production Site in 2020, will become Russia's largest petrochemical complex with an annual capacity 1.5 mtpa of ethylene and 2 mtpa of polymers. It will allow SIBUR to almost double polymer production capacities in Russia.

SIBUR is also considering the construction of a petrochemical facility in the Amur Region in Russia's Far East after 2023–2024.

These facilities currently rank among the Top 5 largest global petrochemical projects; they will help boost the export potential of the Russian petrochemical industry and bolster SIBUR’s position as a major regional player in the international market.

In its priority area of basic polymer production, SIBUR is focusing on global scale projects, whereas in rubber business, it seeks partnerships with the leading producers in the key developing sales markets – China and India.

In 2013, SIBUR and China's Sinopec entered into a JV using the capacities of Krasnoyarsk Synthetic Rubbers Plant (KZSK), which exports a significant share of its products to China. A JV between SIBUR and Reliance Industries Ltd became a unique project for both the company and the entire Russian petrochemical industry. The JV is building a 120 ktpa butyl rubber plant in India, which will make use of SIBUR’s proprietary technologies.

The company’s project, construction and engineering competencies and expertise have become strong enough to capitalise on them by offering services to other market participants. SIBUR's EPC expertise is concentrated in NIPIgaspererabotka, which is currently a leading Russian centre for facility design, supply, logistics and construction engaged in the largest oil and gas and petrochemical projects.

SIBUR is also hard at work developing proprietary technologies. Its corporate R&D Centre NIOST conducts active research looking for new solutions. SIBUR’s R&D activities have broken even and are yielding increasingly high profits.

The new SIBUR holds not just local, but global investor appeal, with the company’s margins reaching those of international leaders.

In 2015, the company welcomed its first foreign investor after a deal was closed in December to make Sinopec SIBUR's strategic investor with a stake of 10%. In 2016, SIBUR signed an agreement to sell a 10% stake to China’s Silk Road Fund.

A large-scale investment programme. Global-scale production projects

After Alexander Dyukov moved on to Gazprom Neft, Dmitry Konov took over as head of the management team. The management was aware that SIBUR’s production and financial achievements were largely the result of well-timed organisational measures. To ensure long-term and sustainable growth, they had to balance production capacities across various processing stages, build the necessary infrastructure and new plants capable of competing with the leading Russian and global peers, and bring the production culture and labour productivity in line with the international standards.

SIBUR’s main way of tackling these challenges was a large-scale investment programme implemented over the following years. It galvanised the company into a new mobilisation stage and boosted its potential. SIBUR's gas processing capacity grew from 8 bcm in 2003 to 25 bcm in 2016, while the recovery of desired fractions in APG processing increased from 62% in 2003 to over 90% in 2016. This was a huge contribution to the beneficial use of APG in Russia, as SIBUR helped prevent GHG emissions of over 70 mt of CO2 equivalent per year. The accumulation of processed hydrocarbon feedstock and depreciation of Soviet-built pipelines called for new transport infrastructure. To that end, SIBUR spent upwards of RUB 50 bn to build a more than 1,000 km long high-tech pipeline connecting NOVATEK’s Purovsky Gas Condensate Processing Plant to the Tobolsk Production Site. This was an extremely important project for SIBUR, providing the company with a stable and guaranteed access to Western Siberia’s feedstock and a launch pad for future petrochemical investment projects.

The Tobolsk Site saw its fractionation capacity for processing feedstock from the northern GPPs into LPG increase manyfold. As a result, the company boosted its feedstock base by upgrading and expanding its feedstock and energy capacities at every stage, including gas processing, logistics infrastructure and gas fractionation. To export the surplus feedstock from the Russian market, SIBUR built the first transshipment facility in Russia’s north-west (and the largest one in the Baltic Sea) with a capacity of up to 1.5 mt of LPG and up to 2.5 mt of light oils per year. The facility started to handle export flows previously channelled through the ports of the bordering countries.

The company continued to launch large-scale and technologically advanced production facilities (including greenfield projects), becoming one of the most active customers in the industrial construction market. Over a very short period of time, SIBUR’s management had to acquire a slew of new engineering and project management competencies. At present, SIBUR is proud to be the sole manager of all its projects.

The expanded feedstock and energy segment unlocked new opportunities for developing the petrochemical business. SIBUR kicked off a number of key import substitution medium-tonnage projects, such as the construction of facilities in Perm and Voronezh producing 100 ktpa of expandable polystyrene and 50 ktpa of thermoplastic elastomers, respectively, and the ramp-up of PET production from 140 to 210 ktpa.

After upgrading and expanding the feedstock capacities, along with improving its industrial construction competencies, SIBUR proceeded to implement unprecedentedly large-scale projects in the petrochemicals segment. In 2013, the company built a 500 ktpa polypropylene facility in Tobolsk followed by a 330 ktpa PVC production site in Kstovo (a joint venture with SolVin) a year later. Large-scale production capacities made the company’s cost per tonne profile more competitive.

In order to expand the application range of its petrochemical products, SIBUR started producing certain higher added value products. For example, the company bought an acrylates business (paints and coatings industry) and BIAXPLEN, a manufacturer of BOPP films for food and other products, later substantially scaling up the output.

The 2008–2009 financial crisis proved to be a serious challenge for SIBUR, while also highlighting the resilience of its integrated business model. Following the drop in demand from the automotive and other industries, the company had to shut down a number of facilities (primarily at its tyre and rubber production sites), effectively suspending its investment programme. SIBUR emerged from the crisis armed with new experience of business growth amid the economic downturn and a newfound confidence.

