CHINA EXPANDS REFINING SECTOR TO HANDLE BOOMING OIL DEMAND

China's refining sector is in the midst of a major expansion and reorganization in response to booming domestic demand for petroleum products.

Plans call for hiking crude processing capacity to 3.9 million b/d in 1995 from the current 3.085 million b/d. Much of that 26% increase will come where the products demand growth is the strongest: China's coastal provinces, notably those in the Southeast.

Despite the demand surge, China's refineries operated at only 74% of capacity in 1991, and projections for 1992 weren't much better. Domestic crude supply is limited because of Beijing's insistence on maintaining crude export levels, a major source of hard currency foreign exchange.

While the government scales back crude exports to feed voracious domestic consumption, it's restructuring the refining sector to reflect regional disparities and foreign participation in Chinese refinery projects. Those steps are part of overall reforms Beijing is implementing throughout the nation's petroleum industry.

SUPERHEATED DEMAND

Steady movement toward a market economy in China's southeastern coastal provinces has made that region the world's fastest growing economy. Some estimates place growth at 20%/year.

The expansion is heating oil demand. China consumes more than 2 million b/d of oil at present, a level expected by most observers to climb by 120,000-140,000 b/d/year. In first half 1992 alone, China's refined products consumption jumped by 18.2% from the previous year's period vs. a planned increase of 12.2%.

In the southeastern coastal provinces, notably Fujian and Guangdong, oil demand is projected to more than double by 2000 from 1990 (Table 1).

Domestic demand for oil is outpacing Chinese crude production. In 1991, China's crude production reached a record 2.792 million b/d, but the need to export crude for hard currency reined processing of domestic crude to less than 2.3 million b/d.

Crude production from onshore eastern China, which accounts for 80% of proved reserves and 90% of current output, is declining after 30 years of intense development.

Although production increased marginally in this region last year, annual growth has dropped from 115,600 b/d in 1986 to a paltry 8,000 b/d in 1990.

EXPORTS, IMPORTS

Because of flat production and the explosive growth in oil demand along the southeastern coast, Beijing has had to backpedal on efforts to promote crude oil exports.

In 1985, China exported 640,000 b/d of crude, which accounted for 20% of its foreign exchange revenue that year. In 1990, it exported 580,000 b/d of crude oil, 100,000 b/d above target because of favorable selling prices on the world market.

However, soaring domestic oil demand is reversing that trend. In 1991, China earned about U.S. $3.2 billion from oil exports, making up 8% of its foreign exchange earnings.

To maintain domestic refinery throughput, China National Chemicals Import & Export Corp. (Sinochem), the country's monopoly for crude imports and exports, cut crude exports to 420,000 b/d in 1992 from a previously planned 640,000 b/d. That garnered earnings of only $2.6 billion.

Sinochem stepped up imports of crude to feed refineries along the coastal provinces, notably Guangdong and Fujian. In 1991, Chinese refineries processed 100,000 b/d of imported crude. The figure was expected to double in 1992.

The regional oil shortages have even led some special economic zones such as Shenzhen to free themselves from the constraints of Sinochem to import their own crude.

The boom town Shenzhen, which borders Hong Kong, in 1991 consumed 23,600 b/d of oil, of which 21,400 b/d was imported, mainly from Singapore.

According to Jiang Yunlong, a Sinochem vice-president, inadequate oil storage capacity in China hampers Sinochem's efforts to import more crude. The present crude storage capacity in China totals only about 18.25 million bbl.

Although China's 450 oil terminals combined can handle as much as 1.8 million b/d, capacity of most tank farms is only about 146,000-365,000 bbl of crude and products each, with the largest at 1.095 million bbl at Zhenhai refinery in Zhejiang province.

It is not profitable to ship crude from the Middle East to China with single shipments of about 365,000 bbl, as would be required under Chinese storage constraints, because of high transportation costs, Jiang said.

REFINING INFRASTRUCTURE

China's current refinery crude throughput capacity of 3,085,200 b/d makes it potentially the world's fourth biggest oil processor after the U.S., the former Soviet Union, and Japan.

