Foreign investment needed to realize petrochemical potential
Elements are in place, but Soviet-style model needs retooling

Simply changing Azerbaijan's chemical industry from the old clapped-out Soviet command model to modern market-oriented enterprises would be challenge enough.

But then toss in an increase in the costs of transporting raw material transportation by thousand fold, add a steep rise in energy costs, as well as obsolete production equipment and, lastly, the need to develop both new entirely supply sources and news markets. These then are just a few of the tasks facing Azerikimya, Azerbaijan's state-owned chemical complex.

Azerikimya is now seeking foreign investment to help it modernize, so develop to the full the real potential of Azerbaijan’s huge petroleum-based chemical industry.

Fikrat M. Sadykov, Azerikimya’s president, and a member of Azerbaijan's parliament, says: "This is what we are facing - trying to find an efficient way to work the plant. We will solve these problems, but with foreign investment, we will do it faster."

Sadykov, a doctor of technical science, explains the huge challenges that changing from a command to market economy are bringing. "The appreciable part of the former USSR's chemical industry was all located here in Azerbaijan. Like so much of the Soviet economy, however, processing plants were situated hundreds or even thousands of miles from raw material sources, and the same distance to many markets. Since no one paid attention to transport costs, such a model could appear to work.

"Raw materials came from all regions of the USSR - aluminum and kerosene, for example. Apatite and sodium chloride were received from other regions of USSR, in spite of the fact that some of them could well have been produced in Azerbaijan.

"We produced 95% of all the sulphanol, the raw material of detergents, used in the USSR. The annual production amount was about 150,000 tons. We sent 42% of that as concentrate to all areas of the USSR, and the rest was combined with water and salts. Nobody paid attention to the fact that that water was transported from Azerbaijan to points a thousand kilometers away, in order to evaporate or be discharged to drainage.

"Moreover, we produced 250,000 tons of caustic soda, and 1.2 million tons of super phosphate fertilizer. We sent 800,000 tons of the fertilizer to other areas of the USSR. We also made different types of chloroparaffins, hydrochloric acid, sulfuric acid, latexes, rubber ware, glass fiber articles, polyethylene, and many other chemicals and products," he recounts.

"We produced ferrous sulfate, aluminum sulfate, perlit for insulation, and organic synthesis reagents for the oil industry." After transition in the region to market economies, however, realistic transportation costs were imposed. Costs for importing raw materials from far-flung parts of Russia were increased hundreds or even a thousand times.

Moreover, with economic decline in Russia after the collapse of the USSR, markets for Azerikimya's products shrank or disappeared.

"A system such as we had before is uneconomical, because it was based on a political decision," Sadykov notes grimly. "The Soviet system of locating production facilities far from raw materials meant that when the USSR collapsed, no republic could be completely independent in an economic sense."

"Our second challenge is from inefficient technology," Sadykov continues. "We have old technology and equipment, and old equipment wastes a lot of energy. Energy now costs 4,000 times what it cost in the Soviet era. Water and gas costs are also much higher."

"Also, our equipment once had very great capacities.Yet when working at low loads, these same facilities still continue to consume energy at the full load level, which results in a far higher net product cost."

The large increase in Azerbaijan's oil and gas production expected over the coming two-to-five years should ease the raw material supply problem for petroleum-based chemicals. Increased gas production will also bring an increase in gas condensates, butane and propane that can be used as raw material. "This will lead to an increase in production of new chemical products," Sadykov notes.

"For example, in the Soviet era," he adds, "we did not produce a single ton of polypropylene or low-pressure polyethylene. We did not produce synthetic fibers; all of ours were imported from Russia and the Ukraine. Now, we plan to create polypropylene, synthetic fibers and polystyrene productions."

To achieve these goals, Azerikimya is seeking foreign investment. "All possibilities are open," Sadykov says. "We are talking to US companies, and the US Trade Development Agency has provided a grant to improve the production of caustic soda using a new membrane technology.

"Moreover, we are talking to ABB regarding the production and development of oil based products and ethylene, and we have had talks with an Italian company on polypropylene production."

The production of nitrogen-based fertilizer is another promising area for Azerikimya. Says Sadykov: "We could produce nitrogen-based fertilizer and sell to Iran, Turkey and Caucasus countries. At the proper volume, transportation would be cost-effective."

The Armenian occupation of 20 percent of Azerbaijan's territory and Armenia's absolute blockade against Azerbaijan's Autonomous Republic of Nakhchevan presents serious raw material supply problems, Sadykov explains.

"We have large deposits - about one billion tons - of sodium chloride (salt) in Nakhchevan. But we can't get to it because the Armenians have destroyed all the train tracks and stations in the occupied territories. So that we now have to bring it in from Turkmenistan at very high prices. Nakhchevan is in blockade, so the only connection with that region is by air."

The Armenian-occupied territory has strong carbonates, according to Sadykov. "The Baku area has carbonates, which are only good for making construction materials," he notes, "but Nagorno-Karabagh has (different) carbonates that can be used for making chemicals."

Manipulation of US foreign policy by the Armenian lobby in the US further complicates Azerikimya's changeover tasks and the potential to attract American investment, Sadykov says.

"Section 907 of the US Freedom Support Act has a very negative effect on US-Azerbaijan relations. If it were repealed, we would have faster progress toward democracy, faster economic growth, and far faster job creation. If this Act can be done away with, the Azeri people would be very grateful."

Azerikimya currently employs about 12,000 workers in 17 plants. Most of the plants will be sold through the privatization process, Sadykov says, but Azerikimya will retain four or five large processing plants.

"Azerbaijan has a strong chemical industry and highly trained, experienced staff," Sadykov says. Azerikimya will be looking for foreign investors to help rejuvenate these key assets:
     * An iodine and bromine plant
     * A tire factory and two rubber factories
     * A large enterprise for the production of plastic insulation materials
     * A pharmaceutical plant
     * A plastic processing plant
     * A glass fiber plant.

"We don't have the raw materials here, but we could produce paints," Sadykov says. "We have strong chemical and technical capacity for the production of household products. Our plants and technical capabilities are strong for all chemical areas - organic, inorganic, synthesis and electrolysis.

"But we need an infusion of capital to upgrade old production facilities and develop new productions. We need active banks and credit facilities, as well as credits for commercial projects without government guarantees. Using these credits, we can construct modern enterprises. We can recover credits by sales of finished products of these enterprises."

Sadykov adds that for medicine production the company needs a source for specialized plants which are in occupied territories, and the country needs to recover its occupied lands for Armenia to regain access to mineral resources of phosphorus and salts, high-quality carbonates, granite, gold and other materials.

Despite its difficulties, Sadykov notes with evident pride that Azerikimya increases its production every year, and since 1997 has not seen any declines in production.

"Azerbaijan, says Sadykov, will become one of the strongest CIS republics. "We will solve all our problems eventually, but with the help of foreign companies, we will solve them far faster."