What are the key features of the Russian refining and petrochemical industry?
While Russia takes a leading position in gas and oil production, the same cannot be said about the processing and petrochemical industry. Russia holds only 2.5% of the global refined products market. In 2019, roughly only 11% of gas and 50% of oil produced in Russia was processed locally, which means Russian downstream production has a lot of growth potential. Outdated technology and high depreciation of fixed assets are viewed as key problems and deep revamp as well as new greenfield initiatives are the way of addressing this bottleneck.
The Russian petrochemicals industry is primarily dominated by large companies, with the leading players being Sibur, Rosneft, LUKOIL and Gazprom. Historically these and other Russian companies have underinvested in the petrochemical production capacity preferring to export crude oil and basic refining products. In the last five years we have witnessed the increased interest in creating a domestic petrochemical production focused both on domestic consumption and export. Many Russian oil companies are looking to invest in greenfield petrochemical production units. There is also a lot of focus on ethylene as a feedstock given the abundance of natural gas in Russia. However the progress has been slow and we have not seen many investment decisions.
To support this trend in 2019 the Russian Government adopted a plan for development of the petrochemical industry up to 2025 (the Plan). In the Plan, the Russian Government declares that the Russian petrochemical complex is of strategic importance for the Russian economy, as it is one of the key drivers of industrial growth. The Plan outlines areas for development, sets goals and contains a roadmap. Among the main problems facing the sector, the Plan identifies the lack of long-term incentives for deep processing, including of LPG and ethane. The Plan suggests granting financial incentives to boost production and export of high value added petrochemical products as well as infrastructure investments.
The upgrade of existing and investment in potential Russian petrochemical projects (see the table below) could boost the production and export capacity delivering over US$15 billion (bln) per year in revenues.
|New projects||Contemplated Investment|
|Amur GPP (Gazprom)||RUB 950 bln|
|Amur GCC (Sibur)||app. RUB 835 bln (US$ 10.7 bln)|
|Ust-Luga GPP (Gazprom and RusChemAlliance)||app. RUB 960 bln (US$ 13 bln)|
|Ust-Luga GCC (RusChemAlliance)||app. RUB 966 bln (US$ 13.05 bln)|
|Irkutsk Polymer Plant (INK)||RUB 168 bln|
|Yamal GPP||app. RUB 318 bln (US$ 4.3 bln)|
|Yamal GCC||app. RUB 725 bln (US$ 9.8 bln)|
|Expansion of ZapSibNeftekhim (Sibur)||Not less than RUB 65 bln|
|New olefin complex for Nizhnekamskneftekhim (TAIF Group)||RUB 234.2 bln|
Reverse excise for LPG and ethane will be introduced in Russia from 2022
The introduction of the financial incentives envisioned in the Plan has been eagerly awaited by the Russian downstream sector. According to the latest legislative changes pushed through by the Ministry of Energy this year from 1 January 2022, LPG and ethane will become subject to an excise tax which in certain cases will be refunded and in some cases the processing companies will be entitled to refund more excise than they have initially paid.
The tax rebate for LPG and ethane processing will work as follows. The refund may be received by the taxpayers who have obtained special certificates confirming that they have processed LPG or ethane and satisfying the following criteria:
- from 1 January 2022 the company has put into operation new production capacities for processing of ethane/LPG into petrochemical products with minimum capacity of 300 thousand tons of ethane/LPG per year; or
- by 1 January 2023 the company has entered into an agreement for the creation or modernization of capacities for the production of petrochemical products with the competent authority and the amount of company’s investment exceeds RUB 65 billion.
The certificate holders will be entitled to the double rebate if they process using ethane cracking or dehydrogenation of LPG. In all the other cases the certificate holders will be entitled to 100% of the originally paid tax.
This should incentivise the construction and modernisation of the processing facilities, however it is not clear how this would impact the existing producers who on the face of it would not be allowed to claim any tax rebates and thus face the increased cost of their products.
 On 1 January 2022, Federal Law of 15.10.2020 N 321-FZ “On Amendments to Part Two of the Tax Code of the Russian Federation regarding the introduction of a reverse excise tax on ethane, liquefied petroleum gases and the investment coefficient used to determine the amount of the reverse excise tax for crude oil” will come into force.