PETROCHEMICALS

TRENDS IN CORPORAtE DEVELOPMENt IN tHE PEtROcHEMIcAL COMPLEX

YURIy ZAPISOTSKYI PARTNER, MORIS GROUp

he petrochemical industry is considered to be one of the fastest growing industries throughout the world, due to innovation, the use of products in a wide range of consumption fields (medicine, pharmacy and biotechnology and advanced manufacturing of industrial and consumer products, agriculture, etc.). New petrochemicals markets are emerging quite rapidly, and new areas of products application are being identified. Countries with a high level of science and innovation development, with an advanced financial and industrial infrastructure, capable of promptly implementing innovative technologies and products into production and capturing segments of the world market, become leaders in the field of chemical technologies.

nal or specific factors, including the lack of proper funding of corporate structures, inadequacy of the organizational structures, and the lack of effective government support in corporate development. The petrochemical complex restructuring, based on management optimization by reducing the number of enterprises and organizations and creating multi-functional integrated structures on functional and territorial grounds, requires a substantial revision of positions with respect to the development of corporate structures in the petrochemical complex. This involves the carrying out of theoretical research and specific practical recommendations for the development of corporate structures in the given industry.

Taking into account the potential market volume of the Post-Soviet space, which is possible in view of the prospects of growth of national economies, and favorable conditions for the production and sales of petrochemical products (on account of the relatively cheap but qualified labor force, the available scientific and technical resources, the availability of raw materials and energy resources), the interest of foreign companies is increasing. Political risks and problems in the privatization of petrochemical companies appear to be an important limiting factor. Due to the low capitalization of many Ukrainian companies, which is one of the major reasons for the impossibility of rapid modernization of fixed assets and the implementation of new technologies, massive investments will be attracted mainly through a public offering on alternative investment markets in London, Frankfurt, and Warsaw. Due to impending changes on the Ukrainian market and its further integration into European and Western markets it is necessary to examine the prospects for the corporate development of leading enterprises in the sphere of the petrochemical industry in Ukraine, to identify their strong and weak points under conditions of increasing business competition on the part of large foreign and Russian companies.

Market Prospects

The inefficient structure of the petrochemical complex, which has not been sufficiently funded over the past several years, with the ageing of technologies and equipment and with the significant decline in capacities, requires a qualitative structural change. The petrochemical complex is being restructured and reformed very slowly. The problem of corporate development in the petrochemical complex is very complicated and multi faceted. The effectiveness of the solution depends on general economic factors, the biggest ones being the crisis in manufacturing, investment and finance; in particular the inter-

Problems

The restructuring of the petrochemical sector on the basis of the management optimization by reducing the number of companies and organizations and creating multi functional integrated structures on functional and territorial grounds could be a way out. Corporate groups thus formed are characterized by a number of specific features: their own financial system, allowing them to evolve into an independent economic system; wider and more effective use of the consolidation capital of the corporation with the view of implementing largescale projects; more orderly and democratic supply conditions between the divisions of the corporate structure; corporation tax optimization; common sales policy to consolidate the financial flow and, consequently, to accelerate the turnover of capital; a more stable position on the domestic and foreign markets; improving the accounting and control system, adapting accounting reports to European standards, which is not possible without access to foreign capital markets; training and educating staff, business exchanges of personnel between a corporation and its foreign partners, steady business relationships with various enterprises. reducing costs as regards research-and-development activities, developing new, more expensive technologies, projects, products, accelerating the implementation of new developments, opening up brand new markets and expansion into adjacent markets, business diversification; use of resources of parent companies or founders and shareholders. In economically developed countries the formation of new joint structures reveals opportunities for the various corporations. And they appear in a wide variety of ways. Through acquisitions and mergers on the basis of the dominant position of the parent company holding a controlling interest, through the merger of different companies, often carried out through banks with their direct participation and control
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Moderate Integration as a Way Out

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over business activity, and through the separation of subsidiaries from the parent company. Thus, the corporation is divided into several independent companies. The effect of such integration being synergetic consists of the benefits to be attained not by way of the arithmetic composition but through multiplication of the capacities of integrating all stakeholders. Annual sales of petrochemicals by world leading companies Exxon Mobil Corp and British Petroleum (through, respectively, Exxon Mobil Chemical and BP Petrochemical) reach 10% of their total sales. In recent years, there is a tendency towards the incorporation of such associations, formed mainly by large gas and oil companies, which are interested in the creation of integrated complexes for processing available petrochemical feedstock resources in the various segments of the Russian petrochemical industry. The three vertically integrated Gazprom, Lukoil and Tatneft are the most dynamic companies. Integration processes having taken place between industrial enterprises and, in particular, the vertical integration of production, have helped local enterprises to get through the crisis. Joining together efforts within the framework of corporations has given a considerable economic effect. The competitive relationship under the integration of businesses into a single corporation is replaced by various forms of cooperation. The range of possibilities of such cooperation extends from weak interaction to direct management, whereby market relations are replaced by intra-company supplies. However, the effect of scale is valid till a certain threshold value, after which the opposite is observed costs increase in accordance with the growing scale of production. This is due to the fact that along with the positive aspects, there are too many negative ones in large companies. Among the main reasons - the inability to control the activity of each of the subsidiaries, the complexity of the management system and the growth of bureaucracy; it increases costs and reduces reaction time to problems. Therefore, in practice, those companies, which strike the right balance, get better chances, skillfully using the advantages of corporate consolidation while simultaneously neutralizing the disadvantages, the source of which is the lack of internal competition. Striking the right balance would be a priority task for the industry in the near future.

Moris Group
Address: 6 Olhynska Street, Office 24, Kiev, 01001, Ukraine Tel.: +380 44220 1058 Fax: +38 044220 1058 E-mail: office@moris.com.ua Web-site: www.moris.com.ua oris Group is a law company providing complex qualified services in the field of Ukrainian and international law. Moris Group was founded in 2004 thanks to the joint efforts of a group of lawyers specialists working in different spheres of law and possessing broad experience in public administration and private professional practice. The word moris (manner) in the name of our company means not only the source of law but first of all rules of conduct formed in the consequence of their practical use. Our companys rules of conduct were formed by its founders and are based on conscientiousness, honesty and responsibility. In the years since the company was founded it has proved to be a reliable partner, protecting business interests and promoting success of its clients, whose trust is the best reference for the Moris Group on the legal services market in Ukraine. Practice areas: Civil and Economic Law, Corporate Law, Representation in Court, Support of Investment, International Arbitration, Representation in the European Court, Tax, Administrative Law, Antitrust, Land, Real Estate, Protection of Property Rights, Labor, Family and Inheritance Law, the Mutual Relations between a Debtor and a Creditor.

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