Preliminary analysis of Chinese refineries – worth paying attention to!

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The \"Action Plan for Air Pollution Prevention and Control\" issued by the State Council aims to accelerate the improvement of the quality of refined petroleum products through special initiatives, in order to meet increasingly stringent emission standards. This is an important measure for improving the environment, addressing pollution such as fog, promoting green development, and enhancing people’s well-being. It also helps to boost investment, facilitate technological upgrades in enterprises, and increase consumer demand. The meeting decided to accelerate the production and supply of clean petroleum products, striving to complete the upgrade of refined oil quality ahead of schedule. First, the areas where vehicle gasoline and diesel meeting National V standards have been supplied since January 2016 have been expanded from the originally designated key cities in regions such as Beijing-Tianjin-Hebei, the Yangtze River Delta, and the Pearl River Delta to all 11 provinces and municipalities in the eastern region. Secondly, the timeline for nationwide supply of vehicle gasoline and diesel meeting National Standard V was advanced from the originally planned January 2018 to January 2017. Third, increase the supply of high-standard regular diesel; nationwide supply of regular diesel meeting National IV and National V standards will begin in July 2017 and January 2018, respectively. To accomplish the above tasks, oil refining companies will increase investment in technological upgrades by approximately 68 billion yuan, which will further stimulate effective investment and production in related industries such as equipment manufacturing. Relevant departments and local authorities should ensure good coordination and provide enhanced support. Strict standards and enhanced supervision are needed to accelerate the improvement of oil product quality. 1. General situation of Chinese refineries: China’s annual processing capacity is 690 million tons, compared to around 930 million tons in the United States. China ranks second in the world in terms of refining scale, right after the United States. Refining technology in China has made significant progress over the years. Among them, the proportion of hydrogenation capacity in China’s total processing capacity rose from less than 20% in 2000 to around 40-50% at present, with some newly built refineries with a capacity of tens of millions of tons having reached 100%. Overall, the technical and economic standards of Chinese refineries are generally on par with world standards, with some even exceeding them. 　　 According to the Nelson coefficient, some refineries in China are on par with world standards. Table 1: Nelson coefficients of Chinese refineries. It can be seen that the complexity level of Sinopec’s refineries is quite high in China; among them, Zhenhai Refinery has a Nelson coefficient of around 12, while Maoming Petrochemical has a coefficient of around 11.3. These values represent the direction in which refineries in China will develop in the future. However, the scale of the specific equipment still lags behind world standards to some extent. Against the trend of larger processing units worldwide, the scale of facilities in Chinese refineries remains relatively low. The largest known scale for a single set of units is as follows: 10 million tons for atmospheric and vacuum distillation units, 2.8 million tons for hydrocracking units, 2.6 million tons for continuous reforming units, and 5.5 million tons for delayed coking units. 1.1 Distribution of Refineries in China Figure 1: Distribution of Refineries in China As can be seen from Figure 1, the geographical distribution of refineries is generally consistent with China’s level of economic development. Among them, the production capacity of refineries in East China accounts for about 35% of the national total, that of refineries in South China accounts for around 16%, and that of refineries in Northeast China accounts for approximately 18%. The production capacity of refineries in South China is slightly lower compared to the level of economic development there, whereas the production capacity of refineries in Northeast China is slightly higher relative to that region’s economic development level. Therefore, the relatively uneven distribution of refineries in China results in a large amount of oil from the north moving southward during peak periods of oil consumption. To address this issue, Chinese refineries are also investing heavily in building new refineries in the South China region in order to alleviate such contradictions. 1.2 Regional characteristics of Chinese refineries As for Chinese refineries, their characteristics are also quite distinct. Most areas of the northern refineries process domestic crude oil as well as low-sulfur light crude oil imported from Russia. Based on the type of crude oil processed, they can be divided into two categories. One category involves processing low-quality crude oil with a low API value; in such cases, the plant facilities are mainly centered around coking or asphalt production units. The other category involves processing low-sulfur, light crude oil, with lubricant production units also being part of these facilities. Two typical refineries are Daqing Petrochemical and Jinzhou Petrochemical. Coastal refineries primarily process imported crude oil, with most of it being crude from the Middle East, having an API value of 25–31 and a sulfur content of 2.1–3.2%. These refineries are equipped with numerous hydrogenation units, and their Nelson coefficients are also relatively high. Typical examples include Zhenhai Refining & Chemical, Maoming Petrochemical, and Dalian Petrochemical. Most of the refineries along the river process imported crude oil as well as crude oil transported via the Shengli pipeline system. Most of these refineries are equipped with residue hydrogenation units, while some are equipped with hydrocracking units. A typical example is Jiujiang Petrochemical. Most of the inland central China refineries process domestic crude oil, and their structure is relatively simple. 