Steady Advances of the Oil Refining Industry in China (II)
— moderate and effective development in the future

By Jin Yun, CNPC and Zhu He, Sinopec

(Continued page 13, issue 17 of CCR)
The oil refining industry in China will keep its scientific outlook on development, transform its development mode, adjust the structure of both its oil refining units and its products through total capacity, optimize distribution according to resources and market, promote technical renovation, reduce costs, improve returns and push for larger scale plants and the integration of refining with chemical production. The upgrading of oil product quality will be highlighted at the same time as making a steady increase of scale. Profit-making ability and international competitiveness will be constantly enhanced. Efforts will be made to achieve a moderate and effective development of the oil refining industry, promote industrial upgrading and realize a real shift of China from a big oil refining country to a strong oil refining country.

   1. The scale of oil refining will increase rapidly, and the mainstream diversified market will develop further.

   The oil refining capacity in China will increase around 35.5 million t/a in 2013. There will be one new refinery with a capacity of over 10 million t/a in Pengzhou of Sichuan, and more than seven renovation/expansion projects, including an expansion project of Urumqi Petrochemical Co., Ltd., a quality upgrading project of Anqing Petrochemical Co., Ltd., a renovation/expansion project of Wuhan Petrochemical Co., Ltd. and a renovation/expansion project in Shijiazhuang Refinery. (See Table 1)

Table 1   Capacity Expansion of Major Refineries in China in 2013     (million t/a)

                  Enterprise             New capacity    Time starting production
PetroChina    Urumqi Petrochemical Co., Ltd.      4                 October 2013
            Sichuan Petrochemical Co., Ltd.      10             September 2013
Sinopec        Anqing Petrochemical Co., Ltd.      3                 September 2013
            Yangzi Petrochemical Co., Ltd.      5.5             December 2013
            Shijiazhuang Refinery              3                 December 2013
            Wuhan Petrochemical Co., Ltd.      2                 June 2013
Local refineries                              8    
Total                                          35.5    


   Besides, some new and renovation/expansion projects will also likely be completed in private oil refining enterprises and some outdated capacity will be phased out. It is expected that by the end of 2013 the total oil refining capacity in China will reach 610 million t/a, an increase of 6.2% over 2012.
   Judging from the status of the oil refining capacity planned to be added after 2013, the total oil refining capacity in China is expected to reach around 680 million t/a in 2015. Around 15 new and renovation/expansion oil refining projects with a capacity of over 10 million t/a are in progress in PetroChina, Sinopec and CNOOC. There are also around 15 oil refining projects planned for construction. (See Table 2.)

Table 2   Partial New and Renovation/Expansion Oil Refining Projects Starting Production after 2013      (million t/a)

Group     Location    Refinery               New capacity Startup time Remark
PetroChina    Southwest China    Kunming Refinery    10          2015           new
            East China    Taizhou Refinery        20         to be fixed   new
            South China    Jieyang Refinery        20         to be fixed   new
Sinopec        East China Qilu Petrochemical Co., Ltd.    4     2015
renovation/expansion
　　　　　　Fujian Refining & Chemical Co., Ltd. second phase     12    to be fixed     renovation/expansion
　　　　　　Yangzi Petrochemical Co., Ltd.            4.5      2015 renovation/expansion
            Zhenhai Refining & Chemical Co., Ltd.    12    2015    renovation/expansion
             South China    Zhanjiang Dongxing Petrochemical Co., Ltd.    3    to be fixed    renovation/expansion
             China-Kuwait Oil Refining Co., Ltd.    15    2014    new
CNOOC         Guangdong    Huizhou Refinery second phase    10    to be fixed    renovation/expansion
             Hebei    Zhongjie Petrochemical Group Co., Ltd.    8    to be fixed    renovation/expansion
SinoChem    Fujian    Quanzhou Refinery     12    2014    new
Others        Fujian    Gulei Petrochemical Co., Ltd.    16    2015    new
Total            172        


