CHINA'S REFINERS FACE MASSIVE OVERHAUL, EXPANSION TO MEET DEMAND GROWTH, NEW CRUDE SLATE

May 9, 1994
China's refining industry has embarked on a massive overhaul and expansion to accommodate soaring domestic growth in refined products demand. Currently that growth in demand is being met by increasing imports of refined products, in recent years attaining triple digit growth rates and squeezing direly needed foreign exchange.

China's refining industry has embarked on a massive overhaul and expansion to accommodate soaring domestic growth in refined products demand.

Currently that growth in demand is being met by increasing imports of refined products, in recent years attaining triple digit growth rates and squeezing direly needed foreign exchange.

The focus is on adding refining capacity of about 1.4 million b/d to the current capacity of about 3.2 million b/d by 2000 (see Table 11, p. 40). Led by China National Petrochemical Corp. (Sinopec), efforts are under way to expand existing refineries and build new grassroots capacity. In 1992, Sinopec operated about half the nation's refineries but at 2.8 million b/d more than 85% of the nations refining capacity. The spread is narrower when 1992 throughput is taken into account: 2.4 million b/d overall and 2.2 million b/d Sinopec. Another state owned company, China National Petroleum Corp. (CNPC), is pressing its own refinery expansion programs independent of Sinopec efforts.

Priority for increasing capacity is being given to expanding existing refineries and participating in foreign joint venture grassroots refineries along China's booming coastal regions as well as hiking output (Table 1). At the same time, Sinopec is emphasizing significant improvement in overall refining utilization rate and product quality. It is focusing on development and efficient operation of technologies for secondary, processing, separation and utilization of gases, and formulation and production of advanced refining catalysts and additives, amoung other areas.

A major challenge for China's refineries is that country's reentry into the General Agreement on Tariffs and Trade (GATT), recently signed in Morocco by more than 100 nations. The accompanying reduction of tariffs on imported refined products will make it more difficult for China's marginal refineries to compete in the domestic market.

PRODUCTS IMPORTS, EXPORTS

China's refined products consumption has skyrocketed in recent years, jumping by another 14% in 1993 (see Table 10, p. 40). The rate of product imports growth has been many times that level to keep up, with China importing 348,000 b/d of refined products in 1993, a 127% increase from 1992's level. Most imported products are naphtha, gasoline, kerosine, diesel, fuel oil, and lubes.

At the same time, China's exports of refined products have plummeted (see Tables 8, 9, p. 40). Products exports fell 31.1% to 74,000 b/d in 1993 from the prior year's level. China became a net products importer in 1992. Net imports since then have soared to 274,000 b/d from 46,000 b/d, representing about 13% of total domestic demand.

The bulk of refined products imports comes from Singapore, with gasoline accounting for the biggest recent growth. Gasoline imports until recently averaged about 6,000 b/d, leaping to 43,600 b/d in 1993, 61% of which came from Singapore.

ln 1993, China imported 64,000 b/d of light diesel and 47,000 b/d of fuel oil from Singapore, accounting for 48% and 61%, respectively, of those products' total import volumes.

Most Chinese refined products exports are sent to other Asian countries. More than half of China's gasoline and light diesel exports go to Singapore for sale on the spot market. Fuel oil is exported to Japan and HongKong. China began exporting motor oil to South Korea in 1992, shipping 7,400 b/d in 1993.

China's exports of refined products to the U.S. fell 84.6% to only 1,000 b/d in 1993 as a result of new gasoline specifications calling for higher oxygen content that China is not able to meet.

At one point during the 1980s, exports of Chinese gasoline to the U.S. California in particular had topped 100,000 b/d.

LPG OUTLOOK

Consumption of liquefied petroleum gas in China has increased at a rate of 50,000 metric tons/year during the past several years.

However, during that period, production has remained stagnant at 2.6 million tons/year. Of that total, three fourths is consumed by local residential utilities.

Growth in demand for LPG is shifting from North China toward southeastern coastal areas, where town gas (coal gas) is expensive to produce and demand is growing the most rapidly. As a result, imports of LPG are expected to grow by Guangdong, Fujian, Guangxi, Shandong, and Zhejiang provinces. Typical of residential consumption patterns for heating and cooking is this breakout for Beijing households; 560,000 town gas, 220,000 natural gas, and 1 million LPG. That also accounts for why Beijing gets the biggest state allocation of LPG supplies (Table 13, p. 41).

