The main problems facing China’s refining industry

The original poster is absolutely right, but how can these problems be solved more effectively now? This is especially evident in local refineries! !

Exploration of China’s refining industry in the 21st century: Issues regarding its development. China’s refining industry has achieved remarkable results, with a total refining capacity of over 200 Mt, ranking it fourth in the world. China’s refining capacity not only meets the demand for light and heavy fuels in various sectors but also takes full responsibility for the production and supply of chemical light oils, playing a significant role in ensuring the healthy, safe, and stable development of the national economy. But like other industries, China’s refining sector has grown under **protection**. China in the 21st century will become a giant ship in global economic integration, facing the challenges of market competition; the refining industry will thus encounter tests like no other before it. With its entry into the WTO, **protectionist barriers will undoubtedly disappear in a short period of time. China’s refining industry must make new advancements in terms of systems, resources, scale, structure, quality, technology, construction, regulations, and restructuring in order to stand among the best in the world. I. Major reforms are needed in the management system and mechanisms. Compared with foreign multinational oil companies, the biggest gap and issue in China’s refining industry lies in its management system and mechanisms. At present, almost all refineries are legal entities that aim at production and operation, investment and development, as well as generating profits and taxes – a consequence of the planned economy, where resources were allocated centrally, products were sold through state-controlled channels, and enterprises were responsible for providing various social services. This situation severely restricts the development of the refining industry; it is the fundamental reason why it is difficult to make progress in areas such as the optimal utilization of resources, reducing processing costs, centralized capital management, improving the investment structure, adjusting the product mix, leveraging technological innovation, and enhancing overall competitiveness. The two major groups are currently undergoing restructuring, with the ultimate goal of transforming each refining company from an entity focused on operation and development into a production-focused one, freeing it from social and supporting functions. The focus will shift from maximizing the profitability of individual companies to maximizing overall efficiency, with companies gradually becoming cost centers. It is estimated that about 5 years will be needed to fully implement the reforms. The key to this cross-century reform lies in whether the separation is smooth and thorough; although painful, it is the first step toward achieving other breakthroughs. II. Adjusting the strategy for oil resources from the perspective of enhancing overall competitiveness. All multinational oil companies in the world have developed on the basis of owning oil resources; their controlled resources are spread across the globe, and the proportion of oil resources they control in total processing volume is generally over 50%, and in some cases even exceeds 100%. In contrast, China’s refining industry faces two major problems: first, the overall adaptability of refining processes is poor ； Second, there is a clear trend of a decrease in resource control levels. The biggest problem lies with the petrochemical companies; by 2005, imported oil accounted for 60%-70% of their total processing volume, while they had no control over offshore oil resources. As a result, their product costs were entirely dependent on international crude oil prices. Taking 1999 as an example, the sharp rise in crude oil prices benefited these petrochemical companies greatly, leading to doubled profits that continued to increase. In contrast, the refining operations of these petrochemical companies faced the risk of losses. Moreover, almost all of China’s imported crude oil is processed by these petrochemical companies, and refineries are generally only capable of handling crude oil with a sulfur content of around 40%. Therefore, on the one hand, petrochemical groups must continue to accelerate the construction of processing bases for sulfur-containing crude oil; on the other hand, they need to adjust their strategy for developing crude oil resources. By using various methods such as wholly-owned investments, joint ventures, partnerships, and shareholdings, they should develop and control these oil resources. Over a period of 10–15 years, they aim to ensure that domestically produced crude oil and resources under their control overseas account for at least 60% of the total processed volume, while the proportion of sulfur-containing crude oil in the total processed volume should increase to 60–70%. III. The establishment of truly international-scale oil refining complexes: At present, most provinces and cities across the country have one or more oil refineries. There are 220 small refineries across the country; of these, only slightly over 50 have a processing capacity of 1,000 kt/a or more. The average processing capacity is 3,000 kt/a, and the overall average capacity is even lower. Currently, the average scale of refineries in operation in South Korea, Singapore, Thailand, Japan, and Taiwan Province of China is 10–20 Mt/a, whereas there are only 3 refineries of this scale in our country. Institutional reform created favorable opportunities for adjusting the development layout of oil refining. In the 21st century, China needs to select regions with great market