2. New capacity additions in Chinese refineries: According to statistics from consulting firms, it is estimated that the total domestic refining capacity will reach around 700 million tons per year by 2015, and this figure is expected to exceed 800 million tons per year by 2020. Most of China’s new production capacity is located in the East China and South China regions; for various reasons, some capacity has also been added in the Southwest region. For details, see Table 2. Table 2: New refinery capacity across the country http://mmbiz.qpic.cn/mmbiz/35JHtweQnntkwF2fYVMrg4myroBmBRicFrVmMozkSSTLfAhtmvZsU145ZS1iawRMJq4JSv2Gic02DU9yvPS3qnE2A/640?wx_fmt=jpeg 3. Situation of domestic refineries in China: The primary processing capacity of refineries in Shandong reaches an astonishing 110 million tons per year (according to consultants, it’s 130 million tons); their Nelson coefficient is around 4.4 on average, with Shida Technology being a typical example. The highest value is around 12; typical examples are local refineries such as Jingbo and Zhenghe, with a capacity of around 5 million tons. The average scale of local refineries in Shandong is around 3 million tons, with Dongming Petrochemical being the largest, having a capacity of 10 million tons. A typical example of a company with a high Nelson coefficient is Jingbo Petrochemical. Table 3: Major production units of Jingbo Petrochemical (in 10,000 tons) http://mmbiz.qpic.cn/mmbiz/35JHtweQnntkwF2fYVMrg4myroBmBRicFx0D6enicw5SwhUDQz1Dh5v3hxjjoj7VdNmwxHJZgRMgN5HPOGuJp8VA/640?wx_fmt=jpeg Jingbo Petrochemical makes very efficient use of its various production units; in addition to the conventional refining facilities such as distillation, catalytic cracking, and hydrogenation units, it also has specialized units that are not found in traditional refineries, such as those for producing methanol, methyl rubber, and thiourea. Its industrial chain is also quite extensive; during economic downturns, it produces more chemical products and reduces the output of petroleum products, giving it relatively strong resilience to risks. Some local refineries have even expanded into the coal chemical industry; for example, Zhenghe Petrochemical has a combined oil-coal chemical production capacity of 2 million tons, while Lijin Petrochemical produces phthalic anhydride and isoprene-based rubber products. The characteristic of large-scale local refineries is their tendency to pursue scale expansion, increasing their primary and secondary processing capacities in order to reach the designated standards. Develop in areas with unique strengths, such as coal chemical industry and specialty plastics, etc. Compared to larger domestic refineries, the operating space for some smaller ones is reduced. Limited by their financial resources, they have no choice but to shift toward the chemical industry, by cooperating with large refineries as downstream facilities or by developing their own chemical production facilities. It is estimated that medium-sized local refineries will face considerable difficulties in the future, as the upgrading of the quality of fuels produced by Russian refineries means that there will be fewer high-quality, cost-effective fuel oil resources available, resulting in narrower profit margins. 3.1 Northeastern Refineries: Most of the northeastern refineries rely on oil fields near Panjin for their operations, with a production capacity of around 10 million tons. Some of these refineries are planning to build new plants with a capacity of 10 million tons. A typical example is Panjin Northern Asphalt Fuel Co., Ltd. Utilize local crude oil resources to produce high-grade asphalt and lubricants. 3.2 Others: Some local refineries in the South and Ningxia are of smaller scale, with a combined capacity of around 10 million tons; most of them focus on processing fuel oil, and their operation rates are low. Or focusing on the processing of C4 resources to produce MTBE and aromatized oil. 4. Future development trends of refineries: In recent years, due to the rapid growth in China’s refining capacity, the load factor of crude oil processing units has been declining; in 2014, it was only 66.5% on average nationwide. Among them, the average load factor of key companies such as Sinopec, CNPC, and CNOOC’s Huizhou refineries is around 85% (and over 90% when calculated based on their overall capacity); the average load factor of other refineries is only about 35%, which is more than 50 percentage points lower than that of the key companies. Most refineries are operating with excess capacity, but as regulations on the refining industry are relaxed, restrictions on private enterprises entering the oil refining sector are also gradually decreasing. 4.1 Thriving domestic refineries: With the introduction of several policies such as the \"Notice on Issues Related to the Management of Imported Crude Oil\" and the \"Action Plan for Air Pollution Control\", regulations on domestic refineries have been gradually relaxed. Once these refineries meet the required standards regarding oil quality and crude oil storage capacity, restrictions on crude oil imports will be lifted, which will encourage well-funded refineries to expand their operations and add more hydrogenation units. It is expected that domestic refineries will exhibit several characteristics: 1) A large number of companies will expand upstream; typical examples include Hengyi Petrochemical and Tenglong Aromatics, which are expanding upstream to secure raw materials and increase profits by building more refining facilities. It is estimated that by 2020, the refining capacity of PTA manufacturers will be around 50 million tons. 2) The local refining industry is experiencing severe polarization and will develop in two directions: larger firms will grow even bigger, while smaller firms will focus on developing unique characteristics. 3) There will be an increasing number of distinctive enterprises with unique products and strengths. 4) He who controls the terminals controls the world; he who controls the gas stations controls the profits, and competition for building gas stations will become increasingly fierce. 4.2 Overcapacity and low operating levels of refineries: There is a certain discrepancy between the capacity of China’s refineries and the actual demand for petroleum products in the country; therefore, low utilization rates of these refineries will become the norm in the future. At present, the operating rate of local refineries generally changes in line with fluctuations in crude oil prices. Given their capacity of around 130 million tons on average and approximately 200 million tons in the long term, a low operating rate has a significant impact on the production capacity of petroleum products. Secondly, the capacity of refineries that are the main focus of operations, amounting to around 650-700 million tons, also affects the production capacity of petroleum products. Compared to local refineries, the trend will be to shut down smaller refineries and those that are not profitable, while increasing the operating capacity of larger refineries that perform well financially. Once again, the gross profit margins of refineries will continue to decline, and certain reforms within the Big Three oil companies will be put on the agenda. 5. Conclusion: The era of huge profits in the oil refining industry is over, and it is difficult to predict the next period of prosperity. It is foreseeable that refineries will continue to operate with low profits for a long time, and overcapacity in this sector will lead to waves of mergers and closures among refineries. As crude oil prices fall, many chemical companies will move upstream in order to maintain their profits. Meanwhile, coal chemical industry, due to strategic considerations, will be developed in a moderate manner under established rules of the game. In the future, as a major market, China will become a focal point for patent holders to compete for; those who gain control of China will be able to survive.