Why Sinopec agreed to build a polyethylene plant in Kazakhstan

The China Petroleum & Chemical Corporation Sinopec will build a polyethylene production plant with a capacity of 1.25 million tons per year in the Atyrau region in West Kazakhstan. Construction will begin in the second half of 2024. The Chairman of the company Ma Yongsheng talked about this during a meeting with President of Kazakhstan Kassym-Jomart Tokayev. Project cost is $7.7 billion.

On October 17, in Beijing, KMG, Sinopec and the Russian Sibur signed agreements to purchase a stake in the Silleno company, whi is the operator of the project. KMG agreed to sell its 20% stake to the Chinese company, Sibur – 10%. Thus, the national company will control 40% of the joint venture, Sinopec – 30%, Sibur – 30%. Legal procedures of the entrance of Chinese company into the project is planned to be completed in the first quarter of next year and by the middle of the year the final investment decision should be made.

It is expected that after Sinopec entrance into the project, the progress of the project will be accelerated, and the plant will be launched on time. Kazakhstan views the company as a strategic partner and believes that cooperation between the two parties can be successful.

KMG chairman noted that the experience of Chinese partners in the design, construction and operation of petrochemical plants will make possible to create a modern and reliable production of polyethylene as well as in to organize the sale of products in China.

The project is currently in the Extended Basic Design (EBD) stage. Licensing agreements for the use of technologies have been concluded with Chevron Phillips Chemical, Univation Technologies and Axens. The plant is planned to be launched in 2028.

Cheap gas

The ethane will be supplied from Tengiz, and a gas separation complex (GSK) will be built at the field. On June 1, KMG PetroChem and Tengizchevroil signed an agreement on this project. KMG subsidiary leases over 111 hectares of land on the territory of the field from TCO for 30 years.

On June 7, KMG PetroChem held public hearings in Kulsary. The plant is expected to process 9.1 billion cubic meters annually of dry gas (maximum 9.9 billion) and produce about 1.6 million tons of ethane. After processing, part of the gas in the amount of 7.8 billion cubic meters and propane (370 thousand tons) will be returned to TCO. Construction of the GSK is planned to begin in March 2024 and to commission in April 2027.

A 225 km pipeline will be constructed to deliver ethane from Tengiz to the plant. The plant will be located on the territory of the special economic zone “National Industrial Petrochemical Technopark” where a polypropylene production plant of the Kazakhstan Petrochemical Industries (KPI) company is already operating.

KMG PetroChem is the former KLPE LLP which initially (before the entrance of Sibur and Sinopec) was the operator of the project for the implementation of the second phase of the gas chemical complex to produce polyethylene (the first phase is polypropylene).

The company notes that the availability of raw materials is one of the main competitive advantages of the project. For example, to get 1.6 million tons of ethane, it is necessary to process 9 billion cubic meters of dry gas. The molar fraction of ethane in the composition of Tengiz gas is about 14%. In neighboring countries to get 2-2.5 million tons of ethane, it is necessary to process 45 billion cubic meters of gas since the molar fraction of ethane is from 3% to 5%. KMG’s attractive features of the project also include the cost of raw materials and the reduction in infrastructure costs due to their division among several projects. All this was supposed to attract investors.

Why Sibur and Sinopec?

In the fall of 2021, the Samruk-Kazyna and KMG signed a cooperation agreement with Sibur. It was announced that the Russian company would share its experience and help in selling finished products for overseas. There was no talk of any investments. Even though, Sibur is a large company (7.3 million tons of petrochemical products sold in 2022), its largest projects were implemented using loan funds. For the construction of the Amur gas chemical complex with a capacity of 2.7 million tons of polyethylene and polypropylene per year, the company created a joint venture with Sinopec (giving 40% in the project) and attracted loans for $9.1 billion from international banks, including Chinese. The total cost of the project was $10 billion. The remaining part must be financed by the project participants, mainly Sinopec. In addition to solving financial problems, it promised to help in the sale of finished products on the Chinese market.

It is possible that Sinopec’s participation in the Kazakh project will be organized according to a similar model. KMG already has experience in attracting Chinese investment in a petrochemical project. For the construction of the KPI polypropylene plant, a loan of $2 billion was taken from the China Development Bank for a period of 20 years and at 5.8% per annum. In KPI project $1 billion 865 million were allocated for the implementation of the EPC contract which was won by China National Chemical Engineering and $135 million was immediately taken by the bank as a reward for services.

Sinopec and KMG also signed an agreement to jointly develop a preliminary feasibility study for a terephthalic acid and polyethylene terephthalate production project in Atyrau region. It is planned to use paraxylene produced at the Atyrau Oil Refinery as a raw material for the plants.

In the summer it became known that Sinopec was creating a new company to invest in oil refining and petrochemical assets abroad. Sinopec Overseas Investment Holding will both buy existing companies and invest in the construction of new plants.

According to Reuters, China’s largest petrochemical company decided with a new strategy because Chinese authorities decided to limit the construction of new oil refineries within the country due to slowing demand growth and excess capacity and as the industry switches to higher-quality materials and products of the energy transition. According to CNPC in 2018, gasoline demand in China is forecast to peak in 2024 and diesel demand has already reached its peak.

Sinopec decided to take full advantage of its capabilities to expand refining and chemicals business overseas. It will give priority to regions where demand for products is growing and there are no problems with the extraction and delivery of raw materials.

The company was exploring the possibility of purchasing refineries in Sri Lanka, Singapore, Australia, and Brazil. Sinopec’s foreign assets include the Yasref oil refinery in Saudi Arabia with a capacity of 400 thousand barrels per day which is planned to be increased as well as the Amur Gas Chemical Complex in Russia which will be commissioned in 2027.

Experts believe foreign investment will also help Sinopec sell its products to international markets.

KMG notes that it is planned to sell polyethylene both on the domestic market and overseas. According to the calculations of the national company, the capacity of the Kazakhstan market is estimated at approximately 180 thousand tons of polyethylene per year with an expected annual growth of an average of 4%. Silleno will be able to sell 10-15% of its products to domestic market and the rest will have to be exported. The CIS countries, Europe as well as China and Turkey are considered as primary markets where polyethylene consumption is expected to increase.

World market

According to ReportLinker, in 2021, the global polyethylene market was valued at almost $140 billion and by 2027 it is expected to reach $186 billion. Demand for polyethylene will increase from 109 million in 2021 to 140 million tons in 2027. Production over the same period will increase from 108 million to 135 million tons.

The growth in demand and production is mainly due to the expansion of such industries as electrical and electronics production, food and beverage packaging and automotive manufacturing. The polyethylene market is projected to grow at 4.8% during 2022-2027.

High-density polyethylene is the most demanded product and in 2021 it occupied approximately 43% of the market share.

The market is segmented into five sectors: packaging, construction, household, agriculture, and others. The packaging segment occupies the maximum share of the global polyethylene market – 60%.

The packaging market is also a driver of industry growth. The Covid-19 pandemic in 2020 has increased the use of polyethylene. The rapid growth in demand through online platforms in many industries including food and beverages, consumer goods and pharmaceuticals has significantly increased the consumption of plastic packaging. Polyethylene’s strength, low cost and light weight have made it a popular packaging material, especially for food and beverage products. In addition, the rapid growth of online food delivery services has significantly increased the demand for such packaging. Polyethylene has a negative impact on the environment, but its use is predicted to increase significantly due to widespread use in many industries around the world.