Argus China Petroleum

46 Pages·2017·4.25 MB·English

Argus China Petroleum
News and analysis on oil markets, policy and infrastructure
Volume XII, 1 | January 2018
Yuan for the road
EDITORIAL: Regional gasoline The desire to avoid tax has been a far more significant factor underlying imports
markets are so far unmoved by a of mixed aromatics than China’s octane deficit.
potential fall in Chinese exports The government has announced plans to make it impossible to buy or sell
owing to stricter tax enforcement gasoline without producing a complete invoice chain showing that consumption
tax has been paid, from 1 March. And gasoline refining margins shot to nearly
$20/bl, their highest since mid-2015. Of course, Beijing has tried to stamp out tax
evasion in the gasoline market many times before. But, if successful, this poses
Mixed aromatics imports 2017 an existential threat — to trading companies and the blending firms that use
’000 b/d Mideast mixed aromatics to produce gasoline outside the refining system, largely avoiding
US
Gulf the Yn2,722/t ($51/bl) tax collected on gasoline produced by refineries. Around
4.39
22.59 300,000 b/d of gasoline is produced this way. And that has caused the surplus
that forces state-owned firms to market their costlier fuel overseas.
Europe But there is little panic outside south China, where most blending takes place.
77.69
The Singapore market is discounting any threat that a crackdown on tax avoidance
might choke off Chinese exports — gasoline crack spreads fell this month. China’s
prices are now above those in Singapore, yet its gasoline exports show no sign of
letting up. Most of China’s mixed aromatics come from Asia-Pacific, where refiner-
ies are running flat out. Supply from European refineries is shrinking (see chart).
Asia-Pacific
130.84 China has long had an octane shortage, partly because its manufacturing
sector absorbs so much naphtha. The problem became more acute with the
introduction of the China 5 gasoline standard, which cut manganese and sulphur
content, further lowering the octane rating of gasoline. But China’s resilience to a
halt in mixed aromatics imports has vastly improved in the past 18 months.
Were China to halt imports of mixed aromatics from March — and loadings data
suggest this may well happen — its new fleet of naphtha reformers should forestall
any domestic fuel supply crisis. Refiners have been adding butane-fed alkylation
and isomerisation units, too, producing still more high-octane components for the
gasoline pool. And local governments are stepping up their scrutiny of ethanol
blending in gasoline, which will also mitigate the octane shortfall. China imported
Contents
around 200,000 b/d of mixed aromatics with an octane rating of around 99 last
year. But, over the course of 2017, refiners opened 250,000 b/d of naphtha reform-
High stocks pressure demand 2
ing capacity — more than enough to replace those imports.
surplus ends gasoline boom hopes 3
technology key to tax crackdown 4
Money matters
export quotas adjust to new policy 5
The devil will, as ever, be in the detail. Blending firms are hunting for loopholes.
‘non-state’ import quota swells 6
The central government will need co-operation from local administrations to ensure
Refiners turn to Mideast producers 7
that the invoice system is strictly enforced and officials are not paid to turn a blind
expansions drive storage growth 8
eye. One way of achieving this would be to allow revenue-starved provinces to
PdV woes raise Jieyang concerns 9
keep some or all of the consumption tax revenue they collect, rather than remit-
Company restructuring continues 10 ting it to the centre. Beijing is wary that this would further skew the imbalance
China turns to LnG amid shortages 11 between wealthy regions, where car ownership is highest, and poorer ones in which
Products 12-16 vehicle penetration is relatively slight. But the central government should set aside
Crude data 17-27 these concerns. It would be relatively straightforward to redistribute tax revenue
Refinery throughputs 28-30 from other sources collected centrally. But it is likely to prove impossible to collect
Import/export data 31-44 consumption taxes unless provincial bureaucrats climb on board.
Copyright © 2018 Argus Media group
Argus China Petroleum January 2018
DemanD
High stocks pressure December demand
Crude output fell back to October Chinese apparent oil demand fell last month as refiners digested high stocks. But
levels, which were the lowest demand growth over the whole year was nearly double that of 2016.
since the 2009 financial crisis Apparent oil demand, the sum of crude production and net oil imports, fell to
12.04mn b/d in December from nearly 13mn b/d in the previous month, and
averaged 12.7mn b/d for the year. Crude output last month fell back to October
levels, which were the lowest since the 2009 financial crisis. Dominant upstream
firm PetroChina hopes to revive production this year, but it is unclear how
realistic this will be. But demand last year grew by 6.3pc from 2016 levels, with
rising imports more than offsetting declining crude production (see table).
Shandong crude balance December crude imports were down by 900,000 b/d — with Shandong prov-
ince, centre of the country’s independent refining sector, accounting for 35pc of
mn bl Shandong bonded crude stocks (LHS) mn b/d
18 Shandong crude imports (RHS) 3.6 the decline. Liaoning, where another two large independents, Huajin and Panjin
3.4 Northern Asphalt, are based, also cut imports in December, mainly from Iraq and
16
3.2 Oman. And imports to Fujian on the southeast coast fell by a hefty 230,000 b/d
14
3
from November levels, as state-owned Sinochem carried out maintenance at its
12 2.8
2.6 240,000 b/d Quanzhou refinery. Quanzhou has reopened this month.
