New projects in the Russian oil and gas industry, including on the Arctic shelf, promise continuing growth to the domestic market for anti-corrosive coatings.
The COVID-19 pandemic has brought a tremendous, but a short-term impact on the global hydrocarbons market. In April of 2020, global oil demand hit the lowest level since 1995, dragging down the benchmark price for Brent crude to $28 per barrel after the quickest rise in surplus oil supplies.
At some point, the U.S. oil price has even turned negative for the first time in history. However, these dramatic events seem not to stop the Russian oil and gas industry’s activity, since the global demand for hydrocarbons is projected to bounce back quickly.
For instance, the IEA expects oil demand to recover to pre-crisis levels as soon as 2022. Gas demand growth – despite record reduction in 2020 – should return in the long-term, to some extent, due to accelerating global coal-to-gas switching for power generation.
Russian giants Lukoil, Novatek and Rosneft, and others harbor plans to launch new projects in the area of oil and gas extraction both on land and on the Arctic shelf. The Russian government sees the exploitation of its Arctic reserves via LNG as the crux of its Energy Strategy to 2035.
In this background, Russian demand for anti-corrosive coatings also has bright forecasts. Overall sales in this segment totaled Rub18.5 billion in 2018 ($250 million), according to research conducted by the Moscow-based think tank Discovery Research Group. Coatings for Rub7.1 billion ($90 million) were imported into Russia, although import in this segment tends to decrease, according to analysts.
Another Moscow-based consulting agency, Concept-Center, estimated that sales on the market ranged between 25,000 and 30,000 tons in physical terms. For instance, in 2016, the market for anti-corrosive coatings application in Russia was estimated at Rub 2.6 billion ($42 million). The market is believed to be steadily growing during the past years with an average pace of two to three percent per year.
Market participants express confidence, the demand for coatings in this segment will be on the rise in the coming years, although the impact of the COVID-19 pandemic has not winded down yet.
“According to our forecasts, demand will be increasing slightly [in the coming years]. The oil and gas industry needs anti-corrosion, heat-resistant, fire-retardant and other types of coatings to implement new projects. At the same time, demand is shifting towards single-layer polyfunctional coatings. Of course, one cannot ignore the consequences of the coronavirus pandemic, which, by the way, is not over yet,” said Maxim Dubrovsky, general director of Russian coatings producer Akrus. “Under a pessimistic forecast, the construction [in the oil and gas industry] may not go as fast as previously planned.
The state is taking measures to stimulate investments and reach the planned pace of construction.”
Non-price competition
There are at least 30 players in the Russian anti-corrosive coatings market, according to Industrial Coatings. The leading foreign players are Hempel, Jotun, International Protective Coatings, Steelpaint, PPG Industries, Permatex, Teknos, amongst others.
The biggest Russian suppliers are Akrus, VMP, Russian Paints, Empils, Moscow Chemical Plant, ZM Volga and Raduga.
During the last five years, some non-Russian companies, including Jotun, Hempel and PPG have localized anti-corrosive coatings production in Russia. There is a clear economic rationale behind such a decision. The payback period of launching new anti-corrosive coatings on the Russian market ranges between three to five years, estimated Azamat Gareev, head of ZIT Rossilber.
According to Industrial Coatings, this segment of the Russian coatings market could be described as oligopsony – a market form in which the number of buyers is small. In contrast, the number of sellers is large. Every Russian buyer has its rather strict internal set of requirements, suppliers must comply with. The difference between the requirements of customers could be drastic.
As a result, this is one of the few segments of the Russian coatings industry, where the price is not among the main factors determining the demand.
For instance, Rosneft authorized 224 types of anti-corrosive coatings, according to the Russian register of the oil and gas industry coatings suppliers. For comparison, Gazprom approved 55 coatings and Transneft only 34.
In some segments, the share of imports is quite high. For example, Russian companies import nearly 80 percent of coatings for offshore projects.
