Assessment of Technical and Financial Viability of Nairit Chemical Plant Operation 99259 Public Disclosure Authorized

Assessment of Technical and Financial Viability of Nairit Chemical Plant Operation 99259 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized June 2015 Prepared by Jacobs Consultancy Ltd for World Bank Public Disclosure Authorized ©2014 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org All rights reserved This report is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colours, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Rights and Permissions The material in this report is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Centre Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 202-522-2422; e-mail: [email protected]. 2 Section A Introduction 3 The Nairit chemical plant is based in the city of Yerevan and was commissioned in 1936 and possesses technology for production of 20 types of polychloroprene rubber and latex based on both acetylene (natural gas based) and butadiene feedstocks. Its key product is synthetic rubber. During the Soviet times the plant accounted for a large share of global synthetic rubber production. Specifically, in 1987, the plant accounted for 15% of global supply. The plant was shut down in 1989 and restarted operations at a smaller capacity in 1993. Several attempts were made to re-commission the plant to its full capacity, but most of these attempts failed given the underlying economics, i.e. the costs associated with importing the feedstock butadiene from Russia and the high cost of process energy given increasing gas import costs. The plant produced some output in early 2000s. In 2006, the plant was sold to a UK-based company, Rhinoville Property Limited. The plant has not been operational since 2011 and is in major financial distress. The objective of this assignment is to assess the technical and technological feasibility and financial viability of Nairit chemical plant operation. We have considered the operation of the Nairit chemical plant operation under three different production scenarios: 12 kta of polychloroprene rubber, via acetylene route 24 kta of polychloroprene rubber, via acetylene route 25 kta of polychloroprene rubber, via butadiene route The report is structured as follows: Section A, Project Introduction (this section): The Project, the Study objectives and the structure of this report. Section B, Executive Summary: Major findings of the various sections within the report presented as a high level summary. Section C, Chloroprene Rubber Market Review: Review of the global supply and demand position for the Polychloroprene rubber (PCR) that has been historically produced at the Nairit production site. Section D, Assessment of the technical feasibility of production: Summarised assessment of the various process technology options that are available to produce the products at the Nairit site. Options that are available to restart the existing facilities along with a brief discussion on possible future production at the site, as well as assessment of the capital costs required to operate the plant under each production scenario. Section E, Assessment of the financial viability of production: In this section: o Forecast of supply and demand balance of butadiene and its estimated cost from various sources of supply o Assessment of the expected cost of production considering all of the required capital, O&M and other expenses, including capital and O&M expenses required for environmental compliance. o Assessment of the logistical challenges associated with sourcing of butadiene and other feedstock required for operation of the plant. o Assessment of the expected revenue under the normal market conditions and prices for polychloroprene rubber. o Calculation of the key financial metrics for assessing the financial viability of the three considered future production scenarios. o Assessment of the cost competitiveness position of Nairit plant in comparison to other similar plants. 4 Section F, SWOT Analysis: A detailed SWOT analysis is presented for each of the potential options for production restart at the Nairit chemical production site, evaluating the strengths, weaknesses, opportunities and threats involved in operating Nairit plant under each scenario. 5 Section B Executive Summary 6 Key Findings and Recommendations The Government requested the World Bank to assess the technical and financial viability of Nairit chemical plant operation. This Note presents the key conclusions emerging from the ongoing assessment, conducted by the Jacobs Consultancy Ltd, and proposes some steps the Government could take with regard to Nairit. The ongoing technical, commercial and financial assessment of Nairit indicates that: 1. The Nairit plant is an unsustainable liability for the Government and continues to be a major drain on the Government.1 The plant has not been operational since 2010 when the private owner abandoned it. The liabilities of the plant exceed AMD121 billion ($250 million), including the sovereign guaranteed loan from the CIS Inter-state Bank, which has not been repaid. The company has not generated any revenues and relied on borrowing from Yerevan TPP to finance the salaries and maintenance costs since 2010. The total debt of the company to Yerevan TPP is AMD23 billion ($48 million), including the payables for steam. If this situation is not addressed, Nairit will remain an unsustainable burden for the state-owned power companies given that the plant needs about AMD2-3 billion/year ($4-6 million) for salaries and maintenance expenses. The book value of assets is less than 50% of the outstanding value of debts and payables. This means that the company’s assets are not sufficient to meet its liabilities. The current book value of property, plant and equipment is AMD57 billion ($119 million). However, a substantial share of equipment has significantly deteriorated and this has not yet been reflected in the financial statements since stock taking and revaluation of assets has not been carried out recently. 2. The cost of supply by Nairit is estimated to exceed the forecast market price for polychloroprene rubber (CR), which makes it uncompetitive globally. The assessment of cash costs of PCR production under various processes and technologies (both butadiene and acetylene based) suggests that even under the least-cost butadiene-based process, Nairit would have one of the highest production costs: Under butadiene-based process: due to the high cost of chloroprene monomer production based on imported butadiene with a large transportation overhead as well as high prices for gas and electricity. Under acetylene-based process: due to high costs of electricity and gas, which are among the highest in the industry. At current and forecast PCR prices, Nairit would not be able to compete globally due to high production costs, large expenses to get the PCR to main export markets (e.g. Europe or Asia), and the pricing policy of the main competitors. Even if one or two main producers have higher costs than Nairit, it would still not be able to compete given: (a) transportation costs of $150/ton, which is 5% of the final product price, to get the product to main markets, whereas other main exporters have lower export-related costs; (b) the need to recover $210-346 million of capital costs that will be required to restart the operations, whereas the existing large exporters have already recovered the capital costs; and (c) trade policy to protect the domestic market in China, one of the largest markets today and in the future. 3. Unrealistic cost reductions or PCR price increases would be required to make Nairit financially viable. For example, a 45% increase of the market price of PCR or a 90% reduction 1 The responsibility for the Nairit plant falls under the Ministry of Energy and Natural Resources, and it became a financial burden for the power sector. 7 in the price of gas would be required to make Nairit commercially viable under all of the production technologies considered. 4. These technical and financial considerations suggest that the Government should consider developing and implementing a liquidation plan. Such a plan should include the key steps below: Conduct stock taking of assets and assess their current market value. Nairit should hire an independent evaluator to carry out stock taking and revaluation of assets, which can be sold to meet the liabilities of the plant to its employees, the state budget, and other creditors in the order of seniority. Negotiate with creditors to settle the outstanding debts, which is most unlikely to be redeemed through asset sale. There is a court ruling mandating Nairit to pay to the CIS Inter-state bank AMD51 billion ($108 million), including interest and fines. Design and implement a social mitigation plan. The Government should ensure the retrenched employees are paid a severance package and the existing social safety net provides the required redeployment assistance to them.

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