Analysis of Influence of Low International Oil Prices on China’s Oil Refining Industry

By Gong Jinshuang, CNPC Economics & Technology Research Institute

Sharp fall of international oil prices both helped & hurt China’s oil refining industry, doing more good than harm overall

1. Declining investment in oil refining industry
As the profits of the oil and gas industry are down across the board, it has to curtail investment and slow down projects. From January to October 2015, the investment in China’s crude oil processing and petroleum product manufacturing was RMB679.1 billion, down 14.2% YoY.
2. Oil demand led growth of oil supply
The sharp decline of international oil prices drove end-user prices down and weakened the price advantage of alternative fuels and alternative raw materials. In the first half of 2015, 117 600 natural-gas-powered cars were made in China, down 9% YoY. From January to October, the national demand for oil was 449.0 million tons, up 4.3% YoY and 1.1% higher than two years earlier. From January to November, 476.1 million tons of crude oil was processed, up 4.1% YoY; the demand for diesel oil, kerosene, naphtha, LPG and most other oil products grew faster than it did a year earlier, and production grew fast too.   
3. Refining costs dropped sharply and profits grew dramatically
In 2015, the profits of the domestic oil refining industry grew dramatically. From January to October, the income of China’s crude oil processing and petroleum product manufacturing was RMB2 428.7 billion, down 17.9% YoY; sales cost of products was RMB1 905.1 billion, down 26.2%; sales tax and extra charges was RMB382.8 billion, up 47.7% YoY; the total of pre-tax profits was RMB541.1 billion, up 45.8% YoY; the total profit was RMB48.2 billion, up 85.9% YoY.

Demand grew more slowly; supply structure changed

The growth of China’s economy slowed down, slowing the growth of oil demand and production. The resulting restructuring of the national economy changed the structure of oil demand and production. From January to October 2015, the national demand for oil products was 263.9 million tons, up 5.5% YoY, 0.1 percentage points slower than the growth for the whole of the previous year; oil production was 307.9 million tons, up 6.3% YoY, 0.8 percentage points slower than the growth for the whole of the previous year; the production/demand ratios of diesel oil, fuel oil, naphtha and LPG decreased sharply, gasoline and kerosene kept rising, the demand/production ratios of kerosene and gasoline both fell to 1.5 or so.

Requirements for environmental protection were strengthened, the quality of oil was upgraded

In recent years, the oil quality of China has been upgraded at an accelerating rate. To achieve the national oil quality goals, refining enterprises boosted investment, developed technology, improved refining processes and sped up refinery upgrades. In order to ensure that the 11 eastern provinces could implement State V automotive gasoline and diesel standards January 1, 2016, CNPC invested RMB12.8 billion and carried out 28 quality upgrade projects in nine refining and chemical enterprises, including Dalian Petrochemical Company, Liaoyang Petrochemical Company, Fushun Petrochemical Company and Liaohe Petrochemical Company. In order to ensure the quality upgrade of automotive gasoline and diesel to State V level, CNPC invested RMB12.7 billion and conducted 57 upgrade projects. At present, the firm’s proprietary technology equips almost 60% of China’s production capacity for oil catalytic hydrogenation of gasoline. The firm has 11 independent R&D projects for upgrading diesel hydrogenation refining and catalytic cracking units; their combined annual output is 18.7 million tons.

The marketization process of oil products accelerated

1. Oil import right
On February 9, 2015, “Notice on Issues of Imported Crude Oil Use and Management” was issued, permitting local refineries who meet certain conditions to use imported crude oil.
In July 2015, the Ministry of Commerce issued a document clarifying qualifications for crude oil imports by non-state owned traders.
At present, thirteen local refineries have obtained use quotas of crude oil totaling 55.2 million tons, seven local refineries have obtained crude oil import qualification, eliminated 37.5 million t/a of obsolete production capacity, and built 400 million m3 of LNG storage and transport facilities. The use quota for crude oil went into effect in July 2015. Dongming Petrochemical Company used the quota to import 270 kt of Oman crude oil in July; it has imported 2 million tons so far. The crude oil import qualification went into effect in October. Self-run Kenli Petrochemical Company has imported 100 kt ESPO crude oil. Acting in another mode, Dongming Petrochemical Company has cooperated with Qatar by granting a 50% stake in the company, and ChemChina has cooperated with Russia for the oil supply.
Permission to import, together with oil import use rights, promotes fair competition among refineries. The market competitiveness of local refineries will improve and their share of the product market will expand. It is predicted that the operating rate will rise from 37% in 2014 to 60% in 2016, and the local refineries’ share of the national gasoline and diesel market will grow almost 5% in 2016.
Expanding the use of crude oil intelligence and eliminating outdated production capacity benefit the optimization and upgrade of the industry’s structure. At present, 19 local refineries’ individual capacities are above 2 million t/a, with combined capacity of 78 million t/a; while 144 local refineries’ individual capacities are lower than 2 million t/a (including small refineries acquired by CNOOC and ChemChina), with combined capacity of 89.7 million t/a. If the industry continues eliminating obsolete capacity, 77.2 million tons of outdated production capacity will be eliminated during 2016-2020.  
2. Oil product export rights opened to local refineries
In November 2015, the Ministry of Commerce announced that Quanzhou Petrochemical Co., Ltd. of Sinochem acquired a 450 kt/a oil products quota, including 200 kt/a of gasoline, 150 kt/a of diesel oil and 100 kt/a of jet fuel. At present, the local refineries including Shandong Dongming Petrochemical Company, Kenli Petrochemical Company and Lijin Petrochemical Company are preparing to apply for oil product export qualification, hoping to success in the second quarter of 2016. On December 23 2015, Sinochem’s Quanzhou refinery exported its first batch of 92# gasoline, 38 kt, to Singapore.
Opening up the qualification of domestic oil products is good for continual, healthy development of local refineries, easing the domestic oversupply of refined oil. From January to October 2015, the difference of gasoline and diesel’s production and demand expanded further, excess capacity reaching 7.823 million t/a, up 23.8%.

Continue profitability in 2016

In 2016, the international oil price will remain low, the domestic refining industry will stay in a good profit situation. The domestic refineries will keep upgrading product quality and restructuring. More outdated capacity will be eliminated, the number of refineries will continue to decrease, and the average operating rate will increase.