10
2.4 Iraq accounted for the most precipitous decline in supply month on month,
8
2.2
more than halving to 470,000 b/d. This comparison is skewed by record receipts
6 2
Jan Apr Jul Oct Jan of more than 1mn b/d in the previous month. Kuwaiti deliveries to south China
17 18
also fell. Guangdong province, dominated by state-controlled Sinopec’s refineries,
cut imports of heavy sweet grades by around 150,000 b/d month on month, with
imports from Angola declining by 100,000 b/d, but increased imports of medium
sour crude by 230,000 b/d. Deliveries of Venezuelan crude to Guangdong province
rose by 90,000 b/d to nearly 500,000 b/d in December, despite Venezuelan
production problems.
mixed aromatics imports
The concertina effect
’000 b/d
450 Crude stocks in bonded storage tank farms around Shandong’s coastline, where
400
trading companies hold crude before selling it on to independents, fell from over
350
300 17mn bl in October, when many refiners were close to exhausting their import
250 quotas, to 13.8mn bl last month. Tight diesel supplies and a spike in gasoline
200
150 margins encouraged crude buying last month.
100 But port stocks began to tick higher again this month, reflecting both Decem-
50
ber’s lower imports and a drop in withdrawals by refiners (see graph). Diesel
0
Oct Jan Apr Jul Oct Jan Apr Jul Oct margins are coming down, and gasoline has retreated from its highs. These
15 16 17
factors, as well as the closure of many businesses for the lunar new year public
holidays from 15 February, are likely to drive crude runs lower next month. And
that should cause bonded crude stocks to rebuild, with vessel tracking data
China apparent demand mn b/d indicating a substantial increase in January deliveries.
Dec nov 2017 ±% 17/16 China’s net oil product imports rose to 410,000 b/d last month, boosted by
record imports of mixed aromatics. Many gasoline blending companies feared that
Net imports 8.33 9.20 8.95 11.1
the government would ban the use of untaxed mixed aromatics in gasoline
Crude 7.92 8.85 8.33 9.7
production from 1 January, and maximised imports last month to get blendstocks
Products 0.41 0.35 0.62 28.2 in ahead of the ban. Imports last reached comparable levels in April last year,
Production 3.71 3.77 3.78 -3.6 when rumours of a ban on mixed aromatics first surfaced. Beijing subsequently
apparent 12.04 12.97 12.74 6.3 confirmed that the new gasoline invoicing system will come into effect from 1
demand
March. South China is now awash with mixed aromatics, traders say. The arrival
Refinery runs 11.56 12.03 11.33 5.7
of so much in December added pressure to gasoline margins and kept exports
high. State-run refiners also exported large amounts of ultra-low sulphur diesel
last month, boosting domestic prices. Combined gasoline, diesel and jet fuel
exports set a fresh record of 1.2mn b/d in December.
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Argus China Petroleum January 2018
PRODUCTS
Surplus dashes gasoline boom hopes
Independent refinery utilisation China’s independent refiners are slashing product prices and cutting runs to
rates are starting to fall, in maintain their competitiveness with state-owned refining companies.
response to weakness in gasoline Gasoline refining margins rose strongly this month after the government
announced plans for a supposedly foolproof system of logging tax invoices that
may make it uneconomic to use imported mixed aromatics as a blendstock. The
move is chiefly aimed at gasoline blending companies in south China, but refiners
Shandong arbitrage
in Shandong fear it will also increase their consumption tax payments.
$/bl PRD gasoil premium to Shandong
High refinery gasoline stocks soon put a halt to the market rally. Prices for 92
25 PRD gasoline premium to Shandong
Ron gasoline rose to Yn7,050/t ($85/bl before tax) on 15 January from Yn6,200/t
20 just days earlier, but fell to Yn6,950/t on 22 January. Diesel margins, the stellar
15 performer last year, fell by nearly $12/bl from December to around $14/bl in
Shandong this month. Diesel’s recent strength encouraged Shandong independents
10 PRD = Pearl river delta
to run hard, producing large amounts of gasoline that have proved harder to sell.
5 And the outlook for fuel margins in Shandong is weaker this year, after China’s
ministry of commerce (MOC) increased the allowance for so-called non-state crude
0
Dec Jan import rights by 1mn b/d in 2018. This is expected to lead to steep growth in
imports and refining in the province. But independents are still well supplied with
feedstocks, and have cut imports after a surge last year. Shandong imported 2.6mn
b/d of crude in December, down from 2.9mn b/d in November.
DQD differential to Ice Brent
Shandong’s independent sector has also being threatened by a rise in crude
$/bl runs by state-owned refiners this month. Independents slashed product prices in
4.00
ESPO Blend DQD Djeno DQD Lula DQD response, leading to an increase in north-to-south product flows (see graph). This,
3.50
3.00 Ice Brent = 0 in turn, is forcing state-owned refiners to export their surpluses. CNOOC, which
2.50 has a 70,000 b/d gasoline export quota, aims to export at least 20,000 b/d of
2.00 gasoline next month from its 440,000 b/d Huizhou refinery on the south coast.
