CNOOC Regroups Refineries in Shandong      

Wu Zhenfang, Deputy General Manager of China National Offshore Oil Corporation (CNOOC), went to Shandong province on March 24th to advance the all-round cooperation between CNOOC and Shandong Provincial Government, especially to regroup local refineries in the province.
   CNOOC has already conducted reformation to five local refineries and is talking with additional two refineries.
   Most refineries of CNOOC are now located in the south of China. In case the purchase of refineries in Shandong is successful, CNOOC can have a crude oil processing capacity of over 10 million t/a in Shandong and acquire a foothold there to compete with Sinopec Group.
   Shandong has always been a realm of Sinopec Group., that has operated in the province for many years and owns a crude oil processing capacity of 20 million t/a.
   The five local refineries in Shandong including Fuhai Group, Kenli Petrochemical, Shandong Zhonghai Chemical, Haike Group and Shandong Petroleum University Sci-Tech Company are listed in the timetable of CNOOC for reformation. Shandong Petroleum University Sci-Tech Group, under China Petroleum University (East China), has a crude oil processing capacity of over 1.5 million t/a, but can only get a supply of  500 000 tons of crude oil a year.
   Crude oil source is therefore the key for CNOOC to regroup local refineries in Shandong. According to Liu Junshan, Spokesman of CNOOC, "the price of crude oil in the international market is not matched to the prices of oil products in the domestic market and a supply shortage of crude oil today is more obvious in Chinese market. It is therefore the optimal time for CNOOC purchasing local refineries in Shandong."
   The enterprises that eagerly cooperate with CNOOC mostly have a 1.0-2.0 million t/a crude oil processing capacity each. CNOOC once held talks with Lihuayi Group and Hengyuan Petrochemical Group, but to no avail. These two companies also have a 5.5 million t/a crude oil processing capacity each.
   "Most of refineries in Shandong are local state-owned enterprises," said an analyst. "The support of the local government will greatly accelerate the refining business of CNOOC in Shandong." The asset value of any medium-scale refinery here is more than RMB1.0 billion. For example, the total assets of Kenli Petrochemical are RMB3.0 billion. Even if based on the net assets, CNOOC should spend several billions RMB for acquiring several refineries at one time.
   Compared with the investment of RMB10 billion needed in Sinopec Qingdao Refinery with a crude oil processing capacity of 10 million t/a, however, the investment of CNOOC is lower and the effect is quicker.
   CNOOC can not only bring sufficient crude oil source to local refineries, it can also help local refineries make overall upgrading in capital, raw material, management and scale.
   The merging of local refineries is also crucial to the development strategy of CNOOC itself. According to Liu Junshan, making use of upstream resource advantage to conduct reformation to downstream sectors can achieve the upstream/downstream integration of industrial chains and reduce market risks. It is the general rule in the 100-year development history of petroleum enterprises and also the strategic target of CNOOC in near future.
   An additional major reason of regrouping local refineries in Shandong is that the annual output of crude oil in CNOOC's Bohai Oilfield that is adjacent to Shandong will reach 30 million tons by 2010. Bohai Oilfield will become an important oilfield in China.
   Liu Aiying, the Chairman of Shandong Refining and Chemical Industry Association, expressed, "Crude oil produced by CNOOC is mostly heavy crude with high cost and great complexity in processing. Sinopec Corp. and PetroChina are not willing to buy heavy crude. Most of heavy crude produced by CNOOC has therefore to be exported. As China controls the outflow of resources and there is a shortage of oil products in the domestic market, it is imperative for CNOOC to find an outlet for its crude oil and process crude oil into oil products."
   The heavy crude produced by CNOOC is not as good as normal crude oil and is sold at a higher price either, but it is more economical than fuel oil imported by local refineries and can guarantee supply. The refining of heavy crude produced in Bohai Oilfield in nearby refineries can also reduce freight cost and ensure crude oil availability in local refineries.
   Under the agreement signed by CNOOC and Shandong Provincial Government, both sides will further strengthen their cooperation in construction of oil/gas pipelines and oil products sales network.