Bitumen Plant and KMG Petrochemicals: Losses Instead of Modernization

Facebook recently reminded me of a post I wrote about the Bitumen Plant. Even then I called it a highly questionable investment. Of course, next to everything else in the KazMunayGas (KMG) portfolio it is small change, but it is precisely projects like this that add up to the overall picture of KMG and Samruk-Kazyna.

So, in 2015 bitumen output fell by almost half from 2014, from 610,000 tons to 369,000 tons. Of that, only 69,000 tons was actual bitumen; the rest was blends, essentially the same crude oil, just without the heavy fraction.

The main reason is a shortfall in feedstock deliveries, even though the shareholder and the feedstock supplier in this project are one and the same. Apparently, even at low oil prices, exporting crude is far more profitable than refining it.

The company publishes no standalone reporting, and everything can only be learned from KMG's reports.

On KMG's balance sheet the asset has already been written down to zero, which means the entire investment in the project has been fully recognized as a loss.

In 2015 the total loss before tax was KZT 34.3 billion. Admittedly, most of it was a foreign exchange loss of KZT 31.2 billion, which means the direct operating loss was KZT 3.2 billion on total annual revenue of just KZT 4.8 billion.

Still, why take out a foreign-currency loan for a facility that will sell all of its output on the domestic market?

The company's net assets are negative KZT 12 billion, and its total liabilities are KZT 75 billion, almost entirely current. This means the company is technically insolvent.

But the plant is new, people work there, and I expect it will be kept going to the last and efforts to revive it will continue.

That is the kind of efficiency we have at KMG.

For reference, our three refineries, which together make up KMG Refining and Marketing (KMG RM), posted a loss of KZT 200 billion in 2015, and the accumulated loss stands at about KZT 620 billion. The company's net assets are now only KZT 245 billion. So if KMG RM were put up for privatization, it would not fetch much, and we will be waiting a very, very long time for our three refineries to be privatized.

Here is another interesting fact. We invest money in refining, commission new capacity, and talk about a fourth refinery and about modernization, yet refining volumes have been falling for years now. In 2015 refining fell by 700,000 tons compared with 2014, and the 2016 plan, according to the KMG RM report, is only 12.8 million tons, which is 1.4 million tons below 2015.

And the reason is not the refineries themselves but, I think, that there is simply no feedstock.

The depth of refining in 2015 was lower than in 2014, even though we supposedly keep commissioning new capacity to increase it.

An aromatics production complex was built at the Atyrau Refinery, with total investment of more than $1.2 billion. It is supposed to produce benzene and paraxylene, with benzene capacity of 133,000 tons and paraxylene capacity of 496,000 tons. In 2015 it produced 1,100 tons of benzene, and that was all. A reasonable question arises: why does the complex stand idle, producing nothing, after all that money was spent? Any sensible person could have seen that nobody would buy benzene and paraxylene, since they are intermediate products that must be processed further. So the capacity will now keep sitting idle, interest will keep accruing, and the equipment will keep rusting, while we import Euro-5 gasoline and diesel from Russia and will go on doing so for another 10 years, after which we will all switch to electric cars together and there will be nothing left to modernize. :)

That is how things are, and how we live: on slogans about cutting-edge bitumen production technology and petrochemicals without diesel or gasoline.