The \"ultimate rescue\" for Shandong’s local refineries: 21 companies plan to form a \"large-scale petrochemical complex\"”

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\"Ultimate Rescue\" for Shandong’s local refineries: 21 companies plan to form a \"large-scale petrochemical group\" – Report by our correspondent Zhang Yaotang from Qingdao, March 18, 2009, 1:04:37. The 21 local refineries in Shandong, which have faced difficulties on numerous occasions, are planning to establish the Shandong Petrochemical Group Company. A staff member from the Technical Transformation Department of the Shandong Provincial Economic and Trade Commission revealed in a telephone interview with our newspaper’s reporter on March 16 that this massive integration plan “is currently in the stage of seeking opinions from various departments”. This integration plan stems from the \"Guiding Opinions on the Adjustment and Revitalization of the Refining and Chemical Industry in Shandong Province\" (draft for comments) recently issued by the Shandong Provincial Economic and Trade Commission. The opinion states that Shandong “will use Shandong Petrochemical Co., Ltd. as a platform to integrate local oil refining enterprises in the province,” in order to concentrate resources, plan secara unified, and arrange things in a rational manner. It is understood that once this ambitious plan for large-scale petrochemical production is realized, Shandong Petrochemical Group Company will become the largest oil refiner in the region, surpassing Sinopec’s current capacity in Shandong. “The “Opinions” on the grand plan for large-scale refining and chemical production were drafted by the Shandong Petroleum and Chemical Industry Association. Procedurally, it also needs to be discussed at the provincial **executive meeting before it can be finally determined. ”An officer from the Technical Transformation Department of the Shandong Provincial Economic and Trade Commission told reporters over the phone, “It’s because the ‘Opinions’ address issues related to certain policies as well as enterprise restructuring and integration.” ”According to the Guidelines, following the consolidation and restructuring of the local refining industry in 2000, Shandong Province retained a total of 21 local refineries as a result of this process. By the end of 2008, the industry employed over 30,000 people, had total assets of around 40 billion yuan, and its capacity for primary processing of crude oil reached 45 million tons per year. In contrast, the three refineries owned by Sinopec, China’s largest oil refiner, in Shandong have a total crude oil processing capacity of less than 30 million tons per year. Despite having substantial production capacity, local refineries have been struggling to survive due to their inability to access the most essential oil sources and a lack of sales outlets, resulting in a continuous decline in their operational rates. According to monitoring data from China Chemical Network, by mid-March, the operating rate of local refineries in Shandong had dropped to a historical low of below 15%. “In fact, as early as 1999, Shandong had the idea of developing a large-scale petrochemical industry; the province wanted to establish a company for this purpose, but for various reasons, this initiative did not yield significant results. ”On March 16, a senior official from a refining company in Shandong told reporters, “The company simply spends a few tens of thousands of yuan each year to obtain the status of a governing member; there is no actual operational or management activity involved.” ”The person in question refers to Shandong Petrochemical Co., Ltd. mentioned in the Opinions. Initially, the company was established through voluntary joint investment by 21 surviving local refineries. The company’s main function is to strengthen horizontal cooperation in order to improve the economic efficiency and overall strength of the local refining industry. The representative of the aforementioned local refining companies in Shandong said that Shandong Petroleum and Chemical Co., Ltd. is essentially the Shandong Refining and Chemical Industry Association, and it has previously acted as the voice representing the interests of these local refining companies in Shandong. The individual said that without substantial restructuring and integration, it is simply impossible to resolve major issues such as oil sources and sales channels given the loose relationships among the local refining enterprises in Shandong. Regarding the concept of \"large-scale refining and chemical production\" proposed in the \"Opinions,\" reporters interviewed several senior executives from refineries in Shandong, all of whom expressed optimism about it. “A single company is weak and has a limited voice; by forming a group, it becomes easier to communicate with various departments, and the company’s demands can be expressed more readily. ”On March 16, Zhou Jingping, general manager of Shandong Jincheng Petrochemical Group Co., Ltd., said to reporters over the phone. The ultimate rescue of the industrial chain poses inherent challenges; domestic refineries, which have long had to survive in difficult conditions, often face hardships related to their sources of oil and sales channels. Whether Shandong’s vision of a large-scale petrochemical industry, which remains only on paper for now, can serve as a ultimate solution for the 21 local refineries in the region, depends ultimately on overcoming these two major obstacles. Whether it is possible to create openings in terms of oil sources to obtain **policy support, and whether it is feasible to effectively control the sales channels of local refineries, are important considerations. For a long time, local refineries have not had the permission to process imported crude oil; current policies do not allow such refineries to process imported crude oil ； The domestic crude oil allocation plan is only 1.7 million tons per year, which is insufficient to match the current production capacity of 45 million tons. With insufficient crude oil available for processing, domestic refineries are forced to turn their attention to fuel oil. As international oil prices had been on the rise earlier, it was profitable to process fuel oil, and encouraged domestic refiners quickly expanded their production capacity. By now, it’s impossible to stop; fuel oil has long become the lifeline for raw materials in the production of local refineries. The choice to process fuel oil into refined products was also a last resort; after the shift from fees to taxes, the significant increase in fuel taxes put this mode of