1.50
1.00
Still going strong
0.50
0.00 But Shandong refiners continue to snap up crude. Imports to the province in
Jan Apr Jul Oct Jan
January are expected to increase from December. Bids for spot crude cargoes are
17 18
also higher on a des Qingdao (DQD) basis this month (see graph).
March-delivery Brazilian Lula crude traded above competing Congolese heavy
sweet Djeno, at $2.50/bl premiums to Ice Brent. And DQD premiums for the
independents’ staple, Russian light sweet ESPO Blend, are trading at $3.40/bl for
February-March delivery, the highest since Argus assessments began in January
2017. Independent firm CEFC is taking over some Trafigura loadings of ESPO Blend
crude this month, as part of a deal in which CEFC acquired a 12.2pc stake in
Russian state-controlled Rosneft. CEFC will load two cargoes of ESPO Blend and
two Sokol cargoes this month.
Shandong independent refiners Djeno DQD premiums have dipped below $2/bl. Strong Chinese demand for
may import more this month west African crude last year helped underpin the strength of Atlantic basin crude
than in December prices. But Chinese buyers are now discounting cargoes after a surge in arrivals.
Vessel tracking data suggest that 190,000 b/d of Djeno arrived in Shandong in the
fourth quarter, and 210,000 b/d may arrive this month.
Russian medium sour Urals has become far less attractive on a delivered China
basis because of the strength of underlying marker North Sea Dated. Vessel
tracking data show no Urals deliveries to Shandong this month — and other sour
grades filling the gap. Oman crude changed hands this month at 20¢/bl below Ice
Brent. Around 170,000 b/d of Nemina crude, a sour blend produced at storage
tanks in Malaysia specifically for the Shandong market, will arrive this month. And
independent refiners Wonfull and Shouguang Luqing have bought Saldanha Blend,
a sour grade produced by trading firm Mercuria at storage tanks in South Africa.
Copyright © 2018 Argus Media group Page 3 of 46
Argus China Petroleum January 2018
DOWNSTREAM
Technology key to SAT tax clampdown
Trading firms fear the govern- China’s state administration of taxation (SAT) has launched a new effort to stamp
ment’s latest effort to crack out the use of untaxed blendstocks in the production of gasoline and other fuels.
down on the use of untaxed This has alarmed importers of mixed aromatics and pushed gasoline prices higher.
blendstocks might succeed Pre-tax spot gasoline prices in south China’s Pearl river delta market have
risen by $2.10/bl to $79.70/bl following the SAT announcement. Pre-tax spot
diesel prices in the same market have risen by 30¢/bl to $107.10/bl. The price of
mixed aromatics in the south China market has also risen, by $2/bl since the
announcement, to Yn5,900/t ($116/bl).
Beijing has long sought to end widespread tax evasion in gasoline production,
Mixed aromatics loadings: Europe-China but has not been successful. It was expected to expand the range of products
’000 b/d subject to the Yn2,110/t consumption tax on gasoline by including mixed aromatics,
80 based on the HS code used to describe it as it enters Chinese ports. This was
70
considered flawed and an alternative proposal, due to come into effect on 1 March,
60
aims to tighten up all aspects of the invoice chain, making it impossible for untaxed
50
40 products such as mixed aromatics and light cycle-oil to enter the fuel market. This
30 will affect the invoicing of sales and purchases of gasoline, gasoil, jet fuel, naph-
20 tha, solvents, lubricants and fuel oil.
10 Trading firms could previously issue invoices for sales of products they had not
0
2016 2017 2018 yet bought, and then buy the products. From 1 March, they can only sell product
once they have logged all the details from their purchase invoices with a new
online SAT “module” operated by the local tax office. That will allow the trading
firm to issue a sales invoice. “The new platform is like a fictitious tank,” one local
trader says. “The stocks represent the invoices you get from the sellers, and then
you can issue your own invoices for cargoes you bought or imported.”
The previous system could trace and monitor only part of the transaction
chain, and was unable to prevent sellers from issuing invoices. This led to the
issuance of many fake invoices showing that tax had been paid.
Sellers must include details for each cargo for which they want to issue an
invoice, including its category and specific code. The total number of each
product’s invoices to be issued should not exceed the combined volumes that
have been confirmed as supplied through the platform based on the documents
submitted by the sellers. The system will only recognise invoices that specify the
purchased volume and attach tax-paid certificates issued by customs for imports.
The new rules are expected to make it almost impossible for trading firms to
obtain invoices for gasoline, diesel or fuel oil produced from untaxed products
such as mixed aromatics, alkylates, light cycle oil and bitumen.
