Kazakhstan’s petrochemical El Dorado [Gas in Transition]

Known for its large oil and gas reserves, Kazakhstan has become increasingly present in the news since the start of Russia’s war in Ukraine for its role as a trusted supplier of raw materials given the West’s isolation of Russia. Beyond crude oil and natural gas, however, Kazakhstan has attracted interest in the downstream sector.

Oil and gas production has continued to grow, but most of the country’s upstream projects have already attracted billions of investment and the interest from foreign companies seems to have reached a plateau.

At an industry conference organised by Argus Media in Almaty earlier in June, one analyst who asked to remain anonymous said that Kazakhstan’s future is in petrochemicals.

“With all the upstream oil and gas projects already assigned, the biggest opportunities for investment are in downstream, especially petrochemicals,” the senior analyst said.

The delayed development of the petrochemical sector in Kazakhstan had been underscored by president Kassym-Jomart Tokayev in his September 2020 address to the nation.

“The western regions of Kazakhstan should become the centre of attraction for investments in the construction of petrochemical complexes, the creation of new production cycles of high added value. The fact that we still do not have petrochemistry and high-value gas processing makes no sense,” Tokayev said.

While the vast majority of oil and gas production is booked for export, the goal is to further develop a local petrochemical market, fueled by local production. Kazakhstan’s plan is to attach the new facilities to the existing oil refineries, which are located in Atyrau in the west, Shymkent in the south, and Pavlodar in the north.

New plant, new plans

In June, state-owned oil and gas company Kazmunaigas signed an agreement with France's Air Liquide to construct a hydrogen production unit in Pavlodar. According to Air Liquide, construction will cost €80mn ($87mnn) and will have a capacity of 160,000 metric tons/year. A joint venture between the two companies will be tasked with building it. The same joint venture had already been supplying the Pavlodar refinery with hydrogen and nitrogen since 2018 as well as operating a nitrogen plant in Karabatan, near Atyrau in the west of the country.

There, in the Karabatan special economic zone, the government had also allocated an area for the construction of a new polyethylene plant, slated to have an annual capacity of 1.25mn mt/yr. According to the plan, 60% of its production will be polyethylene, while 40% will be ethylene.

Karabatan represents a key node in Kazakhstan’s downstream, because of its location near the Tengiz onshore field and with a link to the Kashagan offshore field in the Caspian Sea.

The petrochemical complex in the Karabatan area is perhaps the most interesting, because of its links to the largest upstream projects.

Backed by Catofin and Novolen technologies for polymer-grade propylene production from US company Lummus Technology, in November 2022, state-owned Kazakhstan Petrochemical Industries (KPI) launched operations at a gas chemical plant in Karabatan, tied to the Tengiz field. The facility has a capacity to refine hydrocarbons and produce around 500,000 mt/yr of polypropylene per year, around 1% of global production.

Both Samruk-Kazyna, the state holding that controls KPI, and the China Development Bank backed the project with core loans in 2016. The project’s main contractor was China National Chemical Engineering Group Corporation Ltd (CNCEC).

The KPI flagship project is said to be “phase one” of a larger petrochemical complex in the area.

Making inroads

There had been hiccups in Kazakhstan’s downstream, especially during the aftershocks of the oil price slide during the COVID-19 pandemic. And the petrochemical plant at Karabatan was one of the projects that suffered the most.

In May 2020, Austrian company Borealis dropped out of a project to build a petrochemical plant with United Chemical Company (UCC), a state-owned company in Kazakhstan. Just six months later, KLPE, a joint venture between UCC and Polymer Production ultimately owned by Kazmunaigas, agreed to build a gas separation plant with Tengizchevroil, the operator at Tengiz, co-owned by Chevron (50%), ExxonMobil (25%), Kazmunaigas (20%), and LukArco (5%).

The project had a long history, with a noticeable breakthrough in December 2012, when KLPE was formed in partnership between Korea’s LG Chem (50%), SAT & Company (25%) and UCC (25%). LG Chem left the project in 2016, when state-owned Samruk Kazyna Ondeu bought its stake.

KLPE’s 1.6mn mt/yr ethane facility is poised to be linked to an additional polyethylene plant, which Kazmunaigas plans to build with Sibur Holding, Russia’s largest integrated petrochemicals company. The companies, through their joint venture Silleno LLP, are said to have earmarked a $7.6bn investment for the construction.

Perhaps in an effort to buttress the project, China Petroleum & Chemical Corp. (Sinopec) agreed in May to partner up with Kazmunaigas and Sibur for the construction of the plant. On the sidelines of the China-Central Asia Summit in Xian, Sinopec and Kazmunaigas signed a memorandum, which could be decisive for the final investment decision, planned for 2024. Should the schedule be respected, by 2028 the plant would have a capacity of 1.275mn mt/yr to transform ethane, a byproduct of natural gas extraction, into ethylene.

Alongside this core plant, Sinopec and Kazmunaigas agreed to build two polyethylene facilities.

Chinese companies have several stakes in some of the most important oil and gas fields in the west, north, and south of Kazakhstan.

More gas, better business environment

Virtually cut off from the European gas markets, Russia has offered to sell gas to Kazakhstan at a fraction of the market price. In April, Belarus paid around $129/’000 m3 of gas from Russia, while the rate in Europe was almost four times higher. Kazakhstan is likely to enjoy a similar discount or even greater, given Russia’s lack of other market options.

"They are offering it to us at a much cheaper price than to Belarus," Kazakhstan’s energy minister Almasadam Satkaliyev told reporters in April.

This could help Kazakhstan face its own domestic shortage of gas, but also to prop up the petrochemical industry which hinges its success on the availability of raw hydrocarbons in the local market.

But the technical availability of raw materials is not enough to attract investors, experts say.

The analyst from the industrial conference argued that a more certain rule of law would allow investors to make sustainable long-term plans, especially given the substantial capital expenditure that they face with the construction of new plants.

“One issue remains, and this is the business environment. While steps forward have been made, there is still a lot of corruption and sometimes contracts are not respected as they should. This creates uncertainty, which in turn gives a premium to the companies that invest and are successful,” the analyst said.