potential and favorable geographical conditions, and through renovation or construction, establish large-scale oil refining complexes of international standards, such as those in Maoming, Zhenhai, Qilu, Fujian, and Nanjing. By 2010, five major oil refining complexes with a capacity of 10–20 Mt/a should be established; by the middle of the 21st century, China will need at least 10 super-large oil refining complexes with a capacity of 20–50 Mt/a each. These refining bases are not only key facilities for processing sulfur-containing crude oil, but also large-scale sources of chemical raw materials that supply chemical industries, thus bearing a dual responsibility. Policies should be formulated as early as possible for existing small-scale refineries or those located in areas with unfavorable geographical conditions, and their renovation and capacity expansion must be firmly halted until they are shut down. Most refineries of a certain scale should undergo moderate upgrades with an emphasis on improving product quality. The adjustment principle for the aforementioned processing layout is to develop (large-scale refining), restrict (medium-scale refining), and close down (small-scale refining). By achieving this goal, with minimal investment and maximum efficiency, China’s refining industry can gradually establish a new image in the 21st century, thereby significantly enhancing its overall competitive strength. IV. Substantial progress must be made in the optimal allocation of resources. It is well known that there is great potential for optimizing the allocation of resources. The optimal allocation of resources includes both the optimization of crude oil resources and chemical raw materials; the latter issue is more serious. Currently, all ethylene-based chemical manufacturers produce their own feedstock, adhering to outdated approaches and using costly methods such as coking and high-pressure hydrocracking to increase the proportion of chemical light oil supplied by themselves at any cost. The optimization analysis of ethylene cracking feedstocks for the Petrochemical Group Company in 1998 showed that increasing the rate of mutual supply could result in an additional net profit of at least 1 billion yuan. For over a decade, the rate of mutual supply of chemical raw materials (the ratio of mutually supplied raw materials to crude oil processing volume) has not been increasing; instead, it has been declining year by year. It not only leads to duplicate construction and inefficient investment, but also results in higher production and operation costs. As market competition intensifies, there is an urgent need to reduce the production costs of petroleum products and chemical goods, and optimal allocation of resources is an important approach to achieve this. The allocation of chemical raw material resources also requires the use of both domestic and foreign sources. To reduce the risks associated with expanding oil refining capacity, it is necessary to seek chemical raw materials such as light hydrocarbons, naphtha, and monomers from the international market in accordance with the principles of a market economy. By 2010, the proportion of imported chemical raw materials such as ethylene cracking products in total demand should increase to over 20%. For the refining industry, the goal of optimizing the allocation of crude oil resources is to improve the adaptability of crude oil processing, reduce overall crude oil costs, and lower the production costs of chemical raw materials. Crude oil resources were directed toward large-scale refining and processing bases as well as chemical raw material production sites, in order to meet the requirements of adjustments in the refining industry’s development layout; the main focus of refining plans before 2005 was the optimal allocation of resources. Following the restructuring of the two major groups, substantial progress is expected to be made in the optimal allocation of resources. V. Adapt to market rules and enhance the flexibility in product structure adjustment. Influenced by the planned economy system, Chinese refineries have focused excessively on processing capacity and the degree of processing, resulting in poor flexibility in their processing methods. At present, the diesel-to-gasoline ratio produced by refineries across the country can only be adjusted to 1.5:1 under normal conditions; through measures such as exporting gasoline, this ratio can be raised to 1.7:1 to meet market demands. This situation means that **formulating national policies such as fuel taxes is subject to constraints. Affected by various factors such as the oil product structure in the Asia-Pacific region, the implementation of domestic fuel tax policies, and changes in consumption patterns, the demand structure in China’s oil product market cannot maintain a stable proportion of demand for different products; instead, it features a dynamic and unpredictable demand pattern. In the 21st century, Chinese refineries must address the issue of flexibility in adjusting their product mix in line with the requirements of market economy development. First, adjust the configuration of the units to enhance the capacity of the hydrocracking unit. Currently, the proportion of hydrocracking capacity among the total processing capacity in Chinese refineries is only 3%, whereas it is 8%, 5%, 9.5%, 5% and 10% in Singapore, South Korea, the United States, Japan, and Taiwan, China respectively; the world average is also 5%. In line with the requirements for processing sulfur-containing crude oil, the proportion of hydrocracking (high-pressure or medium-pressure) capacity should be increased to over 10% by 2010. Second, increase the proportion of high-value-added products to improve the processing efficiency