Ghostbusters
The new rules are expected to The move is expected to stamp out ghost trades, where invoices are issued for
stamp out ghost trades, where deals that never took place. This will force companies currently trading blended
invoices are issued for deals that gasoline to pay the full consumption tax. And it will make it almost impossible for
never took place independent refineries to obtain invoices showing that the crude or diluted bitumen
they refined was fuel oil, ending a practice where many claimed consumption tax
rebates on feedstocks. This has allowed many independents to sell refined products
more cheaply than conventional refiners. But the marketing arms of state-owned oil
giants have been major beneficiaries too, finding it cheaper to procure third-party
fuel supplies than buy from their associated refining arms.
Mixed aromatics imports rose to 200,000 b/d in November from 90,000 b/d in
October, customs data show. They are expected to have hit 250,000 b/d last
month, amid rising Brent prices. Most mixed aromatics trades are indexed to Ice
Brent, which settled at $68.82/bl on 9 January, up by $6.62/bl on a month earlier.
Copyright © 2018 Argus Media group Page 4 of 46
Argus China Petroleum January 2018
EXPORTS
Quotas adjust to new policy direction
A rise in Chinese exports could The government is softening its goal of reining in exports, with the issuance of
put pressure on margins in extra export quotas signalling a rise in overseas sales of clean products this year.
Asia-Pacific but help avoid a China’s ministry of commerce (MOC) has issued 1.76mn b/d of export quotas
domestic transport fuel glut for the first quarter, up by 55pc from January-March last year (see table). Exports
of gasoline, diesel and jet will need to average a combined 1mn b/d this year to
avert a domestic transport fuel glut, according to a report this month from the
research arm of PetroChina’s parent company, CNPC.
Oil product export quotas* ’000 b/d Gasoline accounts for the largest year-on-year increase in quota issuance so
Diesel Jet Gasoline Naphtha far, with oil firms allowed to market an extra 270,000 b/d overseas than they
were in the first quarter of last year. PetroChina’s trading arm, ChinaOil, is the
1Q16 660 714 430 0
main recipient of gasoline export quotas, while Sinopec has received the lion’s
2Q16 468 463 319 9 share of the middle distillate allowance — 410,000 b/d of jet and 300,000 b/d of
3Q16 170 106 248 5 diesel. Sinochem and CNOOC, which run large conventional refineries in south
4Q16 355 84 96 30 China, have been awarded a combined 340,000 b/d of export quotas. The MOC
1Q17 472 310 353 0 has increased CNOOC’s allowance by 90,000 b/d after it opened a new crude unit
at its newly expanded 440,000 b/d Huizhou refinery.
2Q17 108 220 73 0
Almost all of China’s gasoline exports remain in Asia-Pacific, so a substantial
3Q17 499 500 309 0
increase is likely to put pressure on margins in the region. Gasoline crack spreads
4Q17 387 176 292 0
in Singapore have already weakened sharply this year. Actual exports may fall
1Q18 589 548 622 0
short of the cap set by the MOC’s quotas if proposals to eliminate the production
*combines third-party processing and general of untaxed gasoline — largely from imported mixed aromatics — prove effective.
This risks tightening domestic gasoline balances, pushing up prices and potentially
triggering a drop in exports. But China’s naphtha reforming capacity is rising,
providing an alternative supply of octane for gasoline.
The MOC has raised diesel export quotas to 590,000 b/d compared with
China: Oil product export quotas*
470,000 b/d a year earlier. Asia-Pacific is the major destination for much of
mn b/d
2.0 Naphtha *Combines tolling and general China’s gasoil exports, but some goes further afield. Beijing tightened road diesel
1.8 Gasoline standards in November, helping to push prices for ultra-low sulphur diesel
Jet
1.6 Diesel significantly above comparable prices in Singapore. Total diesel exports still hit a
1.4
1.2 record 500,000 b/d that month and were at 480,000 b/d in December, with
1.0 Bangladesh becoming a key outlet for China’s higher-sulphur gasoil surpluses.
0.8
0.6
0.4 Corporate viability
0.2
China’s ministry of environmental protection had previously lobbied hard against
0.0
1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 a pro-export policy for oil, arguing that it exacerbated the country’s pollution
woes. The MOC and the country’s top economic planning body, the NDRC, were
more supportive, seeing exports as a means of ensuring the corporate viability of
oil companies. Meanwhile, the state-controlled oil giants opposed the issuance of
extra crude import allowances for independent refiners, which squeezed their
domestic market share and forced their own output into the export markets.
No independent refiners have No independent refiners have been granted first-quarter export quotas, either
been granted first-quarter export for third-party processing deals or general trade, keeping the firms locked out of
quotas, either for third-party the export market. But they have been given far greater access to crude import
processing deals or general trade markets than last year.
This change in direction marks a waning of industrial sector influence, and the
growing clout of local and national administrations. The government used to
depend heavily on expert advice from the oil sector in policy formulation — and
the entrenched local oil giants lobbied hard against granting concessions to the
independent refining sector. But President Xi Jinping’s administration now
appears to expect the oil sector to adapt to the national economic strategy,
rather than the other way around.