In 1992, China processed 2.38 million b/d of crude oil, up about 4% from the 1991 level. Of the total, 2.127 million b/d was processed by 32 refineries operated by Sinopec. The rest was processed by 25 small refineries operated by China National Petroleum Corp. (CNPC), the state owned company that oversees exploration and development operations.

The combined output of gasoline, diesel oil, kerosine, and base lubes totaled 1.209 million b/d in 1992, up 8.5% from 1991.

In addition to domestic production, refineries along the coastal areas processed 300,000 b/d of imported crude, or 14.1% of the total processed volume.

In 1991, Sinopec refineries accounted for about 90% of the 2,272,600 b/d of crude oil processed in China. Of those Sinopec refineries, 30 have crude processing capacity exceeding 50,000 b/d.

Sinopec plans to shift its attention to areas along the coast and the Yangtze River to turn them into export-oriented oil processing bases, according to Sinopec Pres. Sheng Huaren. Sinopec officials point to refineries under construction with domestic and foreign funding in coastal areas.

While expanding its refining capacity, China has made progress in technology development.

China Research Institute of Petroleum Processing developed a deep catalytic cracking (DCC) process to produce gaseous olefins that feature cuts of propylene higher than those of butylenes and ethylene. The process uses heavy hydrocarbon fractions such as vacuum gas oil as feedstock in tandem with special catalysts. With operating temperatures much lower than with steam cracking, the process treats liquid hydrocarbons with conventional alkali and water washing, thus separating out impurities without further refining.

In addition to the DCC process, China also has developed is own processes for heavy oil hydrotreating/cracking and atmospheric and vacuum distillation.

SHENZHEN REFINERY

Chinese officials look to the refinery under construction at Shenzhen as a prototype for sophisticated Chinese refineries of the future.

A joint venture of Sinopec, the city of Shenzhen, and Hong Kong, the $500 million project will have crude processing capacity of 60,000 b/d when complete in 1994. The crude will be imported from the Middle East, and 60% of its products will be exported to Hong Kong.

The project will have eight processing units, including an atmospheric resid desulfurization/hydrogenation complex that is a first for China.

At present, most of China's 100 refineries can process only low sulfur crude. The atmospheric resid desulfurization/hydrogenation unit and Shenzhen's several heavy oil hydrotreating units, catalytic cracking units, and continuous catalytic reformer can process a range of high sulfur imported crudes. The sulfur unit can recover 60,000 metric tons/year of sulfur, compared with an average of less than 10,000 tons/year at other Chinese refineries with sulfur units.

Shenzhen also will yield a much whiter products barrel than other domestic refineries, about 81.92% gasoline and middle distillates. In 1990, the average recovery yield of gasoline and middle distillates at Chinese refineries was 51.53%.

The continuous catalytic reformer at Shenzhen can produce 100 RON gasoline, a significant advance for China. Even with the addition of tetraethyl lead, very few Chinese refineries can produce 90 RON gasoline.

Shenzhen also will have a new deepwater terminal in Dapeng Gulf, several kilometers away from Hong Kong, that could handle oil cargoes of as much as 1.46 million bbl.

At present, the transport cost of a single shipment of crude from the Middle East to the 365,000 bbl Sinopec Maoming Petrochemical Corp. terminal near Zhanjiang, a coastal city in Guangdong, runs as much as $2.74/bbl. But for the Shenzhen facility, transportation costs for the bigger cargo runs to only $1.03/bbl for the same distance.

SHENZHEN, HONG KONG DEMAND

Shenzhen is one of eight refineries China plans or is building along the coastal areas (Table 2).

The eight refineries will have a combined capacity of 560,000 b/d.

Because most of China's refineries can produce only low octane gasoline, which must be further processed by foreign refineries when exported, China's gasoline export business is a low margin operation. On the other hand, finished gasoline is imported from Singapore to Shenzhen at a much higher price.

Hong Kong imported about 143,000 b/d of refined products in 1991, 70% from Singapore. Of the total, 23,000 b/d was exported to Shenzhen and Macao, leaving Hong Kong's net products consumption in 1991 at about 118,000 b/d. The distance between Singapore and Shenzhen and Hong Kong is 2,685 km, putting the transportation cost at about $4.10/bbl. When the Shenzhen refinery begins exporting products to Hong Kong, the transportation cost will drop to about 55 cents/bbl.