of refineries. For example, increasing the production of high-quality lubricants, advanced road asphalts, premium gasoline, and high-grade solvent oils – some of these high-value products require no large-scale crude oil processing, and thus can serve as a distinctive development direction for medium-sized refineries. Third, rely on two markets to adjust the product structure. The market in which the Petrochemical Group operates is located in the south, an area with a relatively developed economy. By 2010, the flexibility in adjusting the ratio of diesel to gasoline production was expected to be between 1.6 and 2.5; 30%-40% of the total gasoline production was to come from 97# high-grade gasoline (which would partly meet export demands). The goal was to raise the proportion of high-quality lubricants produced to international advanced standards to over 70%-80% within a period of ten years. The adjustment of refinery product structures is not only a matter of meeting market demands; it is also directly related to the steady increase in crude oil processing volume and the overall efficiency of refining operations. Taking 1998 as an example, the mismatch between the refinery product structures and market needs led to losses in overall efficiency amounting to over 3 billion yuan for two major groups, as a result of measures such as reducing crude oil production. Therefore, adjusting the product structure helps to increase market share, and it also holds great potential for benefits. VI. Formulate product quality improvement steps and strategies suited to national conditions. The continuous improvement of oil quality is an irreversible trend; as the domestic market gradually integrates with the international market and environmental awareness both domestically and globally increases, the refining industry will always face significant pressure to improve product quality. It is also important to consider the timing of upgrading the quality standards for petroleum products. China has its own national conditions, with very uneven regional development; there are significant differences in the main sources of pollution and the pollution capacity of different regions. Countries and regions around the world formulate and implement different standards for petroleum products based on the characteristics of their respective areas. Therefore, it is necessary to urge **and all levels of government** to take into full account the differences between domestic and international situations, as well as differences among various regions within the country and between different types of energy sources, when formulating environmental protection policies, so as to establish scientific restrictions in this area. Compared to other countries, the density of automobiles in our country is still quite low. Therefore, without compromising the performance of vehicles, there is no need to impose strict requirements on various pollutants in gasoline or to strive to reach international advanced levels in this regard. The slower pace of quality improvement in Japan and South Korea compared to more developed countries is worth studying and paying attention to. Policies for upgrading oil quality should focus on large cities, with an emphasis on raising the standards for gasoline quality. Diesel consumption occurs mainly between cities, in rural areas, and in mining regions, where the impact of pollution is relatively minor. Moreover, if engine performance remains stable, their pollutant emissions are lower than those of gasoline engines, so the pace of upgrading in these cases can be slowed down somewhat. It is expected that **the relevant authorities will formulate relevant policies carefully, and once national standards are established, excessive quality competition among imported oils will have little practical significance. Furthermore, the policies pursued by countries such as the United States and Europe to develop ultra-clean fuels may also constitute non-tariff barriers in the context of accelerating global market integration, which is worth paying attention to. Of course, as a company, it should, on the one hand, call for **the introduction of relatively relaxed policies to reduce pressure, and on the other hand, start working on a quality improvement strategy as early as possible. In the 21st century, Chinese refineries will formulate steps and strategies for upgrading oil product quality for three market regions: the eastern region, the central and western regions, and exports. The market is primarily in the eastern region, and refineries that export certain products need to improve the quality of their products comprehensively. The quality of exported products must keep up with the world’s highest standards in order to have a competitive edge in international markets. The challenges in improving the quality of petroleum products lie in gasoline and lubricants; it is still necessary to adhere to the principle of concentrating funds on key improvements in order to enhance the product quality of large-scale refineries. By taking quality improvement as an opportunity, strategies for optimizing resource allocation and adjusting development plans should be implemented, with small refineries being shut down. VII. Technological breakthroughs will **drive the development of oil refining.** World oil refining technology has made significant progress, and the key area for breakthroughs in this field in the 21st century remains catalysts. Based on the future development needs of Chinese oil refineries, the main catalysts that require focused development are as follows: 1. Hydrocracking catalysts, which enable high cracking conversion rates at lower pressures; at the current conversion rates, the hydrogen partial pressure can be reduced by 30%-40%, or, at the same pressure and conversion rate, the space velocity can be doubled. It will play a significant role in the development of oil refining. 