Copyright © 2018 Argus Media group Page 5 of 46
Argus China Petroleum January 2018
SUPPLY
‘Non-state’ import quota swells
Only three Chinese companies China’s first award of import quotas this year should boost crude imports and
have received quotas matching refining activity.
their maximum potential refinery The ministry of commerce (MOC) issued 837mn bl of non-state crude import
utilisation over the full year quotas to 34 independent refinery operators in late December. This represents a
77pc increase on the 474mn bl of import quotas it awarded to 21 refiners a year
earlier. The MOC based individual quotas on the amount of crude each firm
imported in January-October in the previous year. The independent sector’s
import allowance stands at 2.29mn b/d for 2018 as a whole, equivalent to 67pc of
the recipients’ combined 3.42mn b/d of refining capacity, and 485,000 b/d more
than the MOC awarded to the sector in import quotas for 2017.
Only three companies received quotas matching their maximum potential
refinery utilisation over the full year. These are private-sector firms Shengxing
Chemical, Dongfang Hualong Industry and Trading, and Qingyishan Petrochemical
Science and Technology, which operate a combined capacity of 164,000 b/d in
Shandong province.
Nine firms with a combined capacity of 862,000 b/d received quotas covering
over 90pc of their refining capacity. But the biggest winners, in outright terms,
are state-run ChemChina and Norinco Huajin Chemical, and private-sector firms
Heze Dongming Petrochemical and Panjin North Asphalt Fuel. These received a
combined 744,000 b/d of quotas, representing nearly one-third of the all quotas
awarded and equivalent to 80pc of their refining capacity.
Seven companies have been granted quotas covering less than half of their
refining capacity, either because their actual crude imports last year were below
the amount their quota allowed, or because their quotas to refine imported
crude fall short of their capacity. Ningxia Baota, which buys crude from Russia’s
state-controlled Rosneft and imports it by rail to Inner Mongolia, has been
granted a 21,600 b/d quota, in line with the cut to its refining quota.
The MOC has also granted a total of 49mn bl of crude import quotas to 10
trading companies for 2018, taking the amount of non-state quotas issued so far
to 2.43mn b/d, or 85pc of the 2.85mn b/d cap on 2018 issuance. A second batch
of quotas is likely to be released later in the year, but that will probably be much
Seven companies have been smaller — the overall 2.85mn b/d cap suggests it may be 420,000 b/d. The MOC is
granted quotas covering less than likely to extend import rights to the handful of independents still waiting for final
half of their refining capacity approval from top economic body the NDRC to refine imported crude. At least
four firms operating independent refineries in Shandong received preliminary
approval for refining quotas, of 132,000 b/d, in October-December.
Enter the Dragon
Other refineries are due to open later this year. It is uncertain whether they will
be awarded crude import quotas, even if they are likely to be granted quotas to
refine imports — although total quota issuance last year exceeded the MOC’s
initial guidance by 190,000 b/d.
Private-sector Hengli’s 400,000 b/d Dalian refinery aims to start testing its
crude unit in October, and Dragon Aromatics’ 1.6mn t/yr paraxylene plant will
require condensate when it resumes operations in the second quarter. Dragon
Aromatics was previously a key buyer of Iranian South Pars condensate and had
crude import quotas for 92,000 b/d, before it was shut down in 2015. Hengli is
likely to be awarded a quota to refine crude imports ahead of its test runs. But it
may buy imports through PetroChina and Sinochem initially — both companies
have signed agreements with Hengli. State-owned CNPC expects Chinese crude
demand this year to be 640,000 b/d higher than last year, at 9mn b/d.
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Argus China Petroleum January 2018
DOWNSTREAM
Refiners turn to Mideast Gulf producers
Less competitive Atlantic basin Mideast Gulf producers’ fortunes are looking up. More Chinese refineries designed
grades and new refineries to process sour crude are coming on stream, and a long-delayed strategic
designed to use sour crude have petroleum reserve (SPR) site may open later this year.
boosted Middle Eastern imports The Mideast Gulf’s share of crude supply to China began to recover in the
second half of last year, increasing to around 44pc having fallen to multi-year
lows of 39pc in June. This revival in demand for grades such as Saudi Arab
Medium and Iraqi Basrah Light followed the opening in September of new crude
units designed for medium sour grades, as well as a rise in the price of bench-
mark North Sea Dated that has made Atlantic basin grades less competitive in
China crude imports Asia-Pacific markets.
’000 b/d % More crude units designed to run sour crude will come on stream over the
250 Azerbaijan Kuwait 100 course of this year. PetroChina aims to open an expansion at its Huabei refinery
Norway Oman
200 Saudi Arabia UAE 80 at Renqiu in Hebei province in the second quarter, enabling it to process Mideast
Utilisation rate (RHS)
Gulf sour crude. The expansion includes a 100,000 b/d crude unit, a 60,000 b/d
150 60
(3.4mn t/yr) residue hydrotreater and a 30,000 b/d naphtha reforming unit.
