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Chinas rapid development risks Refining over-capacity
A slowing economy is triggering concerns that China’s aggressive expansion in refining capacity will leave it oversupplied with oil products within a few years.
This has important implications for regional refiners as China will
likely seek to sell overseas any surplus products that it cannot store
effectively at home, putting pressure on refining margins in
Asia-Pacific and beyond.
Until recently, China’s state refiners didn’t have a significant
overseas trading network that they could utilize to export surplus
output.
That changed last year with PetroChina Co.’s (PTR) purchase of a
majority stake in Singapore Petroleum Co., which leases about 220,000
cubic meters, or about 185,000 metric tons, of gasoil and gasoline
storage in Singapore. PetroChina also leased space to store millions of
barrels of bunker fuel in the Caribbean and California earlier this
year.
“Refining overcapacity is foreseeable, based on the current plans,” said
Yang Weijun, head of refining at China Petroleum Planning and
Engineering Institute, PetroChina’s think tank.
But he added: “Not all projects will be completed on time, so China’s
oil supply may only be slightly higher than demand in five years’ time.”
China’s government holds a tight grip on approvals for projects, and
could force delays if the threat of overcapacity in the sector grows.
It has also intervened before to ensure oil refiners raise or cut crude
runs when there has been a sudden change in market conditions.
Still, the International Energy Agency, a Paris-based body that advises
most of the world’s biggest economies on energy policy, expects China to
be churning out more oil products than it can use up to 2015.
Its forecast is based on China’s capacity additions in the near-term and
a drop-off in demand for middle distillates, such as gasoil.
Essentially Balanced
According to a report by the CNPC Research Institute of Economics &
Technology, China’s refining capacity will expand at a rate of 6-7% each
year through 2015.
That means China would have 750 million tons of capacity in 2015, up from 483 million tons in 2009, it said.
Several foreign companies are keen to become involved in the expansion
by forming joint ventures with PetroChina and domestic peer China
Petroleum & Chemical Corp. (SNP), better known as Sinopec.
Among those vying for a slice of the Chinese market are BP PLC (BP),
Royal Dutch Shell PLC (RDSA), OAO Rosneft (ROSN.RS), Qatar Petroleum and
Kuwait Petroleum Corp.
Equity held by foreign investors in China’s refining sector is expected
to reach the equivalent of 31.5 million tons a year by 2015, or three
times the current level, Sinopec said in an in-house newsletter in May.
This expansion in China’s refining capacity will necessitate more crude
oil imports, as the country’s oil production is broadly stagnant.
Declining output from major mature fields like Daqing in Heilongjiang
province is barely offset by new discoveries.
While China is making progress on developing renewable energy, and
encouraging greater consumption of natural gas and nuclear power, the
pace of its economic growth at above 8% a year is ensuring continued
sharp growth in oil demand.
The IEA estimates China’s oil consumption will rise by 4%-6% through
2015, accounting for almost half of global oil demand growth in that
period.
Analysts said any production surplus that China cannot be stored would
be shipped overseas, but they stressed volumes so far were small
relative to demand.
“China is essentially balanced on gasoline and diesel,” said Victor Shum, of consultancy Purvin & Gertz Inc.
“Just a small pickup in demand growth will wipe out all the gasoline and diesel surpluses.”
In the first six months of the year, China’s net exports of gasoline and
diesel totaled about 140,000 and 75,000 barrels per day respectively.
But domestic demand is substantial: about 1.6 million barrels a day for
gasoline, and 3 million barrels a day for diesel, Shum said.
China doesn’t want to import high-value transportation fuels like
gasoline and diesel, and has honed its refining strategy around this
point, Shum said.
A wildcard in forecasting potential overcapacity in the sector is the
output and expansion programs of independent refiners, which make up
around 19% of China’s total capacity and are mostly based in eastern
China’s Shandong province.
Beijing has little influence over these refineries, which are protected
by local governments because of the jobs and revenues they generate.
The central government has tried for years to drive them out of
business, first by denying them access to crude oil supplies and then by
forcing any with a capacity below 20,000 barrels per day to shut
permanently.
However, the refineries have avoided closure by using fuel oil as
feedstock and by expanding capacity to lift them above the
20,000-barrel-a-day threshold.
Source: Dow Jones
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