The large scale, the refining/chemical integration, the industrial concentration and the intensive level of the present oil refining industry in China will be further upgraded and the quality of oil products will also be further improved. Its international competitiveness will reach a new high.
   Various companies will seek new developments on the basis of the present situation and their own characteristics.
   PetroChina will promote the construction of major projects and oil product pipeline networks in an orderly way. It will go with the needs in domestic and overseas markets, coordinate with the progress in the construction of China-Russia, China-Burma, China-Kazakhstan and offshore strategic channels and conduct oil refining distribution and restructuring. The oil refining capacity of PetroChina will reach 187 million t/a at the end of 2013, accounting for 31% of the national total. With the completion of Jinzhou-Zhengzhou oil product long-distance transmission pipeline, the long-distance transmission of oil products in PetroChina will be greatly improved.
   Sinopec will further highlight the 3 refining/chemical enterprise clusters in the Yangtze River Delta, the Pearl River Delta and the Bohai Bay Rim, carefully cultivate and breed riverside and inland refining/chemical enterprises and attain the goal of developing itself into a world’s first-rate oil refining company. It will also unfold joint ventures and cooperation, especially strengthening cooperation with companies of resource-rich countries, exchange market for resources and accelerate the construction of large joint-venture refining/chemical integrated projects. Quite a few large oil refining projects such as the project of China-Kuwait Oil Refining Co., Ltd., the second-phase project of Zhenhai Refining & Chemical Co., Ltd. and the second-phase project of Fujian Refining & Chemical Co., Ltd. are in progress. The oil refining capacity of Sinopec will reach 275 million t/a at the end of 2013, accounting for 45% of the national total.
   CNOOC will continue to uphold its strategy of making mid-stream and downstream extension and expansion. It plans to expand the oil refining capacity of Huizhou Refinery to 20 million t/a. There are also expansion plans in other refineries such as Zhongjie Petrochemical Group Co., Ltd. and Daxie Petrochemical Co., Ltd.
   The oil refining business in ChemChina will make further developments through the acquisition and expansion of partial local oil refining enterprises in Shandong.
   With the completion of the 12 million t/a oil refining project in Quanzhou in 2014, SinoChem will formally become an independent member of the oil refining sector in China.
   Shaanxi Yanchang and local refineries in Shandong will also further enhance market competitiveness and achieve sustainable development through improving the ability of raw material intensive processing and comprehensive utilization and developing terminal sales and special businesses.
   China has always requested and guided small refineries with a capacity below 1 million t/a to shut down, stop production, merge or change products according to industrial policies. Many provinces and municipalities have also designed timetables for implementing the National IV standard for vehicle gasoline and diesel. Some weak local refineries with small scale and unstable product quality face new challenges and reshuffling.
   It is particularly noteworthy that the equity oil refining capacity of foreign companies in China will grow as an outcome of the ongoing development of cooperation between China and resource-rich countries in large oil refining projects. Large newly constructed refineries in China include some Chinese-foreign joint venture projects such as China-Russia Tianjin East Petrochemical Co., Ltd., China-Saudi Arabia Kunming Petrochemical Co., Ltd., China-Venezuela Guangdong Jieyang Petrochemical Co., Ltd., China-Qatar Shell Taizhou Refining & Chemical Co., Ltd. and China-Kuwait Zhanjiang Refinery. Most of these projects started construction in 2012 and their major oil sources are resource-rich countries, operating as partners. State oil companies in resource-rich countries, including Russia, Kuwait, Venezuela and Qatar will follow Saudi Arabia into the oil refining market in China. After the completion of these projects, the equity oil refining capacity of foreign companies will increase sharply from 8.24 million t/a today to over 40 million t/a, accounting for around 6% of the national total.
   In the next three years, the most uncertain factors influencing the market supply/demand balance will still be the progress of major refining/chemical projects, the economic development trend and the oil product pricing policy in China, as well as the import of oil products from neighboring countries and regions. It is expected that the oil refining capacity will increase in the next 3 years by around 40 million t/a each year, on average, and the average annual growth rate will go up to 7.3%.
   The growth of China’s consumption of oil products will slow down due to three factors: the overall slowdown of economic growth, the proliferation of energy-saving vehicles and the intensive reform of the oil product pricing mechanism. Due to the accelerated growth of oil refining capacity and the reduced growth of the oil product consumption, the supply/demand gap of oil products will likely widen for some time. China should locate oil refining projects rationally and control the tempo of project investment and completion. The capacity to supply oil products should not increase too fast, so as to avoid surges of surplus supply caused by too much new capacity going on stream in a short  time. There is already serious supply surplus in some regions like Shandong. The completion of quite a few more projects may create supply surplus in other regions, like Guangdong. The effects of irrational development, such as overheated competition, overly concentrated construction and redundant construction, should also be avoided.

