Sinochem Quanzhou’s 12 million tons per year large-scale oil refining plant is set to start construction in June, with completion and operation expected by 2012

Thread Content

According to officials from Sinochem and Sinochem Quanzhou Petrochemical Co., Ltd. (referred to as Sinochem Quanzhou), Sinochem’s first wholly-owned refinery – the 5 million tons per year heavy oil processing project in Quanzhou – has been upgraded to a large-scale refinery with a capacity of 12 million tons per year. It has passed the approval of the National Development and Reform Commission, and construction is scheduled to begin in June 2009, with operation expected to start in 2012. Sources at Sinochem Quanzhou revealed that in addition to a vacuum distillation unit with a capacity of 12 million tons per year, the project also includes a coking unit with a capacity of 1.4 million tons per year, as well as a catalytic cracking unit with a capacity of 2.4 million tons per year; the focus of oil refining in this project will be on the production of refined oil products. The port and oil depot associated with this refining project will also be completed during the same period. The preliminary foundation work for the project is now nearing completion. According to another insider at Sinochem, significant changes have been made to Sinochem’s current project planning and initial design. According to the original plan, Sinochem Quanzhou Refinery was to be built in two phases; the first phase involved the processing of 5 million tons per year of heavy oil, along with associated port facilities and storage/logistics infrastructure, with commissioning expected by the end of 2009 ； Phase 2 plans to expand the refining capacity to 12 million tons per year. However, since this does not comply with the principle set out in the **Special Plan for the Medium- and Long-Term Development of the Refining Industry**, which requires that new refining projects have a capacity of over 8 million tons per unit, no substantial progress has been made on the refining project, even though Sinochem Quanzhou Petrochemical Co., Ltd. was established as early as September 2006. Some market analysts speculate that Sinochem Quanzhou Refinery’s slowdown in project construction and delay in starting operations are closely related to the current financial and economic crisis affecting the world. “If production resumed at the original schedule, refineries would inevitably face an economic downturn and low demand. It is expected that by 2012, the overall economic situation will have improved significantly, making it a good time to start production,” said the person. However, representatives from Sinochem did not respond to this claim. To ensure a sufficient supply of raw materials for the Quanzhou refinery, as early as the beginning of 2008, Liu Deshu, president of Sinochem Group, publicly stated that the company had signed letters of intent with Saudi Arabia and Kuwait, whereby those two countries would supply crude oil to the Sinochem Quanzhou refinery. It is understood that Sinochem Quanzhou Refinery is the first refining project fully invested and built by Sinochem Group Corporation, with the foundation laid as early as December 28, 2007. Sinochem Group Corporation (referred to as “Sinochem”) is a key state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the State Council. It has been included in Fortune’s Global 500 list 18 times, ranking 257th in 2008. Agriculture, energy, chemicals, finance, and real estate are its five main business areas. 20 billion in petrochemical investment coming to Quanzhou; Sinochem’s dream of a complete oil refining industry has come true. Liu Deshu’s dream of having an oil refining industry has finally been realized – a dream he has pursued for nearly 20 years. 　　Liu is the president of Sinochem Group (abbreviated as Sinochem). Since taking charge of the company in 1998, he has aimed to turn Sinochem into a large enterprise that covers the entire petroleum industry chain. 　　“Sinochem’s project has already started construction, right next to Fujian Refining & Chemical. ”On March 4, a senior official from the Quanzhou government revealed: “Once completed and put into operation, it will become a large-scale petrochemical production base with a processing capacity of 12 million tons, integrating oil refining and chemical manufacturing.” ” 　　This move is of great significance for Sinochem: its business will cover the entire oil industry chain, allowing it to engage in genuine competition with companies such as Sinopec and CNPC (10.95,0.12,1.11%) ； For the domestic refined oil market, Sinochem’s entry marks the emergence of a diversified supply chain; “the reason why the refined oil pricing mechanism has not been able to rely on market-based pricing over the years is that the supply channels have been monopolized by two major groups.” An official from the *Energy Bureau* said. 　　20 billion invested in Quanzhou Quanzhou is located on the west coast of the Taiwan Strait, with a coastline stretching 421 kilometers. It has many deep-water ports, making it the ideal location for establishing large-scale petrochemical complexes. 　　For this reason, Sinopec established the Fujian Refining and Chemical Complex here in 1989 ； Around the year 2000, ExxonMobil and Saudi Aramco were granted permission to take stakes in domestic refineries, and they chose Fujian Refining & Chemical as the only opportunity for such investment. The three shareholders then jointly invested $5 billion to complete the expansion and modernization of Fujian Refining & Chemical in 2008. 　　“Sinochem initially intended to build a 5 million-ton integrated refining and chemical project here, but this did not meet the approval standards set by the National Development and Reform Commission for new oil refining and chemical projects. ”According to people familiar with the matter. 　　In order to obtain approval from the National Development and Reform Commission, Sinochem’s senior management decided to take a risk and increase the scale of the project to 12 million tons, raising the total investment budget for the project to around 20 billion yuan. 　　Previously, Sinochem was mainly engaged in the import and export trade of crude oil; \"international trade was its strength, while project construction and industrial production were not its areas of expertise.\" To build and operate such a large-scale project, it lacked the necessary human resources and experience. 　　