China downstream investment focus shifting

China's 1995 Refining Capacity, Utilization Rate [7793 bytes]

Royal Dutch/Shell Group plans to restructure its integrated refining/ petrochemical complex at Nanhai, China.

The move reflects a quantum shift in how foreign investment will target downstream projects in China.

Shell is likely to restructure its Nanhai project by cutting planned refining capacity while expanding its ethylene-led petrochemical components. Official sources in China have confirmed the readjustment but declined to specify details. Shell has not denied the claim but refuses to comment on any details.

"Some discussions are going on, and we hope that it will come to a conclusion by the end of this year," said Shell official Jeremy Frearson.

According to the original proposal, the Nanhai project, to be located at Huizhou, Guangdong province, would involve installation of 360,000 b/d of crude distillation capacity and 450,000 metric tons/year of ethylene capacity. The project proposal was submitted to the State Planning Commission (SPC) in February 1994.

The new plan calls for expanding the ethylene capacity to 600,000 tons/year, which will be accommodated by cutting the project's proposed refining capacity to 120,000 b/d. The new scheme also turns Shell to the Middle East for light crude supply rather than the original plan to source 36% of the project's crude supply from state owned Chinese National Offshore Oil Corp.'s (Cnooc) production in South China Sea.

Rationale for restructuring

The reasons behind the readjustment might be either economic viability, or as some observers suggest, a shift in Beijing's policy on refining investment in China.

The rapidly growing, volatile domestic refined products market in China in recent years has favored the import of products, much to Beijing's chagrin. Occasional attempts to stem the flood of refined products to help rein domestic inflation and prop up inefficient domestic refineries threw China's downstream markets into disarray, creating refined products shortages in some parts of the country and capacity surpluses in other areas.

It may also present a trend that the major oil companies have run out of patience waiting for market deregulation in China's refining industry, especially after the Sinopec-led industry has recently resorted to a campaign of self-reliance, pursuing debottlenecking projects to bolster sagging utilization rates.

This could represent a major shift away from inviting foreign investment in China's downstream sector. If so, it is a blow to foreign investors, who have been pinning their hopes on participating in China's booming consumer economy through downstream petroleum projects, eventually in refined products retailing. In the near term, however, prospects are slim for foreign players to participate in China's refined products retailing business.

Shell's $5.4 billion Nanhai project is a joint venture involving Cnooc, Guangdong province, and Hongkong Merchants Group. Sinopec withdrew from the project after first joining a feasibility study on it. It also proved painful for Sinopec to help nurture a major competitor.

Status of other projects

Other major grassroots refining projects in China with foreign investment are Elf Aquitaine's Shanghai refinery, Total's refinery at Dalian, Sinochem-Saudi Aramco-Ssangyong Group's Qingdao refinery, Yukong Ltd.'s refinery at Shenzhen, Concord Group's refinery at Ningbo, and Hohbond International Petrochemical's refinery on Hainan Island (see table, OGJ, May 9, 1994, p. 39).

Total's Wepec refinery, completed in 1994, was still undergoing tests late in October to ensure a successful start-up last month. But for the other projects, there has been very little progress.

Elf last year withdrew its proposal to build a 120,000 b/d joint-venture refinery in Shanghai due to budget problems.

Hohbond and Concord are two independent investors proposing to build export refineries in Hainan and Ningbo.

Awaiting final approval from SPC are Sinochem-Aramco-Ssangyong's 200,000 b/d refinery at Qingdao and a 100,000 b/d refinery at Shenzhen proposed by Yukong 100%.

The foreign investors and the Chinese partners are caught in the impasse over questions of major tax concessions and greater access to the Chinese market. China is not ready to respond to the foreign request, while the investors do not want to become only refiners. To foreign investors, the incentives are reduced without access to the retail market.

At the moment, China feels comfortable with its investment policy in the refining industry because it has extra crude processing capacity (see table), and Beijing plans to keep refined products consumption growth capped at 5%/year. On the other hand, foreign companies cannot afford to lose China, given its huge market potential.

Some oil companies have reoriented their China downstream business investments by directing their funds to less capital-intensive projects, such as lube blending plants, petrochemical plants, and LPG retail outlets. Shell is such a company.

Petrochemical focus

However, China is advocating refining and petrochemical integration in order to reduce China's huge petrochemical imports.

An option is for investors to join Chinese refineries in pursuing back-to-back petrochemical projects.

Petrochemicals are now the focus of foreign interest, because domestic production barely covers 50% of demand. China expects to bring that level up to 70% before 2001.

Emphasis under China's petrochemical initiative will be expansion of ethylene capacity with a number of new crackers slated. In addition to two new ethylene crackers proposed by BASF AG and BP Chemicals Ltd., two other ethylene projects are proposed by joint ventures involving foreign companies: Dow Chemical in a joint venture with Tianjin Petrochemical Co. and Amoco Corp. and Exxon Corp. in competition for a plant at Fujian. The latter projects are scaled at capacities of 450,000-600,000 tons/ year.