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Severgazprom Nears Completion on Restructuring

As is perhaps obvious from the last two entries, I have been reviewing the thermal black market over the last few weeks. As part of that process, I have received an update on Severgazprom (Ukhta, Russia), which is the second largest thermal black producer in the world, behind Canada’s Cancarb.

Severgazprom is nearing completion on a major restructuring of its operations that began in late 2005. Severgazprom is a subsidiary of Gazprom, Russia’s state-owned gas, oil and energy conglomerate. Gazprom is the largest producer of natural gas in the world. Under the restructuring, Severgazprom’s divisions dedicated to natural gas extraction and processing have been moved out of Severgazprom and merged with several other Gazprom companies to create a single company that is responsible for gas extraction and processing — Gazprom Pererabotka Ltd. (or Gazprom Processing Ltd.).

Since October 1, 2007, Gazprom Processing is responsible for carbon black manufacturing. Under the current plan (which is not yet finalized), the marketing and sales of carbon black will be handled by Gazprom JSC for domestic contracts (i.e., within Russia) and by Gazprom Export Ltd. for export contracts, while Gazprom Processing will handle only the actual production. It is not yet determined whether pricing and contract terms will be set by Gazprom Processing or by the two sales organizations.

Gazprom Processing produces furnace black (700 series grades including N762, N772 and N774), thermal black (N990 and N991), and channel black (K-354), with a total capacity of 40,000 tonnes per year. There have long been plans to modernize the carbon black units, but this is just one very small business within this huge company, so the project has not found funding. The company has planned to shut down production of channel black because the unit is outdated (circa 1942) and demand for this product is very small. However, it is considered a strategic resource because it is used in tires for military aircraft, so the government has not approved the shutdown.

In contrast to channel black, Gazprom’s thermal black unit is producing near capacity, with most of these volumes either being exported to Western Europe (about 60% of production) or consumed within Russia/CIS (18%). The remainder is exported to North America, Asia and South America. The company expects to raise thermal black prices in January 2008, when the restructuring process is complete. Gazprom’s current thermal black prices are roughly 30% below market, so corrective action is clearly needed. Gazprom’s thermal black business benefits from receiving its natural gas feedstock at net cost, which results in much lower costs of production.

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