. Changes in the production capacity and plant structure of local refineries in Shandong,

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In 2017, the total refining capacity of local refineries in China reached 272 million tons, accounting for 31.41% of the country’s total refining capacity, a decrease of 1 percentage point compared to the previous year. Shandong remains the region in China with the largest number of local refineries and the most concentrated distribution of such facilities, accounting for 63.73% of the country’s total capacity for local refining; other regions such as the Northwest, North China, and Northeast also have a considerable number of local refineries. Specifically, in 2017, the total refining capacity of the crude oil processing units (atmospheric and vacuum distillation) in Shandong’s local refineries was 173.25 million tons per year, an increase of 7.9 million tons or 4.78% compared to the previous year. The average refining capacity was 2.67 million tons per year, with a slower growth rate compared to the two years prior. Since the beginning of this year, the production capacity of the atmospheric and vacuum distillation units in Shandong’s local refineries has continued to increase, mainly due to certain expansions or new constructions of the primary refining capacity at some of these refineries. Overall, however, the growth rate of crude oil refining via atmospheric and vacuum distillation processes continued to slow down in 2017. New refineries were mainly built for secondary and tertiary processing purposes, with hydrogenation and reforming units accounting for a significant proportion of both newly built and under-construction facilities. II. In terms of secondary and tertiary processing units, in 2017 the capacity of catalytic cracking units (including heavy oil catalysis) was 55.12 million tons per year, an increase of 2.55 million tons per year or 4.85% compared to the previous year ； The capacity of the hydrogenation unit is 76.57 million tons per year, an increase of 8.72 million tons per year or 12.93% compared to the previous year. The capacity of other units such as reforming, steam cracking, MTBE, and alkylation plants has also increased. ? In terms of the composition of local refining facilities, since the beginning of this year, there have been some subtle changes in the proportion of refineries controlled by central state-owned enterprises such as Sinochem, CNOOC, and Sinochem International. Data held by JLCC shows that as of 2017, the six refineries under Sinochem (Huaxing, Zhenghe, Changyi, Anbang, Great Wall, and Huaer) had a total primary processing capacity of 22 million tons per year. Among the 3 refineries owned by CNOOC (CNOOC Dongying, CNOOC Asphalt, and HAIHUA), only CNOOC Asphalt has its processing capacity in operation, with a capacity of 4.5 million tons per year; meanwhile, HAIHUA’s atmospheric and vacuum distillation unit with a capacity of 3 million tons per year, as well as CNOOC Dongying’s unit with a capacity of 3.5 million tons per year, are under construction. One refinery under Sinochem International (Hongrun) has a primary processing capacity of 10.7 million tons per year. Entering 2018, the pace of capacity expansion for single units at local refineries will continue, but it will slow down further. In recent years, in order to apply for the right to import crude oil, local refineries have completed the renovation and upgrading of their facilities well in advance. Furthermore, the excess refining capacity in China is becoming increasingly apparent, and competition in the refined oil market is fierce. Relying solely on the development of the refining sector to boost profits has become more difficult. Moreover, against the backdrop of accelerating upgrades to oil products in China, simply expanding existing refining facilities is no longer sufficient to meet the demands for improved product quality. In the long term, the number of upgrades and expansions to primary refining units at local refineries will continue to decline. As domestic refineries process more imported crude oil and face strict tax controls, in order to maximize their refining profits, these refineries will move toward more advanced processing methods, thereby creating an integrated upstream and downstream refining and chemical production structure, particularly in terms of the construction of reforming, hydrogenation, and other downstream chemical processing facilities. Specifically, the reforming units with a capacity of 1.2 million tons per year each at Zhenghe Petrochemical, Huaxing Chemical, and Kenli Petrochemical are set to go into operation by the end of the year. Shengxing Chemical, Yuhuang Shengshi, and Yatong Petrochemical all have reforming units under construction, and some of these units are also expected to come online in 2018, thereby increasing the prevalence of reforming units in domestic refineries. In addition, the number of new units such as diesel and gasoline hydrogenation plants, catalytic cracking units, and residue hydrogenation units is continuing to increase. The overall refining capacity of local refineries will **improve**, thereby serving as an important source to supplement domestic refined oil supplies.