100 40 The Huabei refinery currently processes local Huabei and Daqing crude and
small amounts of light sweet crude from storage. Until mid-2017, Huabei’s lack of
50 20
sophistication prevented it from producing low-sulphur road fuels despite its diet
0 0
of sweet crude. But PetroChina opened a new S-Zorb hydrotreater at Huabei in
Jun Jul Aug Sep Oct Nov Dec
June, allowing the plant to desulphurise gasoline to 7ppm for the first time.
State-run Sinochem agreed this month to help procure crude for private-sec-
tor firm Hengli’s Changxing refinery, which is under construction and due to begin
test runs in October. The 400,000 b/d facility is designed to run sour grades such
as Arab Medium and Qatar Marine. Sinochem also hopes to supply another
private-sector refinery, ZPC in Zhejiang province, with Mideast Gulf crude. The
400,000 b/d plant run by Rongsheng aims to begin building stocks in August.
Delayed filling
Some Middle East crude imports are likely to go towards filling the long-delayed
Huizhou SPR this year. State-run CNOOC is readying the 31mn bl site for start-up,
possibly as early as June. The site was intended to hold Saudi and Omani crude,
as well as west African grades. Infrastructure at Huizhou is expanding to accom-
modate the expected rise in crude imports. Huizhou port put a 2mn bl very large
crude carrier (VLCC) terminal into operation in October. This also serves CNOOC’s
newly expanded 440,000 b/d Huizhou refinery.
Huizhou may receive up to three VLCCs of Saudi crude a month this year, or
200,000 b/d, compared with over 60,000 b/d last year. CNOOC’s 200,000 b/d
expansion to the Huizhou refinery is mainly running Saudi and Kuwaiti crude.
PetroChina also has scope to ramp up throughputs at its new 260,000 b/d plant at
Anning (see chart). The refinery took more than 110,000 b/d of Saudi crude in
September-December through the cross-Myanmar (Burma) pipeline and averaged
A rise in supply of Russian ESPO a utilisation rate of 73pc in December.
Blend crude will compel Petro- But a rise in supply of Russian ESPO Blend crude this year will compel Petro-
China’s Dalian refinery to curb China’s flagship 410,000 b/d Dalian refinery to curb purchases of Mideast Gulf
purchases of Mideast Gulf crude grades. PetroChina’s main facilities that refine Mideast Gulf crude are the Dalian
plant, Anning, its 200,000 b/d Qinzhou plant in southern Guangxi and Dalian
Wepec, a 200,000 b/d joint-venture export refinery in northeast Liaoning.
Dalian Petrochemical is likely to receive much of the increase in ESPO Blend
supply this year because PetroChina has not yet completed upgrades to other
refineries in northeast China, forcing it to cut purchases of Mideast Gulf grades.
PetroChina raised run rates at Dalian this month.
Copyright © 2018 Argus Media group Page 7 of 46
Argus China Petroleum January 2018
midstream
Refinery expansions drive storage growth
China’s crude storage additions The opening of new crude storage tanks may provide a significant fillip to crude
may be considerably lower than demand this year.
forecast this year, but should China plans to add 155mn bl of commercial (CPR) and strategic petroleum
still support demand growth reserve (SPR) capacity in 2018. The country is likely to open around 58mn bl of
new commercial crude storage capacity this year, along with 97mn bl of SPR
capacity (see table). But storage projects, especially the SPR, are prone to
Storage capacity expansions mn bl delays, and crude markets are in backwardation, with prompt prices above
Province Location Operator Cap Year forward ones. These factors suggest inventory building may be considerably lower
than the new tanks’ nominal absorption rate.
Shandong Weifang Hongrun 32.7 2018 CPR†
Shandong province remains an important focus for storage expansions.
Yantai
Shandong Yantai port 7.0 2018 CPR Independent sector refiner Hongrun plans to open 32.7mn bl of storage capacity
Jinzhou Jinzhou
Liaoning 3.8 2018 CPR this year. Hongrun plans to use its niche among independents as a storage
port port
Liaoning Xianren Yinkou 7.0 2018 CPR operator to create locally acceptable crude blends. Among grades it is consider-
port
Huangze- Guangsha ing combining are Latin American sour crudes and US light sweet grades. Storage
Zhejiang 7.0 2018 CPR
shan II Mercuria
capacity is also growing further north, in Liaoning province, where private-sector
CPR total 57.5
company Hengli plans to open a new 400,000 b/d refinery later this year.
Guangdong Zhanjiang Sinopec 31.0 2H18 SPR‡
More than 10mn bl of storage capacity will open in the Dalian Changxing
Liaoning Jinzhou CNPC 19.0 2018 SPR industrial area this year, excluding tanks built as part of Hengli’s Changxing
Jiangsu Jintan CNPC 16.0 2018* SPR refinery project, to serve Liaoning’s burgeoning crude trade. The province is
home to two large independent refineries, in addition to 1.5mn b/d of refining
Guangdong Huizhou CNOOC 31.0 2018 SPR
capacity operated by PetroChina.