   2. The larger scale of oil refining units and refining/chemical integration will be furthered.

   With the completion of a large number of refineries in major consumption regions, the average transportation distance in oil refining logistics will be shortened in China. The oil refining capacity will be better matched to the market. The distribution of the oil refining industry in China will be further optimized. The focus of distribution will be shifted toward regions with convenient transportation of imported crude oil and concentrated market demand and to regions with major oil resources.
   The overall concept is to take the Yangtze River Delta, the Pearl River Delta and the Bohai Bay Rim together as the base, to develop some core areas in central and western regions moderately, to improve distribution in border areas and to construct several refining/chemical bases for refining 20 million t/a oil and making 2 million t/a ethylene. The number of new plants will be reduced in the coming years whereas the number of renovation/expansion projects will be increased. Core areas for development in central and western regions mainly include petrochemical industry clusters with Wuhan, Chongqing and Chengdu as their focal points. The distribution and the scale of projects will be designed mainly to bring about, at a more local level, a balance of supply and demand, and to satisfy the local oil product market. The construction of oil refining projects in Southwest China such as Kunming Refinery will be accelerated to meet the needs of the local oil product market.
   By 2015 the oil refining capacity in South China and Southwest China will change considerably. The total new oil refining capacity will be more than 50 million t/a and the development of the local regional economy will therefore be more coordinated. The proportion of China’s oil refining capacity residing in the northeast will decrease further, and the pattern of making oil products in the north to be sold in the east will fade somewhat.
   It is however expected that by 2015 there will still be certain market gaps in Central and Southwest China. Northeast and Northwest China will continue to ship out an important array of oil products domestically. There will be quite a few new units and expansion projects in East, South and North China in the next few years, expanding the oil refining capacity in these regions rapidly. These areas’ local demands for oil products can then be satisfied, and a rough balance between supply and demand will be established.
   The average scale of oil refining units in refineries will be further increased. It is expected that during 2011-2015 it will go up to 7.60 million t/a and 8.5 million t/a in the refineries of PetroChina and Sinopec, respectively. The average scale of oil refining units in local refineries will also increase. In addition, ethylene units with a capacity of over 1 million t/a will also be constructed in some of the new large oil refining bases to be constructed in next few years such as China-Kuwait Oil Refining Co., Ltd., Taizhou Petrochemical Co., Ltd. and Jieyang Petrochemical Co., Ltd. The completion of these large refining/chemical integrated projects will obviously improve the scale of oil refining units, the ability to process imported crude oil and the integration of oil refining with chemical production. The construction and development of other large refining/chemical bases will in turn be promoted.
   Due to the rapid development of the coal chemical sector and the natural gas chemical sector, the traditional mode of refining/chemical integration will also undergo some changes. Some coal mills will have a new mode of refining/chemical integration. The optimized integration of utility systems will also be intensified on the strength of new and expansion oil refining and ethylene projects. Resource integration and optimization between refining/chemical industrial chains is done to improve resource utilization efficiency, increase resource utilization level, reduce cost, better manage risk, enhance overall competitiveness of enterprises and coordinate the development of oil refining and chemical production.

   3. The adaptability of refineries to process different types of crude oil will be further improved.

   In the past decade the production costs and the price of oil resources have risen constantly around the world. Meanwhile, the proportion of high-sulfur, high-acid heavy crude oil has increased year-by-year. The grade of proven oil reserves in China is coming down. Most refineries have to process more high-sulfur, high-acid heavy crude oil. More processing is needed to remove sulfur, acid, carbon and heavy metals from such crude oil. So more materials and energy are consumed. Costs in the oil refining sector have increased overall. In the traditional processing methods used to process poor-quality crude oil, only small quantities of light components are obtained, and the octane and cetane ratings of the products cannot meet standards. Follow-up processing has to be added. The profitability and competitiveness of refineries are therefore evidently threatened, and it is more necessary and urgent to restructure refineries.
   The proportion of sulfur-containing acid-containing crude oil processed by Sinopec is already more than 80%. In the restructuring of oil refining units, on one hand, refineries in eastern coastal areas will vigorously develop processes and units that have high yield of liquids and can produce the maximum amount of clean fuels for transportation and fuels for chemical production, and on the other hand, inland refineries will restructure with the main goal of improving oil product quality, aiming to moderately increase the capacity of hydrofining units for high-octane gasoline, kerosene and diesel. In the restructuring of products, the proportion of high-grade vehicle gasoline, vehicle diesel and medium/high-grade internal combustion engine lube oil will be increased and the proportion of fuel oils will be reduced to parallel developments in the automobile industry. Economical output of oil products for chemical production will also be increased to meet the changing demands of the petrochemical sector.
   Domestic demand for high-quality light oils for chemical production will increase drastically with the massive development of the ethylene industry and the petrochemical industry in China. The oil refining industry needs to find new ways to provide more high-quality chemical raw materials.

