With Hengli and Zhejiang Petrochemical pressing in from both sides, the local refineries in Shandong face a ‘hellish’ situation yet also have the chance for ‘rebirth’! (Attached are the details of each refining and chemical integration project...

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On December 15, 2018, Hengli’s atmospheric and vacuum distillation units began operations; Zhejiang Petrochemical will follow suit and start production in 2019. What impact will this have on the refineries in Shandong? Private large-scale refining is certainly among the hot topics this year. It must be said that we are standing at the beginning of an era of large-scale oil refining. At present, China’s production capacity for major petrochemical products ranks among the highest in the world. However, the level of industrial intensification, scale, and integration is relatively low; the development of high-end petrochemical products lags behind, and there are structural shortages in supply. In some traditional industries, overcapacity is severe, posing significant challenges for addressing this issue in the short term. To this end, the \"Petroleum and Chemical Industry Planning and Layout Plan\" was formulated, aiming to address overcapacity issues and phase out outdated production capacities. Efforts will be focused on developing seven major petroleum and chemical industry hubs, while also striving to raise the output in the chemical and new energy sectors to 100 million tons by 2020. In the future, when new large-scale petrochemical projects are established, they will, in principle, be prioritized for development in the seven major bases. All of these bases are located in key coastal areas under development; they target the existing three major petrochemical clusters, and they are also situated along important routes for importing marine energy resources. The details regarding the commissioning of each project are as follows: Table 1 summarizes representative private-sector petrochemical integration projects; Table 2 shows the progress of those same projects; Table 3 provides a summary of representative state-owned petrochemical integration projects; and Table 4 outlines the progress of those projects as well. In summary, the progress of state-owned petrochemical integration projects is relatively slow, with little substantive progress to date, whereas private-sector petrochemical integration projects are advancing at a rapid pace. The most representative ones among them are Hengli Petrochemical and Zhejiang Petrochemical, which are expected to start operations as scheduled by the end of this year or next year. Among them, Hengli Petrochemical started operations earlier, with its atmospheric distillation unit coming online on December 15, 2018, while Zhejiang Petrochemical followed closely and was set to begin production in 2019. Once operational, these two major private enterprises will have a significant impact on the refined oil market. Both Hengli Petrochemical and Zhejiang Petrochemical started out in the fiber industry, and their refining facilities were established to complement their upstream chemical production chains. Producing an appropriate amount of gasoline and jet fuel while minimizing diesel production are all based on the main principle of obtaining aromatic raw materials to the greatest extent possible. But with such a large facility, even after compression, the output of gasoline, diesel, and coal from various sources remains significant. According to official statistics, once in operation, Hengli Petrochemical will release 4.6124 million tons of gasoline, 4.02 million tons of diesel, and 1.3005 million tons of aviation fuel into the market each year. Although Zhejiang Petrochemical has not yet announced its production figures, based on its scale, it is estimated that its output of gasoline, diesel, and aviation fuel could be similar to that of Hengli Petrochemical. In other words, once these two refining facilities come online, nearly 10 million tons of gasoline, 8 million tons of diesel, and around 2.6 million tons of aviation fuel will be put on the market. In terms of sales and exports, the two private refining companies are progressing at a rapid pace. The refined products they produce are not only sold in bulk to external customers but are also offered for supply to their own main purchasing entities; since these entities purchase large quantities, it is possible to quickly reduce the refineries’ inventory levels and thus alleviate sales pressure. On the other hand, as calls for allowing private independent refineries to export grow louder, it is possible that these two private refineries will join the ranks of those exporting refined oil in the future; however, whether they can export depends on keeping an eye on **relevant policies**. It is worth noting that Hengli Petrochemical has partnered with Sinochem Group in Singapore to establish a company named Hengli Oil & Chemicals Co., Ltd. This joint venture is structured with Hengli holding 80% and Sinochem holding 20% of the shares; it is responsible for the import of crude oil for Hengli’s refining operations, as well as the export of refined products and petrochemicals. In addition, it engages in third-party re-export trade of crude oil and refined products. Impact on independent refineries in Shandong: Hengli Petrochemical and Zhejiang Petrochemical have clear geographical advantages; one is located in the south and the other in the north, thus sandwiching the independent refineries in Shandong between them. Once these two large-scale refineries begin operations, the pressure on the independent refineries in Shandong will be considerable. The specific impacts are as follows: Hengli Petrochemical is located in the northeastern region, where refineries are concentrated, and production levels are much higher than consumption levels. Once Hengli Petrochemical starts operating, the available resources of refined oil for local consumption will be relatively limited. Therefore, in addition to supplying the Northeast region locally, North China is one of its main combat areas; thanks to its geographical advantages, it can also send ships southward to regions such as East and South China, resulting in a wide coverage area. As early as last year, Hengli Petrochemical took proactive measures by hiring hundreds of sales representatives to develop the gasoline and diesel markets, ensuring a sufficient supply of downstream customer resources once production of refined oil products began. Zhejiang Petrochemical: Located in Zhejiang, it is adjacent to the Yangtze River Delta and Pearl River Delta economic zones; these areas are among those with high consumption of gasoline and diesel, resulting in a significant demand gap. Coupled with its geographical advantage, once it starts operating, it is bound to have a certain impact on the flow of resources from independent refineries in northeastern Shandong and other areas to East China and South China; its scale advantages and transportation benefits are quite significant. In summary, as these two private refining and chemical plants come online, the situation of overcapacity in China is bound to worsen, and this will lead to a new reshuffling of the distribution pattern for refined oil products. The independent refineries in the Northeast and Shandong provinces will likely be the first to be affected; finding ways to break through and retain their market share will be a top priority in future efforts.