“We are recruiting staff from all over; many technical managers from CNPC and Sinopec are also willing to join the petroleum division of Sinochem. We believe that once the project is put into operation, we will be capable of managing this enterprise effectively. ”A senior executive at Sinochem said. 　　According to him, once the project is put into operation, Sinochem will utilize its years of experience in crude oil import and export trade to supply crude oil to the Quanzhou project, while the refined oil and chemical products produced by this project will be sold through Sinochem’s wholesale networks across the country. 　　“The location here has clear advantages: it is adjacent to the Yangtze River Delta and Pearl River Delta, two major economic regions with strong demand for refined oil and chemical products. In particular, Guangdong and Zhejiang provinces have long relied on imports of refined oil resources; once the Quanzhou project comes online, it will be able to quickly fill this market gap. ”The aforementioned Quanzhou* official said. 　　More importantly, Guangdong and Zhejiang are home to many private wholesale and retail outlets for refined oil products; these private enterprises have long relied on CNPC and Sinopec for their supply of such products, and have suffered greatly under the monopoly. With Sinochem entering the refined oil wholesale sector, these private enterprises now have more options. 　　“In order to maintain the normal production and operation of the Quanzhou project, Sinochem must rely on our sales channels, which gives us more power in terms of pricing; whereas CNPC and SINOPEC have their own gas stations. ”A private entrepreneur from Guangdong said. 　　He believes that for a long time, Sinochem has had few retail outlets, which is why it does not hold a significant position in the refined oil market. Once the Quanzhou project comes online, it will need to sell at least 700,000 tons of refined oil per month, representing considerable pressure; this represents a good opportunity for private enterprises to expand. 　　Liu Deshu’s oil dream comes true. Sinochem has long desired to enter the refined oil market; as early as ten years ago, when Liu Deshu was the president of Sinochem, he began planning to develop the company’s presence in the oil sector. 　　The predecessor of Sinochem Group was the China National Chemical Import and Export Corporation, which was responsible for the import and export of fertilizers, crude oil, and other chemical products in China. It functioned as a trading entity and had a very glorious past. “Before 1993, all domestic crude oil import and export operations were under the control of Sinochem, which was a major source of foreign exchange earnings in the country at that time. ” 　　However, import and export companies were a product of a specific period in China’s economic development. As the country’s economy has grown and domestic import and export policies have changed since joining the WTO, domestic enterprises will become increasingly connected to international markets, and the era of relying on import and export companies for external connections is coming to an end. Liu Deshu believes that if Sinochem continues down the old path of export trade, it will find it difficult to survive in the future. 　　Liu Deshu aspires to successfully transform Sinochem from a trading company (a general trading firm) into an industrial enterprise that combines technology, manufacturing, and trade during his tenure, with the goal of turning Sinochem into the \"China GE\". 　　During meetings, he often encouraged his subordinates by saying, “GE’s success is attributed to the rapid development of the U.S. automotive industry, while Sinochem Group places its hopes in China’s petroleum industry.” ” 　　Sinochem has access to crude oil import channels as well as the qualifications for the wholesale and retail of refined petroleum products; what it lacks is a large-scale refinery. 　　In 2003, Sinochem planned to build a large oil refinery in Jinan, but it did not receive **approval ； In 2005, Sinochem attempted to spend $560 million to acquire Incheon Refinery, South Korea’s fifth-largest refinery and one that was on the verge of bankruptcy. Unfortunately, this attempt was thwarted by Citibank, the unsecured creditor of Incheon Refinery, and it ultimately failed ； Soon after, Sinochem submitted another request to the National Development and Reform Commission to build a large-scale refinery in Zhoushan; unfortunately, it still hasn’t been approved yet… This time, the Quanzhou project can finally be launched, which is a great relief for Sinochem as well as for the group’s senior executives such as President Liu. ”The above are the sentiments expressed by the senior officials. 　　Shift in the landscape: Since international oil prices remained high in 2003, the existing pricing mechanism for refined oil products has been the subject of criticism from various parties. However, the **National Development and Reform Commission**, which is responsible for formulating this pricing mechanism, has its own considerations. 　　“At present, the domestic refined oil market is controlled by CNPC and Sinopec; once the prices of refined oil are linked to international rates, market manipulation is likely to occur. Therefore, we have always believed that a diversified market supply system should be established first, before market prices can be gradually liberalized. ”The aforementioned **Energy Bureau* official said. 　　He believes that CNPC currently holds a firm grip on dominance in the northern market, while Sinopec dominates the southern market. Although local refineries in Shandong and Yanchang Petroleum in Shaanxi also supply refined oil to the market, their scale is too small to challenge the market dominance of the two major players. 　　“CNOOC, Sinochem, and others all have their own sources for purchasing crude oil; in the past, due to the lack of refineries, they were forced to sell their resources to Sinopec. With the commissioning of CNOOC’s Huizhou project and the launch of Sinochem’s Quanzhou project, a diversified structure is emerging in the refined oil market. ”He said. 　　In countries such as the UK and the US, the oil industry is also characterized by oligopoly; upstream crude oil extraction and midstream refining are largely dominated by multinational oil giants such as ExxonMobil, BP, and Shell. However, the wholesale and retail sector of refined oil downstream faces fierce competition: weaker refined oil wholesalers and retailers can obtain refined oil supplies from various sources such as ExxonMobil, BP, and Shell, which further intensifies competition in the market.