   4. The volume of crude oil processed will grow steadily, and the output of aviation kerosene will grow fast.

   It is expected that the crude oil processed in China will reach 489 million tons in 2013, an increase of 24.60 million tons over 2012. The output of oil products will be 299 million tons, an increase of 6.2%. Of the total, the output of gasoline will be 95.40 million tons, an increase of 6.5%; the output of diesel will be 180 million tons, an increase of 5.5%; the output of kerosene will be 23.75 million tons, an increase of 11%. A two-digit growth will still be maintained. The increasing number of airports and the increasing volume of aviation traffic will continue to promote the development of aviation kerosene in China in next few years. The output of aviation kerosene in China is expected to reach more than 28 million tons in 2015.

   5. Market competition pressures resulting from external factors will increase further.

   With relentless march of both globalization and China’s opening-up, and the related construction and development of unilateral and multilateral free trade areas, the export of oil products will increase in neighboring countries and regions that have surplus oil refining capacity and develop export-oriented oil refining industry (such as Korea, Singapore, Taiwan Province, Japan and Russia). With the ongoing reform of the oil product pricing mechanism and the closer linkage with the international market, the petroleum and petrochemical industry in China will open wider to the outside world, the investments made by advanced countries and resource-rich countries in the oil refining industry of China will keep growing and the market competition in the oil refining industry of China will be increasingly diversified. High level talks regarding some Chinese-foreign unilateral and multilateral free trade areas have already started. Examples include talks on the China-Gulf Cooperation Council Free Trade Area and the China-Japan-ROK Northeast Asia Free Trade Area. The establishment of such free trade areas has huge implications for the petroleum and petrochemical industry in China.

   6. Clean oil products will become a focus.

Having implemented the National III standard for vehicle gasoline and diesel, China will upgrade gasoline and diesel quality further in the next 3 years. Efforts will be made to attain the National IV standard for vehicle gasoline at the end of 2013 and for diesel at the end of 2014. The National IV standard will be reached ahead of schedule in some areas. Implementation of the National V standard for gasoline will start before the end of 2017. Refineries will regard the acceleration of oil product upgrades and the emphasis on environmental protection as major tasks and take the lead to gain initiative in development. Oil refining projects starting production during 2013-2015 are required to organize production according to the European IV standard. Existing refineries need to raise the level of oil refining units and add secondary processing units such as hydrocracking, hydrofining or catalytic reforming units and hydrogen preparation units so as to meet environmental protection requirements. What should be mentioned is that quite a few refineries in China are located in coastal and riverside areas with dense populations and advanced economy. Increasingly, these areas have higher requirements for and greater sensitivity to environmental protection, green production and safety. Oil refining enterprises in China should therefore take the initiative to give demonstrations, conserve energy and reduce emissions according to high standards and strict requirements, produce more clean oil products and contribute to the harmonious development of the oil refining industry and people’s wellbeing.

   7. Alternative fuels have a bright market prospect.

   The development of alternative energies in China will continue to be concentrated mainly on biofuels, coal-to-liquids, coal-based alcohol ether fuels, natural gas and electric vehicles. According to the 2011-2015 Program for the Development of Renewable Energies issued by the National Development and Reform Commission, biofuel ethanol and bio-diesel in China will replace 10 million tons of oil products in 2020. Ethanol gasoline and bio-diesel therefore have considerable development opportunities. Several fuel ethanol projects not using cereals as raw materials are making steady progress today. New breakthroughs are also being made in bio-diesel processes. The use of methanol gasoline will proliferate after some technical and economic problems are solved. With the rapid development of the natural gas industry and the completion of a group of LNG projects, LNG vehicles in China will enter a new phase of rapid development. The amount of natural gas used to replace conventional vehicle fuels will go up fast. The development of alternative energies will bring new concepts for restructuring the oil refining industry to suit the rapid development of alternative fuels such as coal, natural gas and biomass and to diversify the raw materials used in refineries. Large state-owned oil companies such as PetroChina, Sinopec and CNOOC will participate in the large-scale development and utilization of practical alternative energies in a selective way. On the whole, however, China’s vehicle fuels in that time frame will still be primarily petroleum-based gasoline and diesel, and alternative fuels, despite their growing importance, will be secondary and supplementary, volume-wise.