The competition on the Russian market for anti-corrosive coatings is very strong, said Dmitry Smirnov, general director of the Moscow Chemical Plant. This pushes the company to keep up with the demand and launch production of new coatings lines every couple of years. The company is also running service centers, controlling coating application, he added.
“Russian coatings companies have sufficient capacities to expand production, which would reduce import. Most coatings for oil and gas companies, including those for offshore projects, are produced at the Russian plants. These days, to improve the economic situation, for all countries, it is important to increase the output of goods of their own production,” said Dubrobsky.
A shortage of raw materials for anti-corrosive coatings production is listed among the factors preventing Russian companies from expanding their share on the market, the Industrial Coatings reported, citing local market analysts. For example, there is a shortage of aliphatic isocyanates, epoxy resins, zinc dust and some pigments.
“The chemical industry is highly dependent on imported raw materials and is sensitive to their pricing. Thanks to the development of new products in Russia and import substitution, there are positive trends in terms of raw materials supply for the coatings industry,” Dubrobsky said.
“It is necessary to increase capacities further to compete, for example, with Asian suppliers. Fillers, pigments, resins, in particular alkyd and epoxy, can now be ordered from Russian manufacturers. The market for isocyanate hardeners and functional additives is provided mainly by imports. The feasibility of developing our production of these components must be discussed at the state level.”
Coatings for offshore projects in the spotlight
The first Russian offshore project was the Prirazlomnaya offshore ice-resistant oil-producing stationary platform in the Pechora Sea, south of Novaya Zemlya. Gazprom chose Chartek 7 from International Paint Ltd. The company reportedly purchased 350,000 kg of coatings for anti-corrosive protection of the platform.
Another Russian oil company Lukoil has been operating the Korchagin platform since 2010 and the Philanovskoe platform since 2018, both in the Caspian Sea.
Jotun provided anti-corrosive coatings for the first project and Hempel for the second. In this segment, requirements for coatings are especially strict, since the restoration of a coatings lawyer underwater is impossible.
The demand for anti-corrosive coatings for the offshore segment is tied to the future of the global oil and gas industry. Russia owns some 80 percent of the oil and gas resources tucked under the Arctic shelf and bulk of explored reserves.
For comparison, the U.S. holds only 10 percent of shelf resources, followed by Canada, Denmark, Greenland and Norway, which divide the remaining 10 percent among them. Russia’s estimated explored offshore oil reserves add up to five billion tons of oil equivalents. Norway is a distant second with one billion tons of proven reserves.
“But for a number of reasons – both economic and environmental – those resources may go unrecovered,” said Anna Kireeva, analyst of environmental protecting organization Bellona. “According to many estimates, global demand for oil could plateau as soon as four years from now, in 2023. Enormous government investment funds that were themselves built on oil are also pulling away from investments in the oil sector – a move that could spur a global capital shift away from fossil fuels as governments and institutional investors pour funds into renewable energy.”
At the same time, natural gas consumption is expected to grow over the next 20 to 30 years – and gas constitutes a bulk of Russia’s resource holdings not only on the Arctic shelf but also on land. President Vladimir Putin has said he aims to make Russia the world’s largest supplier of natural gas – an unlikely prospect given Moscow’s competition from the Middle East, Kireeva added.
However, Russian oil companies claimed that shelf project is likely to become the future of the Russian oil and gas industry.
One of Rosneft’s main strategic areas is the development of hydrocarbon resources on the continental shelf, the company said.
Today, when almost all major onshore oil and gas fields are discovered and developed, and when technologies and shale oil production are rapidly growing, the fact that the future of world oil production is located on the continental shelf of the World Ocean is undeniable, Rosneft said in a statement on its website. The Russian shelf has the largest area in the world: More than six million km and Rosneft is the largest holder of licenses for Russia’s continental shelf, the company added.
Post time: Apr-17-2024
