China's state-owned and independent refiners plan to boost their combined refining capacity by 14% by the end of 2020, but given the oversupply of products in the country, expansion plans are likely to move at snail's pace, delaying some of the projects.
While state-owned refiners may drag their feet on expansions as they try to gauge oil demand growth in China and Beijing's policy on product exports, independent refiners may also struggle to find funds as banks restrict credit.
China plans to add 85 million mt/year (1.71 million b/d) of primary refining capacity -- following the government's final approval -- with operations expected to startup between 2018 and the end of 2020.
The country currently has around 15 million b/d of refining capacity, which is likely to grow to around 15.5 million b/d by the end of 2017, following the 200,000 b/d expansion of CNOOC's Huizhou Petrochemical as well as PetroChina's greenfield 260,000 b/d Yunnan Petrochemical plant.
But China's oil products demand is far short of current capacity. Refinery throughput was as low as 11.26 million b/d and apparent oil demand 11.57 million b/d in the first four months of 2017.
"There are likely to be delays in projects as it is difficult to find an outlet for oil products that China is currently producing, while for independent refiners, projects may meet hurdles due to lack of funds," said Hou Rui, an analyst with S&P Global Platts' China Oil Analytics.
State-owned Norinco initially developed a 300,000 b/d refinery project in the northeastern Liaoning province in 2011. The project got final approval in 2015. But there was no update about the project until it recently started actively looking for partners. Finally, with Saudi Aramco's involvement, it has become a Belt & Road project and a groundbreaking ceremony was held last Tuesday.
A Belt & Road project will be supported by the Chinese government. But the Norinco project has still to overcome many challenges.
"Even some high-profile Belt & Road projects will meet problems and result in delays," a Hong Kong-based analyst with an investment bank said, adding that the North Industries Group or Norinco's joint project with Saudi Aramco and Panjin Xincheng Industrial Group was likely to be delayed beyond the targeted date of 2019 amid oil products surplus in the region.
Refining capacity around Bohai Bay, comprising Beijing and the provinces of Hebei, Liaoning and Shandong, is at 6.9 million b/d, accounting for 45.7% of China's total refining capacity. Products demand in Liaoning has been weak because of a gloomy economic outlook in the country's northeast.
The Norinco project is designed to add supplies of around 6.62 million mt of gasoil and 1.05 million mt of gasoline annually when it runs at 100% of capacity.
In addition, Norinco also lacks an oil products outlet as it was initially a Chinese state-run group for research and production of military equipment. So building business relationships and finding long-term customers in the oil market would be a challenge.
SINOPEC'S PLANS
With the region around Bohai Bay struggling with surplus oil products, Sinopec has decided to suspend its approved 200,000 b/d project in Caofeidian in Hebei province. This would mean that the 200,000 b/d Guangdong Petrochemical project in southern China would remain the only greenfield project by 2020.
Sinopec has developed a supply and marketing network both domestically and overseas, which would help the Guangdong project find an outlet for its oil products.
Construction on the project started at the end of 2016, although it was planned in 2009 and had won final approval in 2011. Sinopec aims to finish construction by 2018 and start commercial operations in 2019.
The project has been reduced from the originally planned 300,000 b/d because of the plentiful supply of oil products in the region.
At the end of 2016, total refining capacity in Guangdong and Guangxi provinces was 1.62 million b/d, accounting around 10.6% of China's total nameplate capacity, according to CNPC.
CNOOC's Huizhou Phase 2 project in the same region with a capacity of 200,000 b/d is expected to come online in 2017.
INDEPENDENTS WORRY ABOUT FUNDS
The target for the remaining two approved refinery projects -- in which independents have invested -- to come online is end 2020.
One is the 400,000 b/d Dalian Hengli Petrochemical refinery in Liaoning province, which aims to startup in October 2018. The other is the 800,000 b/d Zhejiang Petrochemical refinery in eastern Zhejiang province, which plans to startup 400,000 b/d of capacity by the end of 2018 and rest by end 2020.
Theoretically, independents can move ahead faster than the state-owned ones on projects because of their shorter decision-making chain, but there are other hurdles to cross.
"In addition to finding sales channels for their oil products, the projects would require more funds than the Sinopec one due to the relatively bigger capacity, indicating more financial risks during the construction stage," said the Beijing-based analyst.
Hou added: "In China, it is more difficult for independent companies to get substantial funds, compared with the state-owned refineries."
Therefore, even though the construction of the phase 2 of Zhejiang Petrochemical is expected to start after the phase 1 is launched at the end of 2018, it is unlikely to be completed by the end of 2020, analysts said.
Attracted by high refining margins and encouraged by the country's strategy to increase the output of value-added petrochemical products, an additional 1.72 million b/d of independent refining projects are waiting for approval or are under the planning stage. But some state-owned companies have stepped back from adding more refining capacity. - Platts -