2. Hydroprocessing catalysts for sulfur-containing residue: The best approach for processing sulfur-containing crude oil remains hydroprocessing of such residue. The current issues are high hydrogen pressure, low space velocity, and high costs; efforts should be made to reduce the hydrogen partial pressure to around 10 MPa, and there is a need to improve the performance of the catalysts. Almost all large-scale refineries in the eastern region in the 21st century will be converted into fully hydrogen-based refineries, and technological advancements in hydroprocessing catalysts will influence the pace of this transformation. 3. For catalytic cracking catalysts, it is first necessary to address the issues related to controlling the levels of olefins, aromatics, and sulfur in gasoline within 3–5 years. thereafter, high-performance catalysts must be developed based on advances in catalytic process design and chemical kinetics theory, in order to accommodate the characteristics of feedstocks with high carbon residue levels. It is expected that by 2010–2020, catalytic cracking technologies for heavy oil that can achieve satisfactory conversion of light oils while maintaining acceptable levels of coking will become available. 4. Isomerization catalysts: Producing high-quality gasoline components through the isomerization of naphtha will be an important approach to improving the quality of petroleum refining in the 21st century. Processes such as MTBE and alkylation are heavily constrained by gas resources; only a few regions with abundant light hydrocarbon resources, such as Saudi Arabia, have prospects for development. One drawback of reformation processes is the difficulty in reducing aromatic content, while reducing the levels of olefins in catalytic cracking gasoline may come at the cost of lower octane ratings or reduced yields. Therefore, isomerization represents the best option when there are abundant resources and a high demand for high-quality products. 5. Lubricant catalysts: In another decade or so, all the main equipment used in lubricant production will be replaced by selective hydrocracking technology. Catalysts with lower production costs, as well as high performance and selectivity, will contribute to a comprehensive improvement in the quality and performance of lubricants. Furthermore, information technology will bring about revolutionary changes across the entire process of China’s refining industry, including crude oil procurement and allocation, production planning, plant control, and product structure adjustment. By the middle of the 21st century, the control of refineries and even gas stations will be carried out directly by headquarters, with refinery and sales staff responsible only for coordination, safety supervision, and equipment maintenance. In summary, technological progress in the refining industry in the 21st century will play an increasingly important role in enhancing processing flexibility, reducing processing costs, increasing the yield of light oils, lowering investment expenses, improving product quality, and upgrading management methods. VIII. The concept behind refinery construction models needs to be updated. It is clear that the operation and development models of multinational corporations’ refineries will have a direct impact; in the 21st century, the operation and development of China’s refining industry will enter a modern management phase characterized by high levels of centralization, with all aspects ranging from resource development and allocation, processing, and sales to renovation and expansion being coordinated by the group company’s headquarters. Therefore, the renovation and construction models of refineries need to adapt to changes in the development environment, and design approaches must be adjusted from an overall perspective with new concepts. 1. Focus on building large-scale oil refining bases. The model of balanced development among various refineries must be broken, and refinery renovation and expansion projects must be planned in a coordinated manner by strictly adhering to the principles of maximizing overall efficiency and achieving regional optimization and complementarity. The renovation and expansion plan for large-scale processing bases is established based on various factors such as crude oil allocation, crude oil properties, the structure of the petroleum products market and quality requirements, as well as regional demand for chemical raw materials. The product plan particularly emphasizes the production of chemical raw materials. Following the internal restructuring of the two major groups, **their ability to manage capital more effectively will be enhanced, creating favorable conditions for the development of large-scale oil refining facilities that require substantial investment. 2. Expansion of the processing equipment scale. A large total capacity in refineries is not an indicator of economic scale; what truly affects economies of scale is the increased capacity of individual processing units. Refineries with a capacity of around 10 Mt/a are essentially combinations of multiple small-scale processing units, and they are far behind similar refineries abroad. For example, the nominal processing capacity of the Maoming refinery is 13 Mt/a, yet its processing units consist of 4 atmospheric and vacuum distillation units, 3 catalytic cracking units, 5 hydrofining units, and 3 lubricant production units; further development thus presents the difficult choice between renovation and construction of new facilities. To truly build refineries of international standard (spreading capacity expansions and upgrades across other smaller refineries is an even worse decision), it is necessary to construct larger-scale facilities. When the processing capacity is increased to 16–20 Mt/a, the old units must be discarded, and new plans must be developed with a maximum of 3 atmospheric and vacuum distillation units, 2 catalytic cracking units, 3 hydrorefining units, and 2 lubricant production lines, in order to truly reduce consumption, improve efficiency, and enhance flexibility. The group headquarters should establish guidelines for plant operation and construction scale, shut down plants that fall below these guidelines, and adjust them as circumstances evolve, thereby reducing the overall processing costs of oil refining and enhancing overall competitiveness. 