SPR total 97.0
New refining capacity further down the east coast will also help underpin
2018 total 154.5
storage capacity additions this year, with the opening of private-sector firm ZPC’s
Shandong Dongying Haixin 3.0 2019 CPR new 400,000 b/d Zhejiang refinery planned for December. ZPC had hoped to
Shandong Binzhou Shandong 6.3 2019 CPR begin stockpiling in August, but the company now does not expect to open its
Guoyou
Yinkou 20mn bl Mamu transit crude storage site until October, and construction of all
Liaoning Xianren 26.0 2019 CPR
port tanks is not expected to be fully completed until October 2019.
Dalian oil
Liaoning Dalian 5.0 2019 CPR
logistics
Shandong Rizhao Dongming 10.0 2019 CPR Go-slow strategy
port CEFC
Xinjiang Shanshan CNPC 39.0 2019* SPR The long-delayed Jinzhou SPR in Liaoning, initially due to open by June 2014, will
Zhoushan Zhejiang 2019- finally open this year, a PetroChina official says. A pipeline will connect the SPR
Zhejiang 20.0 CPR
(Mamu) Petchem 20 cavern to PetroChina’s 180,000 b/d Jinzhou refinery.
Caofeid-
Hebei ian Sinopec 38.0 2018 SPR The Sinopec-run Zhanjiang SPR and PetroChina’s Jintan SPR on the east coast
CEFC 2019-
Yangpu 2 Hainan 24.0 CPR are also supposed to open this year, but may be delayed again. Sinopec started
(Huaxin) 20
2019-20 total 171.3 filling new commercial storage tanks in Zhanjiang in southern Guangdong province
*unconfirmed †commercial petroleum reserve last year, but has not given an update on its progress at the SPR. And the CNOOC-
‡strategic petroleum reserve run Huizhou SPR, scheduled to open in 2017, is now due to open this year.
China’s National Statistics Bureau (NBS) has confirmed that the country’s total
SPR crude stocks hit 275mn bl (37.73mn t) in mid-2017, up from 243mn bl a year
earlier. The 90,000 b/d annual increase in SPR stocks partly reflects the opening
of the Sinochem-run 19mn bl Aoshan SPR extension project, which began filling in
September 2016.
Actual crude stocks are higher China’s nominal SPR capacity was 180mn bl in mid-2015, the NBS says. Actual
than SPR capacity because China crude stocks are higher than SPR capacity because the government leases tank
leases tank space from state-run space from state-run and private-sector firms. China’s SPR included as much as
and private-sector firms 85mn bl of crude held in leased storage tanks by the middle of last year, new NBS
data suggest, up from 60mn bl in mid-2016. China finished building the 91mn bl
phase 1 of its SPR programme in 2013. The 166mn bl phase 2 is still under way.
But the government has abandoned a December 2020 deadline for its 168mn bl
phase 3 SPR project. Phase 3 envisages building sites at Caofeidian in Hebei as
well as inland Chongqing.
Copyright © 2018 Argus Media group Page 8 of 46
Argus China Petroleum January 2018
DOWNSTREAM
PdV woes raise questions over Jieyang
The Venezuelan firm’s financial The massive planned Jieyang refinery on China’s south coast is still, officially, a
problems make it hard to see joint venture between CNPC and Venezuelan state-owned PdV. But Mideast Gulf
how it will cover its share of rather than Venezuelan crude will be its base-load crude supply.
investment in the Jieyang plant CNPC’s listed subsidiary PetroChina plans to bring the 400,000 b/d Jieyang
complex in southern Guangdong province on stream by the end of 2021. PdV holds
40pc of the venture, under a 2011 agreement in which the two companies
planned to build three refineries. As part of the deal, PdV would send 800,000
b/d of heavy and extra-heavy crude to cover its share of the investment costs, as
well as repay historical loans from China. PdV last year sent around 400,000 b/d
Venezuelan crude receipts of crude to China in debt repayment, up from 390,000 b/d in 2016 — but Venezu-
’000 b/d ela had promised far more than this. PetroChina sells most of this to independent
600 refiners in Shandong province.
2016 2017
500 Work at Jieyang started in 2012 but stalled in 2014 following a disagreement
over crude pricing and investment terms. Jieyang aims to gain Guangdong local
400
government approval by June and resume construction by the middle of this year.
300
But one of the Jieyang crude units will now be designed to process Mideast
200
Gulf crudes — most likely from Iran and Saudi Arabia — rather than Venezuelan
100
crude. The latter tends to be heavier and sourer than Middle Eastern crude.
0 PetroChina wants to ensure it can process at least 200,000 b/d of Middle Eastern
Jan Apr Jul Oct
crude in case there are disruptions to Venezuelan supplies. Its new configuration
will include a 1.2mn t/yr ethylene plant and a benzene, toluene and xylene plant
with a capacity of 2.6mn t/yr.
Venezuela produced only 1.5mn b/d of crude in November, PdV chief execu-
tive Manuel Quevedo says. This is considerably lower than the 1.837mn b/d figure
for November communicated to Opec by the country’s energy ministry. Quevedo
does not explain the discrepancy, but adds that production rebounded by “up to
400,000 b/d to over 1.9mn b/d” in December.