SINOPEC'S APPROACH

Sinopec first will emphasize installing new grassroots capacity at existing refineries along the coast, notably at Dalian, Zhenhiai, Maoming, Fujian, Gaoqiao, Jinling, and Guangzhou (Table 2).

Plans call for each of those refineries to have a minimum crude distillation capacity of 200,000 b/d. The thrust here will be on foreign joint venture participation, notably involving the major multinational oil companies.

Sinopec also will press revamps at existing refineries to meet expected major changes in China's refinery crude slate. Most of the existing refineries in China were designed to process low sulfur domestic crude oil. As imports of foreign crudes are expected to increase sharply in the years to come, especially higher sulfur Middle East crudes, the need to revamp will become more urgent to accommodate a broader spectrum of crude qualities.

Sinopec also will concentrate on a broad sweep of improvements to bring Chinese refining technology up to par with international standards, Sinopec International Co. Deputy General Manager Zhang Ying told a China oil conference in Houston in March.

She said special emphasis will be placed on technologies involving:

  • Resid conversion, notably hydrodesulfurization or similar processes, that will be widely adopted to treat increasingly sour crudes.

  • Quality upgrading, targeting especially motor gasoline and diesel. Emphasis will be on broadening the implementation of isomerization and etherization while increasing reforming and hydrocracking capacities.

  • Energy conservation, a problem at most of the technologically lagging Chinese refineries.

  • Utilization of surplus processing capacity, which poses another opportunity for foreign investors.
Foreign companies can select refineries to process their crudes or other feedstock and take all products needed with payment of a processing fee. Part of the consideration by Sinopec will be the foreign participant's input for maximizing profits from the plants with surplus capacity (Tables 4, 5).

REFINING CAPACITY

By yearend 1993, Sinopec operated distillation capacity had grown to 2.94 million b/d, or 86.9% of the nation's total. Secondary processing capacity increased last year to 1.34 million b/d.

Last year, Sinopec's crude runs increased 3.7% from the year before to 2.26 million b/d, or 88.2% of the nation's total. Imports account for an increasingly larger share of those crude runs. One thing that the domestic crude supply shortfall is a change in policy by Beijing toward infield burning of crude for power by domestic crude producers. Each year, the state allocates a large volume of crude to oil fields under CNPC jurisdiction for direct burning for infield power generation. Beginning in 1994, however, the government is directing crude production agencies to burn coal or other fuel to generate infield power, thus channeling more crude to Sinopec refineries. China currently has 64 refineries with a combined crude processing capacity of 3,255,200 b/d (Table 3). Of those, 34 are operated by Sinopec with a total capacity of 2,868,000 b/d. The remaining 30 refineries, operated by CNPC and various local agencies, account for a combined capacity of 387,200 b/d.

Refining utilization nationwide currently stands at about 78%. China's reforming capacity represents only 2.9% of the total distillation capacity. Fluid catalytic cracking capacity, however, totals about 800,000 b/d.

Sinopec processed 400,000 b/d of imported crude in 1993, or about 15% of its total crude runs. By 2000, that figure is expected to reach 1 million b/d, mostly at Sinopec's coastal refineries: Maoming Petrochemical Corp., Guangzhou General Petrochemlical Works, Fujian Refinery, Zhenhai General Petrochemical Works, Gaoqiao Petrochemical Co., Jinling Petrochemical Co. in Nanjing, and Dalian Petrochemical Co.

The Fujian refinery is a newcomer, located in Huilan county, Fujian province. The $210 million plant incorporates 10 units for atmospheric and vacuum distillation, heavy oil cracking, gas sweetening, Merox treating, sulfur recovery, coking, catalytic cracking, hydrocracking, gas separation, and production of methyl tertiary butyl ether (MTBE). The 28,000 b/d heavy oil cracker is considered to be the showpiece of China's refining industry. The Fujian refinery has ready access to a major oil terminal at Meizhou Gulf Harbor, which has a capacity of 124,200 b/d of crude and four tanker berths that can accommodate three 100,000 dwt vessels and one 300,000 dwt vessel at once.

To meet China's growing need for processing imported crude, Sinopec is preparing to expand transportation and storage facilities for the coastal refineries.

