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The operation of the Yunnan refinery will have an impact on all existing suppliers; the refineries in the Northwest region, represented by the China National Petroleum Corporation, may lose their competitiveness in the long term. The market share of local refineries in Shandong as well as oil blending companies in the Southwest region will also be significantly reduced, while Sinopec will be affected to a lesser extent. After six years, Sinopec Corporation (691857.SH, hereinafter referred to as Sinopec)’s 13 million tons per year Yunnan refining project is finally set to go into commercial operation this year. On May 6, CNPC Yunnan Petrochemical Co., Ltd. (hereinafter referred to as Yunnan Petrochemical) held a mobilization meeting for the start of operations following the material feeding process, announcing that the 13 million tons per year Yunnan refining project – a key strategic energy project and an important part of the China-Myanmar oil and gas pipeline – has fully moved from the construction phase to the operation phase. As planned, the start-up of Yunnan Petrochemical’s commissioning process will be carried out in three phases. The first phase is from May to June this year, during which the refinery will focus on the first hydrogen leak test and loading of the high-pressure hydrogen handling equipment ； The second phase took place in July of this year: the atmospheric and vacuum distillation unit started operating for the first time using low-sulfur crude oil; the high-pressure hydrogenation unit underwent its second hydrogen integrity test; small quantities of purchased oil were brought into the plant for use; preparations were made for the transportation of oil to the subsequent units and for starting up the operations ； The third phase is in August, when the atmospheric and vacuum distillation unit resumes operation to start producing qualified products. Previously, since China’s crude oil production areas were mainly concentrated in the Northeast, Northwest, and North China regions, large-scale refining and chemical enterprises were also mostly located there. Yunnan, Guizhou, Tibet, and Chongqing were the only few regions in China that did not have any oil refineries. Due to its complex topography and geography, as well as severe shortages of oil and gas resources, Yunnan has long been at the end of China’s refined oil supply chain. It can only meet its own demand for refined oil by importing it from the north, which in turn limits the region’s development. To establish an important land-based route for China’s oil and gas imports in the southwest direction, China began construction of the China-Myanmar oil pipeline in 2010. Once completed, China’s crude oil imports will no longer need to pass through the Strait of Malacca, reducing the transportation distance by 1,820 nautical miles and enabling diversification of oil and gas imports. Therefore, it is also particularly important to build a “crude oil consumption facility” at the end of the China-Myanmar crude oil pipeline. To address the oil shortage in Yunnan and to utilize the crude oil coming from the energy corridor in the southwest, CNPC, Saudi Aramco, and the Yunnan-based chemical company Yuntianhua Group announced in 2011 that they would jointly invest in the construction of a 10 million tons per year oil refining project in Yunnan. In July 2012, the environmental impact assessment for the Yunnan refining project was approved by the **Ministry of Environmental Protection**, and in February 2013 it received approval from the **National Development and Reform Commission**; construction then began in Caopu Town, Anning City, Kunming, Yunnan Province. In April 2015, the **Ministry of Environmental Protection issued a notice approving the environmental impact assessment application for the optimization of CNPC Yunnan’s 10 million tons per year oil refining project (the CNPC-Saudi Aramco joint venture’s 13 million tons per year oil refining project in Yunnan). In June of the same year, the intermediate stage of construction for CNPC Yunnan Petrochemical’s 13 million tons per year oil refining project was completed. Zhang Yonghao, an analyst at Zhongyu Information, told a reporter from Jiemian News that, based on the structure of the facilities in the Yunnan petrochemical project, a full hydrogenation processing chain is employed, which includes atmospheric and vacuum distillation, residue hydrodesulfurization, catalytic cracking, and hydrocracking. The hydrogenation units in this facility are at the world’s highest standard. Considering regional functional needs and market positioning, the Yunnan refinery is a purely fuel-oriented refinery, with its facility capacities designed to maximize the production of refined oil while minimizing by-products. “The commissioning of the Yunnan Petrochemical project will meet all the demand for refined oil in Yunnan Province, and it will also have an impact on the entire Southwest market. ”Zhang Yonghao said, “This includes not only gasoline and diesel but also high-value-added products such as aviation kerosene.” ”For a long time, the