PdV expects to lose about 588,000 b/d of production from its ageing reser-
voirs by December. But this will be offset by investments that add 1mn b/d of
production, Quevedo says — taking national output to about 2.5mn b/d by the end
of the year. A senior national guard officer with no prior oil industry experience,
Quevedo was appointed in late November following the arrests of then energy
minister Eulogio Del Pino and former PdV chief executive Nelson Martinez on
corruption charges.
Oil-backed debt
Upstream executives in Venezu- Upstream executives in Venezuela doubt that PdV can hit Quevedo’s ambitious
ela doubt that struggling PdV can production targets, suggesting that the net increase in output will be smaller
hit its new chief executive’s than the implied 400,000 b/d. The company’s financial liabilities including bonds,
ambitious production targets bank loans, promissory notes, and debts to goods and services providers, total
more than $65bn. This does not include outstanding oil-backed debt of $25bn
owed mainly to China and Russian state-controlled Rosneft, according to the
energy ministry. The company is in default on interest payments owed on five
bonds worth $17.9bn.
PdV’s financial problems and declining production make it hard to see how it
will cover its share of investment in the Jieyang plant. And PetroChina’s decision
to run at least half of the Yn58bn ($8.8bn) plant on Saudi and Iranian crude will
make that task harder still for PdV — doubling the time it will take to pay CNPC
back. That, in turn, raises questions about whether the Venezuelan firm can
afford to remain in the joint venture. PetroChina aims to start testing Jieyang’s
crude units by October 2021 and its petrochemical units by December 2021.
Copyright © 2018 Argus Media group Page 9 of 46
Argus China Petroleum January 2018
CORPORATE
Government heralds outcome of restructuring
The petrochemical sector could China plans to step up the restructuring of state-owned companies this year by
be included in the next round of introducing further reforms to make the firms more efficient, state-run assets
major restructuring aimed at regulator Sasac says.
making companies more efficient The government has mooted the idea of including the petrochemical sector in
its next round of major restructuring, leading to renewed speculation that
state-owned refining and chemicals firm ChemChina and state-owned oil firm
Sinochem could be merged or have their petrochemical assets combined. Sino-
chem has, in the past, denied the possibility of a merger.
State-owned Baowu Steel Group became far more profitable last year as a
result of a merger, the government says. Baowu was previously two separate
firms — Baosteel and Wuhan Iron and Steel, the latter being one of the country’s
most-indebted steel producers. Baowu made a profit of Yn8.66bn ($1.26bn) in
January-June 2017, a 100pc increase from a year earlier.
ChemChina is also heavily indebted. It completed the $43bn acquisition of
Swiss agrichemicals group Syngenta in June last year — China’s largest overseas
deal to date. ChemChina, which received backing from government investment
arm China Reform Holdings for the acquisition, is busy refinancing loans used to
complete the deal. This month, it arranged a $5.5bn syndicated term loan facility
to refinance part of the $12.7bn it used to fund the acquisition.
Around seven “yangqi” companies — those supervised by Sasac — have
merged in the past year, including the country’s biggest coal producer Shenhua
and power utility Guodian, which were combined to form China Energy Invest-
ment in November. The merged entity is worth Yn1.83 trillion ($278bn). It has
175GW of installed thermal power generation capacity, of which 173GW is
coal-fired, and nearly 500mn t/yr of coal production.
The watchdog reduced the number of yangqis it oversees to 98 from 117 last
year through restructuring and mergers. Workforce cuts at yangqis have helped to
resolve overcapacity in the steel and coal sectors, removing around 5.95mn t/yr
of steel and 25.23mn t/yr of coal capacity last year, Sasac says. China has
eliminated over 115mn t/yr of blast furnace-based crude steel capacity since 2016
and shut down 140mn t/yr of induction furnace capacity, while the government
set a target to remove 150mn t/yr of coal capacity in 2017.
Sasac’s latest comments indicate more mergers could be on the way. The
government will push for further restructuring in the coal, power, petrochemical,
equipment manufacturing and communications sectors this year, Sasac chairman
Xiao Yaqing said at a recent work summit focused on yangqi reforms.
Saving zombies
There are suggestions the reforms could extend to companies controlled by
provincial governments. Beijing also wants to encourage asset management
companies to be set up in fields including coal, steel, marine equipment and
environmental protection, in order to streamline resources. Debt-to-asset ratios
dropped for yangqis last year as they cut interest-bearing loans, while profits at
the firms rose by 15pc to Yn1.4 trillion.
Critics say the government’s Some critics say that Beijing’s restructuring strategy effectively bails out
restructuring strategy effectively zombie firms by tying them to profitable ones. Its decision to merge Macau-based
bails out zombie firms by tying downstream oil firm Nam Kwong and crude trading firm Zhuhai Zhenrong appears
them to profitable ones to have led to almost no operational changes. Zhenrong ran into difficulty when
its main customer, Dragon Aromatics, closed — it, formerly, supplied South Pars
condensate to Dragon. China’s imports of Iranian crude fell to an almost two-year
low in December, but supply to Asia-Pacific held steady.
Copyright © 2018 Argus Media group Page 10 of 46