REVAMPS NEEDED

China also is pressing a wholesale overhaul of its refining sector to accommodate a rapidly changing and growing new crude slate (Table 6).

Refineries in China are designed to specifications for domestic crudes, which tend to be have high paraffin content, relatively low gravities, and low sulfur content. The emphasis on Middle East crudes will entail a switch to crudes that tend to have higher gravities and higher sulfur content.

Accordingly revamps at the coastal refineries will emphasize modification of atmospheric and vacuum distillation units and reforming units, as well as adding vacuum residual desulfurization units and increasing capacity of hydrotreating and sulfur units.

At the forefront of China's grassroots refining capacity expansion and revamp programs is Sinopec's Maoming Petrochemical Corp. (MPC), China's top refining complex. MPC is the largest processor of imported crude in China. In recent years, the ratio of foreign crudes processed at Maoming has increased sharply, with an estimated 62,000 b/d, or 45% of the total crude run there in 1993.

Topping MPC's revamp list is a 16,000 b/d hydrocracking unit, designed 15 years ago to process crude feedstocks with a maximum sulfur content of 0.68 wt %. Plans call for revamping this unit to process feedstocks with sulfur content of as much as 2.5 3 wt %. The revamp, expected to get under way in 1994, includes building a much larger capacity hydrocracker as well as refinery as and LPG treating facilities.

Geographically, MPC is better located with respect to the Middle East and Southeast Asia oil trade compared with other domestic refineries. This favored locale has given MPC special impetus to upgrade facilities for a first shot at the coming flood of Middle East crudes.

A number of other revamps and expansions are targeted at China's coastal refineries. Sinopec expects to sign several contracts with foreign companies this year covering such projects.

Meanwhile, China is adding three ethylbenzene units at Sinopec's refineries at Guangzhou, Daqing, and Panjing. Contractors are a combine of Mobil Corp. and Badger Co., Sinopec International Co., and China National Technology Import & Export Co.

THIRD PARTY PROCESSING

The geographic distribution of China's refineries largely aligns with its historical crude oil production, which has predominantly been in the Northeast.

At the same time, consumption growth in the southeastern provinces has far outstripped that in the northeastern provinces, and crude production in the Northeast has stagnated in recent years. The result: significant refinery overcapacity in the Northeast and undercapacity in the Southeast. About 70 75% of the new refining capacity to be added in China will be in the coastal and other southeastern provinces (Table 7).

Because of domestic crude constraints, China's refineries are operating at a current utilization rate of only 78%, with the northeastern plants pulling down the average (Table 11).

Accordingly, Beijing encourages any refinery with excess capacity to process foreign crude, even through third party processing arrangements. Zhenghai General Petrochemical Works in Zhejiang province, with an oil terminal capable of handling 150,000 tankers, processed more than 65,500 b/d of such imported crude in 1993, more than half its crude run last year. Most of Zhenghai's crudes were low sulfur crudes from Oman and Southeast Asia. Of China's refineries, only Maoming can handle the sour Middle East crudes.

Most third party processing deals for China refineries are conducted via Hong Kong companies that act as intermediaries for end users of refined products. Hong Kong has no refinery.

FIRST JOINT VENTUPE REFINERY

China's first grassroots refinery with foreign equity participation is scheduled to start up in mid 1995, although construction of the 100,000 b/d joint venture refinery at Dalian is expected to be essentially complete by yearend 1994.

The Dalian refinery, in China's northeastern Liaoning province, is expected to run a 50 50 slate of light and heavy crudes.

The municipality of Dalian will hold a 27.5% interest in the new plant, Sinochem (Hong Kong) 22.5%, France's Total 20%, Daqing municipality 15%, Ministry of Chemical Industry 10%, and Sinochem (Beijing) 5%. At least 70% of Daban's output will be exported, but more could be shifted to domestic markets if prices there are favorable.

Joint ventures with foreign participation in China's special economic development zones are entitled to a 50% tax reduction during the first 5 years of operation if 70% or more of their output is exported.

Operator Dalian Petrochemical Corp. (DPC) also has outlined a long term investment program that calls for adding another 100,000 b/d refinery in 2000, doubling its overall capacity. All crude oil needed for the long term project will be imported from the Middle East. The first phase refining project will process crude from Indonesia, Malaysia, and Daqing oil field.

