SOCAR & Turcas Refining Proceed with $3.5 Billion Naphtha Refinery at Petkim's Aliaga Petrochemical Complex

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Researched by Industrial Info Resources (Sugar Land, Texas)--SOCAR & Turcas Refining AS (STRAS) (Istanbul, Turkey), a wholly owned subsidiary of SOCAR & Turcas Energy AS (STEAS) (Istanbul), is progressing with development plans for its $3.5 billion refinery project at the Aliaga complex of Turkish petrochemical manufacturer Petkim Petrokimya Holding AS (IST:PETKM) (Izmir, Turkey) in the Aegean port city of Izmir. The firm is expediting developmental activities following approval of its environmental impact assessment (EIA) report granted by the Turkish Ministry of Environment and Forestry in November last year.

The refinery will process about 10 million to 15 million tons per year of Caspian crude and provide raw materials such as naphtha to Petkim, in addition to supplying diesel fuel and other petroleum products to the Turkish market. Engineering and detailed studies will be performed this year, followed by construction activities. The project is scheduled for completion by 2014. The facility will be developed over a land area of 13,750 acres, and is expected to generate employment opportunities for 1,500 to 2,000 people. With an investment value of $3.5 billion, the project is reportedly the largest investment to be made in Turkey in four decades.

STEAS was established in 2006 as a result of a strategic partnership between Turcas Petrol AS (IST:TRCAS) (Istanbul, Turkey) and State Oil Company of the Azerbaijan Republic (SOCAR) (Baku, Azerbaijan) to pursue new ventures in the petroleum refining, petrochemical and natural gas sectors. SOCAR holds a 51% stake in STEAS, while Turcas and Aksoy Holding AS (Istanbul) hold stakes of 25% and 24%, respectively.

In 2007, STEAS applied for a license to the Energy Market Regulatory Authority (EMRA) for the development of a grassroots oil refinery with a capacity of 10 million tons per year in Ceyhan. The firm commenced technical and economic feasibility studies and EIA investigations, with a schedule to begin construction in 2010 and commercial operations by 2012-13.

However, in July 2007, STEAS and Injaz Projects Company Limited (Riyadh, Saudi Arabia) participated in the privatization tender for 51% of Petkim's shares. The SOCAR-Turcas-Injaz alliance acquired a 51% stake in Petkim for $2.04 billion, and the transaction was concluded in May 2008. In September that year, STRAS was established as a wholly owned subsidiary of STEAS, and in November, STRAS applied to the EMRA for a refinery and storage license for the development of a refinery at Petkim's petrochemical complex in Aliaga to supply feedstock to Petkim and reduce Turkey's imports of fuel products. The project also was envisaged to create additional synergy in the form of a vertically integrated refinery-cum-petrochemical facility, which would share existing infrastructure and benefit from mutual transfers of side streams to deliver higher-value-added products. Consequently, plans for the refinery at Ceyhan were placed on the back burner.

With the first and second petrochemical complexes established at Aliaga in 1965 and 1985, respectively, Petkim currently operates 15 main plants, eight auxiliary units, and a 220-MW captive power plant on a land area of 19 square kilometers. The complex has a total annual installed production capacity of 1.916 million tons, including 520,000 tons of ethylene, 240,000 tons of propylene, 144,000 tons of polypropylene, 346,000 tons of aromatics, 334,000 tons of low-density polyethylene (LDPE), and 96,000 tons of high-density polyethylene (HDPE). Petkim commanded 25% of the domestic market share in 2008.

The complex operates on a feedstock of naphtha, liquefied petroleum gas (LPG), butane, and condensate. Petkim was entirely dependent on Turkish Petroleum Refineries Company (IST:TUPRS) (Tupras) (Kocaeli, Turkey) for supply of naphtha feedstock until the latter's privatization in 1990. As Tupras' management decided to convert part of its naphtha production capability to produce gasoline, Petkim came to rely increasingly on feedstock imports, especially from the CIS nations. Procurement of naphtha feedstock accounts for about 75% of the company's production costs.

As part of an extensive post-privatization restructuring strategy for Petkim, STRAS identified development of a refinery in the Aliaga complex as a crucial investment required to ensure secure supply of naphtha for production of ethylene. STRAS estimates that the cost of construction at Aliaga would be 30% to 40% less than if the refinery were to be constructed elsewhere, as the site already has the requisite infrastructure, including a port, and the refinery project will entail only development of new plants.

Petkim also aims to increase its market share in the Turkish petrochemical sector to 40% by 2018 through investments in downstream units. This includes expansion of its ethylene production capability from 520,000 to 700,000 tons per year by 2011. The new production capacity also will be designed for operations based on naphtha and LPG feedstock used interchangeably. The existing ethylene plant is capable of feedstock flexibility and currently utilizes about 10% LPG, but the upper limit for this is only 30%. Turkey currently imports about 70% to 75% of its chemical product requirements, and the new refinery and downstream projects are expected to reduce the share of chemical product imports to 30%.

With SOCAR as one of its major stakeholders, Petkim also hopes to import natural gas from Azerbaijan at favorable prices and is awaiting approval on the same from EMRA and BOTAS Petroleum Pipeline Corporation (Ankara, Turkey). In addition, Petkim will undertake expansion of the Aliaga port through development of bulk transportation capacity and container port facilities. An investment decision in this regard was to be finalized by the end of last year. Kenan Yuvaz, the chief executive officer of STEAS and a board member of Petkim, said that the firm intends to develop the Aliaga port into the largest logistics hub of the Aegean region.

STEAS plans to invest $5 billion in the refinery project until 2015. The firm also plans to invest $60 million in 2010 to maximize capacity and in cost-reduction initiatives, including shifting of its production units to automatic control systems.

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