Aiming at Japanese refineries: CNPC accelerates overseas acquisitions in downstream industries

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　　April 14th – While continuing to increase its overseas acquisitions of upstream resources, CNPC is also accelerating its acquisitions of downstream resources abroad. Our newspaper’s reporters learned from relevant sources on April 13 that CNPC is acquiring a Japanese refinery. 　　At the recently concluded 4th Petrochemical Summit, Hu Jie, the chief engineer of CNPC’s refining and chemical division, revealed this information; however, he said that the purpose of acquiring this refinery was not merely to obtain its refining facilities, but rather to strengthen cooperation with the refinery’s parent company. 　　CNPC did not disclose the name of this Japanese refinery in detail. However, a staff member in charge of media relations at New Japan Petroleum’s Beijing office confirmed to our newspaper that the refinery acquired by CNPC is owned by New Japan Petroleum. 　　The official said that the details regarding how CNPC will take a stake in the company are still under discussion. The two parties had planned to establish a joint venture in April this year, but that plan has been postponed; “there is no specific timeline yet.” 　　Japan and China join forces. New Japan Petroleum Corporation is Japan’s largest oil importer and distributor, as well as its biggest oil refiner; it operates 9 refineries with a refining capacity of over 1.3 million barrels per day. The company holds a 23% share in Japan’s gasoline market and operates over 13,100 gas stations. 　　Since 2004, the company has been providing refining services to CNPC. The daily processing volume increased from the initial 40,000 barrels per day to 70,000 barrels per day during the 2007–2008 period. Meanwhile, starting in 2007, Nippon Oil supplied propylene and other resin raw materials to CNPC. 　　It is understood that as its first investment project in Japan, CNPC Group began negotiations as early as last May regarding the acquisition of 49% of the shares in this Japanese refining company operated by Nippon Oil. 　　This refinery is located in Osaka, a city in western Japan, with a processing capacity of 115,000 barrels per day. As planned, CNPC Group will supply crude oil to this refining company, with the processed petroleum products being sold in China. 　　Price is likely to be one of the reasons for the joint venture’s delayed establishment. 　　“A cautious atmosphere has restricted trading activities, and the sharp drop in oil and gas prices in a short period of time has created a disparity in price expectations between buyers and sellers, making it difficult to reach deals. ”Xu Yongfa, director of the PetroChina Economic and Technical Research Institute, said that some deals that had originally been agreed upon are being postponed due to such an economic environment. 　　According to the data provided by Xu Yongfa, the upward trend in international oil and gas M&A activities since 2002 began to decline rapidly in the second half of 2008. In 2008, the value of upstream M&A transactions in the global oil and gas industry declined by 45% compared to the previous three years. Among them, company-level M&A deal values dropped by 47%, while asset-level M&A deal values saw their first decline in 6 years. 　　“Historical experience shows that continuous declines in oil and gas prices often lead to a wave of mergers and acquisitions within the industry, and such a wave of integration is bound to occur as well. ”But Xu is likely to appear in the second half of this year. 　　Technical crisis: If the acquisition of this Japanese refinery goes through, it will mark the beginning of CNPC’s acquisitions in the downstream sector. Hu Jie said that CNPC pays close attention to overseas M&A opportunities; “It not only focuses on the acquisition of upstream resources but also looks for targets in the downstream sector, with the difference lying in the areas of focus.” ” 　　“We hope to acquire technologies, management experience, and even management personnel by purchasing downstream resources. ”Hu Jie said that CNPC’s targets for downstream acquisitions are mainly developed regions such as Europe, the United States, and Japan. 　　CNPC is China’s largest oil company, but its downstream technologies and production capacity still fall short of those of Sinopec, which ranks second. Sinopec is not the most formidable opponent; in the coming years, CNPC’s petrochemical products are likely to face competition from the Middle East. 　　According to data from the PetroChina Economic and Technical Research Institute, global refining capacity is set to increase by 750 million tons between 2009 and 2013. This additional capacity will come mainly from new projects or expansions in the Asia-Pacific and Middle East regions, with China and India accounting for 25% of this increase, amounting to 188 million tons ； The Middle East accounts for 20%, with an additional capacity of 155 million tons. 　　“The target markets for new petrochemical facilities in the Middle East are Western Europe and China; should the Western European market face obstacles, petrochemical products from Eastern Europe will inevitably be exported on a large scale to China. ”Andrew Spiers, senior vice president for the global chemicals sector at Nexant, a global consulting firm in the chemicals industry, said that within just a few years, the share of chemicals exported to China will rise from 3% of total Middle Eastern production to 20%. 　　Due to its unique resource endowments, the Middle East has maintained a cost advantage. Taking ethylene as an example, its production cost can be as low as 100 dollars per ton, whereas the average production cost of ethylene from naphtha cracking units in China is as high as 530 dollars per ton. 　　“Our country once promised the Middle East that a 5% tariff on products from that region entering China would remain unchanged for a long time. ”Chu Futong, deputy general manager of Zhongji Shenzhen Mineral Resources Company, told our newspaper that the predicament faced by Chinese chemical products can be imagined under such circumstances. The company has recently started importing chemical products from the Middle East. 　　Hu Jie believes that if it were only the advantage of raw materials, Middle Eastern products would not be so devastating. “The Middle East not only has the most advanced refining facilities, but also leads the world in terms of technology and management standards; moreover, the people who operate these refining facilities are quite Westernized,” Hu Jie believes that China does not have any advantages in these areas. 　　“To counter the impact of Middle Eastern petrochemical products, Sinopec has introduced the world’s most advanced technologies in locations such as Tianjin and Zhenhai to build integrated refining and chemical projects, with the aim of reducing production costs. ”An anonymous source from the Refining and Chemical Engineering Institute of CNPC’s Planning General Institute told our newspaper that CNPC does not have such plans at present. 　　“In the future, CNPC will increase the scale and pace of refinery construction in southern China, with a focus on strengthening cooperation with resource-rich countries in exchange for resources. ”However, Hu Jie said that the possibility of establishing a joint venture refinery to introduce technology is low. 　　According to Hu Jie’s logic, CNPC’s task of introducing downstream technologies needs to be accomplished through overseas acquisitions. 　　And at this moment, opportunities arose one after another. 　　Since the drop in oil prices last July, the stock prices of major international oil companies have averaged a 40% decline, those of large independent oil companies have fallen by 50%, while medium and small independent oil companies have seen an average decline of 60%; some smaller companies have experienced declines of over 70%. 　　The situation is even worse for petrochemical companies; according to Andrew Spiers, from last July to February this year, Dow Chemical’s stock price dropped by 71%, Huntsman Corporation’s stock price fell by 88%, and Nova Chemicals’ stock price declined by 93%. 　　“We negotiated the acquisition of one of those three chemical companies last year, but the deal fell through due to price issues; however, with prices now so low, things might change. ”Hu Jie told our newspaper. 　　Previously, our newspaper reported on CNPC’s plan to increase its overseas oil and gas equivalent production from 60 million tons to 200 million tons over the next 10 years or so. Has CNPC also drawn a strategic blueprint for the downstream sector? 　　Hu Jie said regarding this: “There are no specific targets at the moment; the capacity to be acquired will depend on the circumstances. But it is certain that CNPC will accelerate its international acquisition activities in the downstream sector.” ”