DPC is negotiating with U.S. and Japanese companies possible financial and technical cooperative agreements for the second phase project. The refinery's product slate would include lube oils and paraffin waxes. And DPC is considering installing a 90,000 ton/year polystyrene plant at the complex in a bid to diversify into petrochemical operations.

CNPC PLANS

Sinopec isn't the only Chinese refiner pursuing expansion plans.

With crude still being sold at a state controlled price of a little more than 100 yuan/ton, while refined products for which there is relatively much stronger demand command a premium beyond the usual added value, CNPC is interested in expanding its downstream diversification.

CNPC refineries produced about 200,000 b/d of refined products in 1992.

With the start up in early September 1993 of its 20,000 b/d Gulum refinery in northwestern Qinghai province, CNPC crude processing capacity reached 220,000 b/d.

CNPC plans call for revamping some refineries along the eastern coastal areas, such as those in Dagang and Liaohe oil fields, to ramp up processing capacity to 500,000 b/d this decade.

Those projects include:

  • A 100,000 b/d refinery, possibly a first stage capacity, in Sichuan province at a cost of $1 billion. CNPC would refine crudes transported by pipeline from Xinjiang to Sichuan. Capacity would double under a second stage.

  • A 20,000 b/d refinery at Korla, Xinjiang, that would refine crudes from Northwest China's Tarim basin to produce gasoline, kerosine, and diesel for the regional market. Cost is pegged at $150 million.

  • A $100 million revamp and expansion to 50,000 b/d of the Dagang refinery in Tianjin to produce gasoline, diesel, and kerosine, among other products.

  • A $50 million revamp and expansion to 50,000 b/d of the Panjin refinery in Liaoning province. It would utilize heavy crude from Liaohe oil field to produce naphthene based lubricants and highway asphalt.

  • A revamp of the Dongying refinery in Shandong province to produce gasoline, diesel, and highway asphalt. Estimated cost is $100 million.

  • A $50 million revamp of the refinery at Daqing oil field in Heilongjiang province. It would enable the plant to utilize paraffin base crude from Daqing to produce paraffin waxes, lubricants, and chemical feedstocks.

  • A $110 million expansion of the refinery at Huhhot in the Inner Mongolia autonomous region that would enable it to produce gasoline, kerosine, diesel, and other products.

Three other CNPC projects would entail petrochemical operations (see following related story).

GATT CHALLENGE

Chinese refining officials say small refineries those with capacities of less than 50,000 b/d will find it difficult to survive when imports of less expensive refined products pour into the Chinese market as GATT implementation proceeds the next few years (Table 12).

They contend only refineries with capacity of at least 100,000 b/d in China will be competitive in the years ahead as the world moves closer to unfettered trade.

At the same time, officials say, inadequate refining facilities are putting some Chinese refined products at a disadvantage on the highly competitive international market. For example, most gasoline for the domestic market is made through catalytic cracking. Although there is a substantial alkylation capacity in China capable of yielding a higher quality gasoline, utilization of this capacity is depressed because of a butane shortage. For that reason, Chinese produced gasoline has a competitive disadvantage in foreign markets, especially market leader North America.

The quality and experience seen in marketing subsidiaries of multinational oil companies will help them erode the domestic market share of China's refiners when price becomes less of an issue. That already is evident in Guangdong province, where imported refined products sell briskly while the area's two big refineries sometimes have no takers for their products.

Sinopec's dominance in the domestic market will be threatened as more refining/petrochemical joint ventures, bolstered by foreign funds, enter the arena. Joint ventures and solely foreign funded refineries with advanced technology and efficient management will be strong competitors for Sinopec.

Chinese officials propose the following measures to help the country's refining sector adjust to the changes accompanying China's reentry into GATT:

  • Import and export practices associated with refining/petrochemical enterprises should be readjusted to conform to GATT standards. For example, issuing of import licenses should be controlled by market forces rather than by administrative preference. In addition, import tariffs should be cut from the present 22% to 18% and eventually to 13%, which would conform to the average among developing nations.

  • Processing capacities of small and medium sized refineries should be expanded to the minimum economic threshold of 100,000 b/d or shut down.

  • Administrative approval procedures regarding imports should be reduced and eventually abolished.

  • Domestic enterprises should take advantages of opportunities provided by readmission into GATT to conduct international operations.

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