“How should the refining industry operate during the 13th Five-Year Plan period?

Thread Content

Under the new normal, the overcapacity in China’s refining sector will further increase. In the future, product upgrading, green and low-carbon development, as well as growing larger and stronger will remain the key focuses of the refining industry. In recent years, China’s refining industry has been undergoing profound changes. 2016, as the first year of China’s refining industry’s entry into the 13th Five-Year Plan period, exhibited many distinctive features. In 2017, China’s refining industry continued to develop under the new normal; refining capacity saw increased growth, crude oil processing volume kept rising, and overcapacity further intensified. In the future, China’s refining industry will face both significant opportunities and challenges. On the one hand, there are opportunities stemming from economic transformation and upgrading, as well as the substantial development prospects brought about by the \"Belt and Road\" strategy. On the other hand, it faces challenges such as rapid growth that leads to overcapacity, weak demand for refined oil products, fast-growing exports, intensified competition in both domestic and international markets for refined oil products, and rapid development of alternative energy sources. Additionally, the industry is under pressure due to stricter environmental regulations and the need for faster quality improvements. Transformation and upgrading, green and low-carbon development, as well as growing larger, stronger, and more competitive will remain the key focuses for the development of China’s refining industry during the 13th Five-Year Plan period. Four characteristics of the refining industry in 2016: Refining capacity increased slightly compared to the previous year. By the end of 2016, China’s refining capacity was 750 million tons per year, representing a net increase of 240,000 tons per year over 2015, with little change overall. Of this, 21.1 million tons per year of new refining capacity will be added, while 20.86 million tons per year of refining capacity will be phased out. In terms of the operating entities, China has developed a diversified landscape featuring three major oil companies, Sinochem, CNPC, China North Industries Group Corporation, local refineries, foreign-funded enterprises, and coal-based oil products manufacturers. In 2016, there were still 24 refineries in the country with a processing capacity of 10 million tons each, giving a total refining capacity of 314 million tons per year, which accounted for 42% of the country’s total refining capacity. The combined refining capacity of CNPC’s and Sinopec’s refineries with a capacity of 10 million tons each accounts for 55% and 69% of their respective total capacities. The average annual refining capacity of CNPC’s refineries is 7.25 million tons, while that of Sinopec’s is 7.43 million tons, which is already close to the world average. However, due to the presence of many small oil refining units in China, the average capacity of Chinese refineries is only 4.05 million tons per year (excluding those small units that have been shut down for many years), which is still a significant gap compared to the world average of 7.54 million tons per year. In terms of the distribution of refining areas, North China, Northeast China, South China, and East China are the main regions where oil refining capacity is concentrated in China. In 2016, the refining capacities of these four regions were 270 million tons per year, 124 million tons per year, 114 million tons per year, and 101 million tons per year respectively, accounting for 36%, 16%, 15%, and 13% of the total capacity – together they make up 80%. This results in a distribution pattern with the eastern region as the main hub, supplemented by the central and western regions. In 2016, the average operating rate of various refineries in China was 76.7%, an increase of 1.3 percentage points compared to the previous year, mainly due to a significant rise in the operating rate of domestic refineries. The processing volume of local refineries is growing rapidly, while the share of the leading companies is declining. The country’s annual crude oil processing volume was 541 million tons, representing a 3.6% increase on a year-on-year basis, with the growth rate declining by 0.2 percentage points compared to the previous year. It is estimated that the national production of refined oil products will be 345 million tons in 2016, an increase of 2.1% on a year-on-year basis. Due to a slowdown in economic growth and weak demand for diesel, diesel production experienced negative growth; it is expected that the ratio of diesel to gasoline production for the whole year will be 1.39, a decrease of 0.1 compared to the previous year. The share of local refineries is increasing, while state-owned enterprises’ market share is declining. By the end of 2016, the total refining capacity of local refineries across the country (including those acquired or controlled by central state enterprises) was 262 million tons per year, accounting for 34.8% of the country’s total refining capacity. In terms of scale, local refineries now account for one-third of the total refining capacity. Especially after the relaxation of restrictions on their operations, these refineries have shown strong competitiveness and an impactful role, becoming an important part of China’s refining industry. The domestic refining industry continues to develop toward a more diversified range of operating entities. By the end of 2016, **81.93 million tons per year in crude oil quotas had been allocated to 22 local refineries. In the first 10 months of that year, these refineries imported 33.85 million tons of crude oil on their own, accounting for 11.3% of China’s total crude oil imports, resulting in significant changes in the pattern of crude oil imports. During the same period, the processing volume of crude oil at local refineries was 81.98 million tons, an increase of 26.4% on a year-on-year basis ； The operating rate was 51.8%, a significant increase of 11.3 percentage points year-on-year, reaching a historical high. During the same period, the production of gasoline and diesel by local refineries was 58.028 million tons, an increase of 23.4% on a year-on-year basis ； Thanks to its price advantages and operational flexibility, the market share of domestic refineries reached 23%, an increase of 4.1 percentage points on a year-on-year