refined oil in the southwest region has relied mainly on external supply routes, and such supply routes are constrained by various factors such as terrain and transportation. Zhang Yonghao believes that the refined oil pipeline network in the southwest is not well-developed; in some areas, transportation still relies on railways, roads, waterways, etc. Factors such as the timing of transport arrangements and weather conditions can affect the steady and efficient delivery of refined oil to various regions in the southwest. This is also the reason why there has been an overall surplus of refined oil in China in recent years, while certain areas in the southwest still experience short-term shortages of oil. “Once in operation, the Kunming refinery in Yunnan will be able to serve the entire province of Yunnan as well as other southwestern provinces such as Sichuan, Chongqing, Guizhou, and Guangxi, providing a stable supply of resources for these regional markets. ”Zhang Yonghao said. Including the Kunming refinery in Yunnan, the southwestern region of China will have three large refineries with a production capacity of over 10 million tons each, resulting in a total refining capacity of 39 million tons. The other two refineries are located in Pengzhou, Sichuan, and Qinzhou, Guangxi, respectively. On the other hand, with the commissioning of the Yunnan refinery, the massive supply of refined oil products is bound to lead to a reshuffling of the distribution pattern of such products in the southwest region. Zhang Yonghao analyzed that the resources of Sinopec’s refineries in South China and Central China, as well as those of CNPC’s refineries in Guangxi and Sichuan in the southwest region, along with the resources of refineries in the northwest and local refineries in Shandong as well as private oil traders, together constitute the supply network for refined oil products in the southwest. The operation of refineries in Yunnan will have an impact on all existing suppliers; however, thanks to its established pipeline transportation and retail sales network for refined oil products in the southwest, Sinopec will be less affected compared to refineries in the northwest and Shandong. “Refineries in the Northwest, represented by Yanchang Petroleum Group, may lose their competitiveness in the long term due to the lack of mature pipeline networks; meanwhile, other transportation methods are inefficient and unreliable, making it difficult for them to compete with local resources in the Southwest. ”Zhang Yonghao said, “The market share of local refineries in Shandong as well as oil blending companies in the southwest region will also be significantly reduced.” ”The construction of the Yunnan Petrochemical project was not smooth sailing. In August 2015, the **Ministry of Environmental Protection issued an administrative penalty decision against CNPC Yunnan Petrochemical Co., Ltd.** Yunnan Petrochemical Company committed an environmental violation by starting construction on a 10-million-ton-per-year oil refining project without re-submitting the environmental impact assessment documents due to significant changes in the project details, and was fined 200,000 yuan as a result. Furthermore, as originally planned, CNPC would hold 51% of the shares, while Saudi Aramco would hold 39%. SABIC will supply some refining feedstocks to the Yunnan refinery, while Yuntianhua Group will be responsible for purchasing the chemical products produced by the refinery other than refined oils. However, business registration records show that Yunnan Petrochemical Company, the entity responsible for the construction and operation of the Yunnan refining project, was established in May 2011. CNPC holds 100% of its shares, while Saudi Aramco and Yuntianhua Group do not hold any shares in it. China National Petroleum Corporation’s 2015 annual report shows that the investment budget for the Yunnan Petrochemical project was 20.08 billion yuan; by the end of 2015, the actual amount of funds invested in the project accounted for 84% of the budgeted amount. PetroChina’s 2016 annual report stated that its capital expenditures in the refining and chemical sector last year amounted to 12.847 billion yuan, which were primarily used for large-scale refining and chemical projects such as Yunnan Petrochemical, as well as for projects aimed at improving the quality of petroleum products. It is estimated that in 2017, expenditures in this sector will still be around 13.6 billion yuan, with part of these funds going toward Yunnan Petrochemical’s 13 million-ton refining project. Citing Yu Mingxiang, the Party secretary of Yunnan Petrochemical Company, 21st Century Business Herald reported that negotiations with Saudi Aramco are still ongoing. Saudi Arabia hopes to use this project to gain access to CNPC’s downstream sales activities in Yunnan Province, while CNPC is interested in participating in Saudi Aramco’s upstream exploration and development efforts. The two parties are currently discussing details such as the shareholding ratio, and there are no conflicting issues between them. Source: Industrial Energy Circle (ID: IE_jiemian) Editor: Guan Guan