The government estimates that the city of Shenzhen's oil consumption will climb to about 38,000 b/d by 1995 and 58,400 b/d by 2000. In Hong Kong, net oil consumption is expected to climb at a rate of 4%/year by 1995 to reach 140,000 b/d and 3%/year thereafter to reach 160,000-164,000 b/d by 2000.

SOUTHEAST COAST DEMAND

The six provinces of Southeast China--Guangxi, Yunnan, Guizhou, Hainan, Fujian and Guangdong--rely mainly on Guangzhou Petrochemical Corp. and Sinopec Maoming Petrochemical Corp. for refined products supply.

Processing capacity of Guangzhou Petrochemical is 104,000 b/d and of Sinopec Maoming Petrochemical 170,000 b/d. Last year, the two processed a total of 200,400 b/d of crude oil.

The region's booming economy is fueling a terrific thirst for refined products, triggering the refinery building boom.

The Fujian refinery is the first to be completed of the eight refineries Sinopec is building along the southeastern coast. The 50,000 b/d plant started up in September 1992 in Fuzhou, capital of Fujian province.

Currently there are three refineries under construction in Southeast China. The combined crude throughput of old and new refineries in the area is expected to reach 362,000 b/d in 1995. Of that, only 137,600 b/d is earmarked for Guangdong, 89,200 b/d short of projected demand. That shortfall won't be made up by 2000.

Although throughput is expected to reach 532,000 b/d in 2000, Guangdong will account for only 199,000 b/d--138,600 b/d short of projected demand.

1993 PLANS

In 1993, China plans to process 2.54 million b/d of crude, with 2.24 million b/d processed by Sinopec refineries. Of the total crude processed, about 380,000 b/d will be imported by Sinopec.

In 1993, China's total production of gasoline, diesel, kerosine, and lubricants is expected to reach 1,306,200 b/d, with Sinopec accounting for 1,162,000 b/d. That compares with 1,209,000 in 1992, in turn a rise of 8.5% from 1991's level.

Sinopec has 51 catalytic cracking units with a total processing capacity of 840,000 b/d. In 1992, Sinopec cat crackers' throughput averaged 640,000 b/d. Sinopec now can produce 60,000 tons/year of seven kinds of catalysts.

Sinopec also has delegated authority to four refining and petrochemical corporations to import crude and conduct foreign trade.

In addition to Sinopec Maoming Petrochemical and Guangzhou Petrochemical, they are Zhenhai Petrochemical Corp., Zhejiang province, with refining capacity of 110,000 b/d, and Gaoqiao Petrochemical Corp., Shanghai, 104,000 b/d. In 1993, the four corporations will import 80,000 b/d of crude.

FOREIGN INVESTMENT

Foreign participants are becoming increasingly common in China's refining sector.

Construction began in May 1992 of a 100,000 b/d export refinery at Dalian in Northeast China's Liaoning province. It is a $437 million joint venture of four Chinese companies, Hong Kong's Sinochem International (H.K.) Co. Ltd., and Total. The foreign partners have a combined 42.5% stake in the venture.

It is expected to produce 38,000 b/d of gasoline, 12,000 b/d of kerosine, 3,200 b/d of naphtha, and 2,600 b/d of liquefied petroleum gas. Crude oil will be imported from the Middle East and processed with technology and equipment provided by Total. Total also will help the Chinese partners purchase crude and sell products on the international market.

Royal Dutch/Shell Group is considering participation in a 100,000 b/d refinery near the coastal town of Aoutou, Guangdong. Pending results of a feasibility study, Shell could take a 50% stake in the joint venture, with the rest held by a Chinese group led by the Guangdong provincial government and including China National Offshore Oil Corp. The study is to be complete this year. If it receives timely approval, the project could be complete in 1997-99.

In addition to the refineries to be built along the coast, Sinopec plans to build a 160,000 b/d refinery at Shanghai in cooperation with France's Ste. Nationale Elf Aquitaine next year. The planned refinery has been given a go ahead by Beijing's State Council.

Meanwhile, China Chemicals Import & Export Corp. (Sinochem) is negotiating with Saudi Arabia to build another 120,000 b/d refinery at Quingdao, a port city in East China's Shandong province.