basis. Affected by the impact of local refineries, the market share of major companies such as Sinopec and CNPC has been declining, dropping from 90% in 2010 to 77% by October 2016. The structure of refining units has been continuously optimized and adjusted. In recent years, as the pace of improvement in oil quality has accelerated, there have been changes in the demand pattern for oils, with a clear trend toward heavier crude oils. As a result, refineries have kept optimizing the structure of their units, enhancing their flexibility in processing, as well as their ability to carry out advanced processing and to handle low-quality imported crude oils. Catalytic cracking capacity has increased year-on-year due to the increased operation of current S-Zorb units for desulfurization of catalytic gasoline ； Due to the improvement in the quality of crude oils, the capacity for hydrorefining continued to grow at a rapid pace. Its share of total processing capacity rose significantly from 15.6% in 2000 to 41.4% in 2016, an increase of 2.2 percentage points on a year-on-year basis; however, this figure remains below the world average of 55%. At present, the hydrorefining capacity of the refineries owned by these two major groups accounts for more than 50% of their total processing capacity. China currently has over 20 large-scale refineries for processing high-sulfur crude oil, with a combined annual processing capacity of 262 million tons. The rise of alternative energy sources: Coal-to-oil production exceeds 10 million tons. In 2016, three new plants for coal-to-oil conversion were put into operation, adding a total capacity of 7 million tons per year. As a result, China’s overall coal-to-oil production capacity exceeded 10 million tons, reaching 10.8 million tons per year, with 15 companies engaged in this industry. In 2016, it is estimated that 30.43 million tons will replace refined oil products, accounting for 9.7% of the total consumption. As an alternative to conventional fuels, vehicle natural gas has seen steady growth, replacing 21.8 million tons of refined petroleum products. Methanol gasoline enjoys lower market acceptance compared to conventional gasoline. The M15 standard has not yet been established, and the relevant standards for additives, blending methods, and distribution protocols are still incomplete. However, driven by economic interests, it is often used in direct blending with gasoline, which has contributed to a continuous increase in its consumption; in 2016, it replaced approximately 3.15 million tons of conventional gasoline. There was no new capacity added for fuel ethanol; throughout the year, it replaced 1.2 million tons of refined oil products. The market size for electric vehicles continued to expand, with 750,000 tons of refined petroleum products being replaced in 2016. With the economic downturn leading to weak demand for diesel, and coupled with difficulties in entering the retail fuel distribution system, biodiesel’s development has gradually been pushed to the periphery; in 2016, it was intended to replace 2 million tons of conventional diesel. Key focus areas for the development of the refining industry in 2017: An excess in refining capacity of 110 million tons per year by 2020. In 2017, China’s refining capacity was expected to show growth, breaking away from the trend of decline or slight increase observed in the previous two years; the net increase in capacity was projected to be 35 million tons. Among these, 46 million tons/year of new capacity has been added, including that from Yunnan Petrochemical and Phase II of the Huizhou refinery; meanwhile, 11 million tons/year of outdated capacity has been phased out. It is estimated that by the end of 2017, China’s total oil refining capacity will be 790 million tons per year, representing a year-on-year increase of 4.6%. Similarly, influenced by Yunnan Petrochemical, Huizhou Refinery (Phase II), and local refineries with crude oil import rights, China’s crude oil processing volume in 2017 was 557 million tons, representing a 3% increase year-on-year. The output of refined oil is expected to reach 360 million tons, a year-on-year increase of 4.3%. The problem of excess refining capacity in the country is set to worsen, with the total annual net exports of refined oil products possibly rising to 40 million tons. In particular, the relaxation of restrictions on these two aspects has encouraged domestic private enterprises to expand their production capacity. In 2020, China will add another 120 million tons per year of refining capacity, bringing the total capacity to 870 million tons per year. Taking into account domestic demand and maximizing export potential, China’s refining capacity will be in excess of 110 million tons per year by 2020; if we consider the new refineries or those that have been upgraded in some traditional importing countries in the Asia-Pacific region in recent years, which will increase their self-sufficiency in refined oil and thus reduce imports, the degree of overcapacity in China’s refining sector will further increase, reaching over 150 million tons per year. Increased overcapacity in refining will lead to intensified competition in the refined oil market. By 2020, the total volume of crude oil imported for local refining will reach 100 million tons, accounting for 25% of the country’s total crude oil imports, thus becoming a significant source of crude oil imports ； The market share of local refineries could rise from 23% in 2016 to over 30%; thanks to their price advantages and operational flexibility, their influence on market wholesale prices will further increase ； In the future, independent refiners will gradually integrate their sales terminals, leading to a significant improvement in quality standards and brand capabilities. In the future, the domestic refined oil market will see the rise of private enterprises, which will put significant pressure on both the existing and new markets held by the major refining companies; as a result, competition in this sector will intensify further. In line with the Belt and Road Initiative, efforts to expand overseas operations are being accelerated. China’s Belt and Road Strategy provides excellent opportunities for the petrochemical industry to develop international capacity cooperation, build a global brand presence, and expand its operations abroad. To date, China’s petrochemical companies have invested in 11 overseas refining and chemical projects, including the Yanbu Refinery