production and operation at risk of rapid collapse. Under the latest tax reform policies, the consumption tax on fuel oil is the same as that on diesel; starting from January 1, 2009, the tax rate increased significantly from 0.1 yuan per liter to 0.8 yuan per liter. Based on this calculation, the consumption tax per ton of fuel oil is 811.6 yuan, a sharp increase of 710.15 yuan per ton compared to the previous unadjusted rate of 101.45 yuan per ton ； Given that value-added tax still has to be paid on the consumption tax portion, the actual additional cost per ton of fuel oil amounts to around 830 yuan. “This directly results in local refineries being unable to compete fairly with the two giants. ”On March 13, at the \"Second Shandong Local Refining Market and Development Summit\" organized by China Chemical Industry Network, Li Xinjiang, the person in charge of raw materials at Shandong Jingbo Petrochemical Co., Ltd., told reporters, \"The two major groups process crude oil, so they are not subject to this tax.\" ”“With current fuel oil prices of over 3,000 yuan per ton, and the ex-factory price of diesel being less than 4,000 yuan per ton – plus taxes of around 800 yuan – how is it possible to continue with its production? ”Director Zhu of the General Office of the Shandong Province Fuel Oil Association analyzed to the reporters. The huge losses finally made the company realize that the production model based on processing fuel oil would be unsustainable. The roads that were once unobstructed have become blocked under the combined pressure of policies and market forces, forcing local refineries to once again hope to obtain crude oil. With international oil prices remaining low, domestic refiners have long been eager to import crude oil. Regarding this core issue, the Guidelines also state that efforts should be made to **increase the planned quotas for crude oil, lift restrictions on domestic refineries’ use of imported crude oil, and secure the qualification for non-state-owned entities to import 10 million tons of crude oil per year. “As long as there is an oil source, companies have the incentive to take shares. ”The person in charge of the local refining enterprises in Shandong mentioned to the reporter, “We can follow the approach adopted by Shaanxi Yanchang Petroleum and integrate the local refining companies in Shandong into one entity, with a unified procurement and sales platform.” ”It is reported that, unlike other regions in the country, Shandong’s oil refining market features a production capacity of 45 million tons on the part of local refineries – a figure that exceeds that of all Sinopec-owned refineries in Shandong. However, Sinopec has its own distribution channels, while local refineries can usually only supply oil to private traders on a wholesale basis. Faced with fierce competition, Sinopec has to be cautious when setting local wholesale prices. “Everyone is most concerned about the oil source, but that is only part of the problem. ”The individual told reporters, \"Companies all want to maximize their profits; as long as there is a profit margin, they will operate at full capacity, which leads to overcapacity, falling product prices, and ultimately a vicious cycle of losses and reduced production.\" ”The integration roadmap: The integration of local refining enterprises in Shandong seems to align to some extent with the currently **advocated policy of favoring larger enterprises at the expense of smaller ones**. According to incomplete statistics, the production capacity of the petrochemical projects set to come online in China in 2009 was over 30 million tons, all of them being large-scale refineries. On March 5, Zhang Guobao, head of the **Energy Bureau**, said that as small refineries are phased out by the market or acquired by larger oil refining companies, China’s oil refining industry will undergo consolidation. For domestic refineries, \"one possibility is that, as market prices change, those that are not viable will simply disappear on their own.\" ”Zhang Guobao said that another possibility is being acquired by large state-owned oil companies. Regarding future integration, some local refineries say it is quite difficult. As a result of years of restructuring and integration, the property rights structure of current local refining enterprises in Shandong is complex, with many of them having joined central state-owned enterprise groups. By 2008, Sinochem Group had acquired, restructured, or taken control of six local petrochemical enterprises in Shandong, including Jinan Petrochemical Group, Jinan Great Wall Refinery, Zhenghe Group Co., Ltd., Shandong Huaxing Petrochemical Group Company, Shandong Changyi Petrochemical Co., Ltd., and Qingdao Anbang Petrochemical. CNOOC restructured Shandong CNOOC Petrochemical Co., Ltd.; as of now, there are still 13 purely local petrochemical enterprises in Shandong. After the release of the ‘Opinions’, there will surely be competition over who will end up being the one to carry out the final integration. Whether it is the locally-controlled Shandong Petrochemical Group or some other central-state-owned enterprise giant has become a focus of market attention. During the national ** period, Jiang Daming, the governor of Shandong Province, also said that he encourages local refineries in Shandong to form partnerships with large state-owned companies; such partnerships will help smaller refineries gain access to channels for selling crude oil and refined products. ”“Currently, in terms of the integration of local refineries, CNOOC has gone quite far ahead, holding absolute control over the enterprises it has integrated. ”The person in charge of the aforementioned local refining enterprise in Shandong said, “However, the ideal partner for integration for local refineries in Shandong is still Sinopec, as it has the most complete industrial chain.” Currently, the oil refining sector is facing overcapacity; Sinopec shows little interest, but it also does not want to see strong consolidators get involved. ”Previously, CNOOC’s stronghold in Shandong was Dongying. In early September 2008, after gaining control of Shandong Haihua Group, CNOOC restructured the local refining enterprise there, Shandong CNOOC Petrochemical Co., Ltd. Together with CNOOC Asphalt, for which investments had already been made earlier, these entities formed part of CNOOC’s business network. Although Sinopec does not have access to oil sources, its six refineries located in Shandong have begun to work together, with the goal of unified procurement and sales. http://www.21cbh.com/HTML/2009-3-18/HTML_7WKOPE9EIIRL.html 21st Century Network