SIBUR successfully sold its non-core production assets, namely the tyre and mineral fertiliser businesses, generating stable profits thanks to the company’s efforts.
The proceeds from selling the non-core assets, as well as profit from core businesses were used to finance polymer projects. Throughout 2006–2016, the company implemented over 150 large- and mid-scale investment projects. Its CAPEX for the decade exceeded RUB 650 bn.

In the meantime, Gazprom Group continued searching for a strategic investor in SIBUR which it still viewed as a non-core asset. In 2010–2011, Leonid Mikhelson, a Russian entrepreneur and a co-owner of NOVATEK, acquired a controlling stake in the group. After that, other Russian investors bought SIBUR's shares, and so did the current and former managers of the company.

Restructuring. Paving the way for growth and greater efficiency

After the initial management team left SIBUR, the company saw its management changing many times. Gazprom and lenders had to decide whether to try and save the company or sell its assets to cover for the losses to the maximum possible extent. The solution depended directly on how efficient the new management team would be. In early 2003, Alexander Dyukov was appointed CEO of SIBUR, after holding executive positions with the Sea Port of St Petersburg and Petersburg Oil Terminal.

He was prompt in forming the management team's core by both inviting new generation managers and relying on ambitious production professionals. The new team united in a bid to build an effective business that would be noticeable not only in the industry, but also across the Russian economy overall.

SIBUR's development strategy, when shaped, provided a strong momentum for company development.

Created by Dyukov’s team and approved by Gazprom, the company’s development strategy was underpinned by several key principles followed by the company ever since. The first one is to cement long-term access to advantageously priced feedstock and to offer oil and gas producers effective solutions for handling by-products At that time, SIBUR’s infrastructure for APG processing was unique but largely outdated, and required upgrading and expansion.

The next principle is to monetise feedstock access by building new capacities for feedstock transportation and advanced processing. The new management immediately determined the core and priority, and non-core businesses. The team put a stake on capturing domestic growth opportunities and demand for polymers as the Russian market called for building new large facilities to produce PP, PVC and polyethylene used in a wide range of industries from construction to medicine.

Consolidating resources for large-scale investments, the company, led by the new management team, gradually divested from non-core assets. In the end, the group had three lines of business clustered in three divisions – Hydrocarbons, Synthetic Rubbers, and the Plastics and Organic Synthesis. The tyre and mineral fertilizer businesses were turned into subsidiary holdings and given much operational independence. It was resolved that, after their value is increased, they will be sold to strategic investors.

Finally, the company defined another strategic principle – to pursue operational excellence, reduce risks and create a more powerful and sustainable business.

SIBUR started to introduce common standards of corporate governance and culture singling out best practices and creating centres of competence. The new team was quickly transforming an amorphous and loose structure into something close to modern business.

The strategy so selected and precisely implemented began to deliver results back in 2005-2006, and helped SIBUR stabilise its financial and production positions.

As part of the final stage of vertical integration and a solution to debt-related issues, AKS Holding was founded, to which the assets of AK SIBUR were transferred. The debt, accumulated in the previous years, was, on the contrary, consolidated in AK SIBUR and fully repaid within several years, after which this legal structure was abolished. In December 2005, AKS Holding was renamed SIBUR Holding. For Gazprom, petrochemicals remained a non-core business. After SIBUR’s business has stabilised, Gazprom initiated a gradual divestment from SIBUR by transferring this non-core asset to Gazprombank and Gazfond.

Asset ramp-up

In 1998, in addition to Gazprom, entrepreneur Yakov Goldovsky became a co-owner and head of SIBUR.

The financial muscle of Gazprom and availability of basic petrochemical feedstock paved the way for industry consolidation around the new company. In 1998–1999, SIBUR acquired over 60 assets covering multiple segments of the petrochemical and related industries.

The company expanded beyond Russia acquiring assets in Hungarian chemical companies. SIBUR’s management team planned to continue its foreign expansion to cover the Czech Republic and Serbia.

As a result, the company accumulated huge debts in excess of USD 1 bn with no finance to repay them. In the meantime, the margins were in the negative territory as most of the consolidated businesses required reorganisation and financial rehabilitation.

On this backdrop, SIBUR found itself facing teething problems and a management and financial crisis in early 2000s. The situation went from bad to worse as the integration of new assets coincided with a strong slump in the global petrochemical market.

The company’s debt continued to grow with no significant improvements in its financial position given the scale of the problems.

Seeking to solve SIBUR's problems Goldovsky suggested that the company should tap into the stock market and issue additional shares, which jeopardised Gazprom’s control over the company. In 2001, the offering of shares was frozen.

In 2002, as part of a crisis management process, Gazprom initiated SIBUR’s bankruptcy proceedings, and Yakov Goldovsky had to leave the company and sell his stake.

Founding the company. Initial phase of re-establishing production ties and relations in Russia’s petrochemical industry

As the single planning centre, previously represented by ministries and the State Planning Committee (Gosplan), ceased to exist, the disintegration of the gas processing and petrochemical sectors in Russia resulted in the shortage of feedstock and contracted sales markets. Logistics became more challenging too. The start of privatisation made things even more complicated with a bitter competition for Soviet assets where financial flows rather than restoration or upgrade of plants were the main target.

Incorporation of Siberian-Ural Petrochemical Company (SIBUR), set up by a government decree in 1995, became the first step in re-establishing broken relations and reviving the industry. The integration was underpinned by the production cooperation of petrochemical enterprises from the former Soviet Union (FSU), while Gazprom became the driving force of petrochemical asset consolidation around SIBUR.

Albeit petrochemicals were not its core business, the gas company embarked on the mission set by the government to create a powerful national player in the deep hydrocarbon conversion market.

In 1995, the new company embraced gas processing plants and infrastructure assets of Sibneftegazpererabotka; Permsky Gas Processing Plant producing petrochemical products and NIPIgaspererabotka, a design institute.