in Saudi Arabia and the PK Refinery in Kazakhstan. The total refining capacity of these projects is 76.6 million tons per year, of which the share held by Chinese parties amounts to 53.17 million tons per year. It also completed the construction of an 80,000-ton/year lubricant plant in Singapore on a wholly-owned basis, participated in oil and petrochemical storage projects in Indonesia, the UAE, and the Netherlands, acquired a 10% stake in Russia’s Sibur company, and invested in a 42,500-ton/year nitrile rubber project in Russia. For many years, China’s oil refining plant construction teams have worked abroad, participating in numerous refinery construction projects in Southeast Asia, the Middle East, Central Asia, and Africa. Currently, an oversupply of refining capacity exists in the domestic market, and the wave of upgrades and expansions is coming to an end. Refining and chemical engineering companies are facing a decline in domestic business volume; therefore, they need to pursue an international strategy, thereby encouraging their engineering, construction teams, and equipment manufacturing sectors to expand their operations overseas as well. “Adopting a strategy specific to each plant will drive the upgrading of oil products. In the future, the refining industry will face the dual pressures of further improvements in oil product quality and further adjustments to the product structure. Starting from January 2017, National V-grade gasoline and diesel will be promoted for use across the country. Meanwhile, a draft version of the standards for National VI-grade gasoline and diesel has been released, with implementation expected across the nation starting from January 1, 2019. Compared to Standard V, Standard VI is more stringent, which imposes higher requirements on the process modifications and process combinations of domestic refineries. For gasoline production, oil companies must consider reducing olefins, benzene, and aromatics, increasing the proportion of high-octane gasoline components, and focusing on accelerating the construction of units for alkylation, isomerization, and other processes. Olefins are an important source of gasoline octane rating; reducing olefins means losing at least 35 units of octane rating. Achieving low-cost reduction of olefins and improvement of gasoline octane number to meet National VI standards will be the main challenge for the refining industry during the 13th Five-Year Plan period. For diesel production, it is necessary to consider reducing polycyclic aromatic hydrocarbons and increasing the cetane number, with a focus on accelerating the construction of units for hydrorefining, hydrocracking, and hydrogenation of residue (wax) oil. In the coming years, China’s refineries will concentrate their efforts on developing technologies for gasoline and diesel that meet National VI standards, adopting a strategy tailored to each refinery in order to further improve the quality of these fuels. Green development: Advancing intelligent development. The \"Development Plan for the Petrochemical and Chemical Industries (2016–2020)\」states clearly that by the end of the 13th Five-Year Plan period, water consumption per 10,000 yuan of GDP in this industry should decrease by 23%, while energy consumption and carbon dioxide emissions per 10,000 yuan of GDP should drop by 18%. The total emissions of chemical oxygen demand and ammonia nitrogen should be reduced by 10%, those of sulfur dioxide and nitrogen oxides by 15%, and the emissions of volatile organic compounds in key industries should be cut by more than 30%. **A series of fiscal and tax policies to restrict or control the production and consumption of traditional fossil fuels will also be introduced. As a result, the operating costs of the refining industry will increase, placing higher demands on technological innovation. With the deterioration and diversification of raw materials in the refining and chemical industries, as well as the need for cleaner production processes and greener, more distinctive, and higher-quality products, it is necessary to accelerate the development of corresponding technologies. Although the refining industry has yet to move away from a development model characterized by high input, high consumption, and high emissions in terms of energy conservation and emission reduction, its development is highly uneven, with substantial consumption of resources and energy, and relatively serious environmental problems. There is an urgent need to accelerate the establishment of green and low-carbon refineries that consume fewer resources and cause less environmental pollution. With the integration of informatization and industrialization, building intelligent refineries has become a new model for the industry’s transformation and development, as well as a necessity for strengthening and improving its performance. Sinopec has planned to build 10 intelligent refineries and chemical plants during the 13th Five-Year Plan period, building on previous pilot projects. During the 13th Five-Year Plan period, refineries are shifting from a fuel-oriented model to one focused on fuel chemicals and heavy industries; alternative energy sources for transportation, primarily natural gas and electricity, will see rapid development. By 2020, the number of new energy vehicles is expected to exceed 5 million, accounting for 1.5% of fuel consumption at that time. In the short to medium term, new energy vehicles have a limited impact on the demand for refined petroleum products; however, in the long run, their substitution for conventional fuels is irreversible. In the future, especially once breakthroughs are achieved in technologies such as high-energy storage batteries and hydrogen fuel cells, this will lead to explosive growth in the new energy vehicle industry, exerting significant pressure on nearly 200 refineries in the country, and diminishing oil’s role as an important fuel. However, oil as a raw material for the chemical industry still has a long and promising future. In the medium to long term, refineries will gradually shift from processing fuels to a model that emphasizes both fuel production and chemical manufacturing, evolving into chemical-oriented refineries that convert crude oil into a wider range of chemical materials. Therefore, continuous technological innovation and the development of new materials are necessary to lay the foundation for sustainable development in the future. Source: Jin Yunzhu, Fei Huawei, “Sinochem New Network”