Clare Nuttall in Baku -

AzMeCo is building what will be Azerbaijan's first modern petrochemicals complex. This $1.1bn project will be the flagship of the Baku-based company's chain of refineries that stretch from Russia through Central Asia to Afghanistan.

The plant, AzMeCo's first in Azerbaijan, is 60% completed and is due to start operations in 2011. It will have a refining capacity of 2,000 tonnes a day, dwarfing the small refineries that make up the rest of the company's operations. "The idea was to monetize Azeri gas by going into the downstream segment to make methanol," says AzMeCo CEO, Nasib Piriyev. "The next development will be to go further down the refining chain and produce derivatives of methanol such as ammonia, urea, formaldehyde, melamine, karmaline and others."

AzMeCo has already acquired all the licences it needs, as well as signing a contract with the Azeri government for gas supplies. $200m has already been invested in the complex, and the first stage - to set up methanol production - will cost $330m. "At the first stage of the project, we are bravely entering the international methanol market," says Piriyev. "Within five years, Azerbaijan will have its own privately developed, privately owned large petrochemical complex, which will produce a range of chemicals to supply the local market as well as products for export. This will be the first large industrial complex to be constructed in the new history of Azerbaijan. It's a small step for the global petrochemicals market, but a big step for the Azeri private sector."

Piriyev also stresses the environmental credentials of the project, especially in contrast to existing operations. "Methanol is an ecologically pure product, and the grade of the methanol and the quality of the derivatives we will export must be in agreement with international standards. AzMeCo is an environmentally friendly company that carries out no-residue production."

Origins

The company's origins are in the Soviet era, when Nasib's father Nizami first started a manufacturing business when former Soviet leader Mikhail Gorbachev signed off legislation allowing private enterprises to be created. "Since then, my father's passion and main business model has been developing industrial projects," says Piriyev. "A year after the Soviet Union collapsed, he established a business in the US. At that time people here were thinking about how not to starve, how to find themselves in this new world. But he was, and still is, an innovative businessman who is ready to take risks and go and learn."

The first refinery was set up in Uzbekistan, in a remote area of the Karakalpakistan region. "Six years ago, there was a small fountain of gas condensate in the desert. Now that area is a small town with a refinery, and there is a proud, privately owned player in the Uzbekistan oil and gas business, which is a very tough business in a very tough country," Piriyev says.

Despite numerous challenges along the way, the refinery was a real success in terms of return on investment. AzMeCo then set up operations in Russia, where it is now building a new refinery in Kalmykia, and Kyrgyzstan, before moving into an even more difficult environment - Afghanistan. "We all know about Afghanistan from the news, but when you start to dig deeper, you understand that it is a big country full of natural resources," says Piriyev. "Of course, we envisaged there would be problems with starting up a proper industrial project in Afghanistan, but it turned out not to be as difficult as we expected. One reason for that pleasant surprise was probably our experience managing start-ups in difficult, remote areas. The second is the positive influence from international players including the US, advising the Afghan government on how to operate a free market."

AzMeCo's Afghan plant, which is near Herat on the Afghan-Uzbek border, has been operating for the last quarter and is due to increase capacity soon. "If everything goes well, we will develop this into a proper refining complex," says Piriyev.

IPO

Behind the scenes, AzMeCo has put together a proper corporate structure and financial team, which is currently consolidating all its Central Asian refineries into a single group. The company is also in the process of setting up IFRS compliant accounting systems - no easy task with operations spread across the Commonwealth of Independent States and Afghanistan - and financial IT systems.

In parallel with its expansion plans, AzMeCo has drawn up a five-step financial strategy. The first step, obtaining $120m in funding from the European Bank for Reconstruction and Development (EBRD), was completed in December. The next step was bridge financing, which AzMeCo obtained from Azerbaijan's largest bank, the International Bank of Azerbaijan. "The third step will be to create an even stronger financial team that is able to access additional financial markets - Islamic finance, long-term Asian money, long-term investments from the Middle Eastern funds. We are carrying out a 360-degree examination of today's markets," says Piriyev. "Fourth will be raising equity finance, because we as a group are now ready to expand. The fifth step will be the magical word of IPO - the first ever from Azerbaijan."