3. Refinery upgrades and expansions also require knowing what to do and what not to do. Almost all oil refineries in China follow the same model, often combining various processing methods such as atmospheric and vacuum distillation, catalytic cracking, hydrocracking, coking, solvent deasphalting, visbreaking, MTBE production, and alkylation. It seems that the more methods used, the better, but this approach comes at a high cost. Currently, the operating rate of solvent deasphalting units is only 30%-40%, while the operating rates of viscosity reduction units and alkylation units are even lower due to insufficient overall capacity; approximately 20 Mt/a of crude oil processing capacity remains unused, which is the fundamental reason for the high processing costs in Chinese refineries. Therefore, new capacity expansion and construction efforts should be approached with caution. The period up to 2005 will be an important time for adjustment for Chinese refineries; those that truly need to expand their capacity should adopt specialized approaches, such as changing the concept of comprehensive gas utilization and using regional distribution of petroleum products to restrict the construction of small-scale gas utilization facilities. IX. **Resource and market policies should be formulated as early as possible.** At present, coordination and intervention are still used to manage oil resources and markets; however, with the development of a market-oriented economy, and especially after China’s accession to the WTO, this approach poses significant policy risks to the development of China’s refining industry. Countries around the world regard oil as a strategic resource for ensuring national economic development and **security; they have established regulations, policies, or emergency plans regarding the exploration of crude oil resources, their storage and allocation, the construction of refineries, oil product prices and supply, as well as international cooperation. In this regard, China still lacks such frameworks and experiences instability and a lack of transparency. It is necessary to develop relevant regulations and policies within 3 to 5 years at the latest, in order to ensure the stable development of the refining industry and to identify strategic measures. X. Seeking strategic restructuring partners globally: World oil giants carried out strategic reorganizations such as mergers and acquisitions ahead of the new century, aiming to complement each other’s strengths, expand their scale, and strengthen themselves, with the goal of establishing a more competitive dominant position in the fields of resources, technology, and markets in the 21st century. Based on projections of the development trends in resources and markets, after 2020 the international oil market will gradually enter a phase of intense competition. By the middle of the 21st century, the number of truly competitive oil companies that will be able to survive worldwide is likely to be less than one-third of what it is today. Undoubtedly, neither of China’s two major oil and petrochemical groups is capable of competing on the international stage on its own; between 2010 and 2020, they had to seek partners for new strategic reorganizations. The internal restructuring carried out by these two major groups holds great strategic significance for their future development. Once the joint-stock companies are established, they pave the way for cross-border restructurings, and it is not impossible to imagine some form of combination with companies such as Exxon, Shell, BP, and oil-producing countries. There are many ways to restructure. In a few years, the mindset of needing 51% control will be overcome; as long as overall control is achieved, as long as it serves the development of core business activities, and as long as control over key product markets can be secured, it is possible to consider restructuring by giving up control over certain projects or areas in exchange for control over other resources or products. Based on the historical patterns of the global oil industry, minor regional reorganizations take place every 10 years, while major global reorganizations occur every 20 years. Therefore, in 20 years, China’s refining industry and its oil and petrochemical companies will surely present themselves to the world in a completely new form. 4. Actively seek joint venture and cooperation models for construction. Refining operations operate within a narrow range determined by crude oil and refined product prices, which entails significant risks associated with expanding existing refineries or building new ones. Seeking cooperation from foreign parties can help share these risks; in particular, partnering with oil companies from oil-producing countries is very important as it enhances the reliability of resource supply. Following the restructuring, many oil refining companies can operate more efficiently, laying a solid foundation for international cooperation.