High Operation Rate in Refining Sector

Despite of the price fluctuation of crude oil, local refining
capacity continues to expand in the coming five years.  The
National Development and Reform Committee (NDRC), the most
authority governmental department controlling production in
China, plans to add around 90 million t/a refining capacity till
the year 2010 while shutting down low efficient  refineries with
a total capacity of 20 million t/a.
   An expert from China National Petroleum Corp. (CNPC) said
that China's total refining capacity will reach around 400
million t/a by 2010, 100 million t/a more  than current number.
Both the increasingly brisk demand for oil products in domestic
market and expectation on the opening up of oil products business
make Chinese petroleum companies be further interested in
expanding refining capacity that exceeds the expected number.
     At present the average operation rate in local refineries
has already reached 90% in order to meet the growing demand for
oil products. Government is requiring refineries to improve
operation rates further, saying 95%. Of course refineries must
remain operation flexibility and safety. Newly constructed
refineries typically feature with high stability, which make the
new refineries has strong competitive edge. Most newly
constructed refineries are operated by Sinopec Group and CNPC.
The common strategies for these two companies include
constructing large scale refining and chemical integration base
and approaching the consumption market that is well developed.
     Analyst from a securities firm comments that refining
industry is becoming a pillar sector in China. China is becoming
the most active place to invest in petrochemical industry.
Construction of large scale petrochemical projects such as Secco,
BASF-YPC, Fujian Refining & Chemicals, Huizhou Refinery, and
Tianjin Petrochemical, etc. is being executed one by one, but
having not caused any negative impact. Except local brisk demand,
another main reason is that joint venture refineries and
crackers in China are contributing to the world.
     Newly added demand for petroleum mainly comes from
transportation that is pulled by the increased demand for car.
In the coming years, the growth of consumption for gasoline in
China is projected to be 6%.  
     Since 1998 China divided petroleum digging and refining
business into CNPC and Sinopec Group taking Great Wall as
dividing border, CNPC has monopolized the oil and gas reserves
and refineries in northern China, while Sinopec has controlled
oil and gas businesses in southern China. Now the border has been
broke. CNOOC has started building a 12 million t/a refinery in
Guangdong that was the appointed place for Sinopec, although the
latter has already three refineries with a total capacity of 26.2
million t/a.  CNPC is planning a new refinery in Guangxi
province of southern China to process the crude oil delivered
from Sudan of Africa, which has been suffered opposition from
Sinopec and finally became a joint venture between the two
competitors. Sinopec mulls to increase refining imported oil in
order to get rid off relying on local crude oil.
      More and more powerful companies are putting their feet
on refining business that is currently called as a sector to
suffer loss. Such companies include Sinochem, ChemChina, CITIC,
and Shaanxi Yangchang Petroleum Corp. At present the most
economic model for new refineries is crude oil resources,
refineries and hundreds of gas stations. New comers are ready
to face the situation of exhausted crude oil in dozens of years,
the important role that the refining sector took in chemicals
sector drives them to join in refining business, however.  
　　
Zhong Weike
November 30, 2006