Chinese language - Balancing Act

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Balancing Act
By WANG YU (China Daily)
Updated: 2007-09-24 07:17

As the locomotive that is the Chinese economy pushes forward,
oil-refining capacity needs to pick up to fuel the engine.

How to do that is a dilemma confronting the country's economic planners,
since it is difficult to find a way for capacity and efficiency to
co-exist.

China's long- and medium-term plan, set two years ago to increase oil
refining and ethylene producing capacity, has been subject to regular
revisions and upgrading as the nation's economy continues to grow and the
demand for refined oil products and petrochemicals as industrial raw
material shoots up.

But the capacity hike should match the stringent criteria of efficiency
and competitiveness, Zhao Zhiming, executive vice-president of the China
Petroleum and Petrochemical Equipment Industry Association, tells China
Business Weekly.

"The overall capacity for oil refining and petrochemical production
should be enhanced to meet the soaring demand. There should be no doubt
about that. The capacity within a single project, however, needs to be
guaranteed to reach a certain level, for the sake of efficiency and
competitiveness enhancement," Zhao says.

Operators of smaller projects that do not meet single project capacity
requirements are now figuring out ways to apply with labels other than
ethylene and refining plants, Zhao says.

Earlier this month a stunning media report quoted an anonymous source
saying China National Petroleum Corp, PetroChina's parent company, and
China Petrochemical Corp, known as Sinopec Group, plan to build 30 oil
refineries over the next three years at a cost of at least 200 billion
yuan.

The report says Sinopec Group plans to build at least 20 refineries, each
with an oil-processing capacity of 10 million tons, over the next two to
three years.

Asia's top refiner Sinopec refused to comment on the report. "Usually we
do not leak our plan for future development on new refineries or anything
else. We do not have a clue as to where the information is from," says a
senior Sinopec press manager.

Refining capacity

Taking into consideration China's overall refining capacity increase, the
report may not be out of thin air, Zhao says.

"Bearing in mind that China may hike refining capacity to 400 million
tons per year by 2010, the 30 refineries are not too much to meet the
target," he says.

The bulk of the 30 refineries referred to in the report are actually
expansions and upgrades of existing facilities. Only a few plants will be
newly constructed, Zhao says.

There may be some small projects that do not meet single capacity
standards but use other names to get the industrial watchdog's approval
among the reported 30 refineries.

The minimum single-project capacity should be 10 million tons. Otherwise,
the plant lacks competitiveness both at home and abroad.

"We have to let go of projects from a global perspective. Only in this
way can these new plants defend from global competitors," Zhao adds.

Refineries built in the Middle East usually have access to cheaper crude
oil. If Chinese refineries are smaller in single project capacity and
lack efficiency, they will be further locked in an underdog position.

China's long- and medium-term plan set in 2005 to increase oil-refining
capacity states that there will be about 20 refineries newly built or
expanded around the country to meet surging oil demand.

The plan is subject to frequent changes and updates because of
ever-changing market circumstances. It is inevitable that the country
will come up with more and larger refineries and ethylene crackers than
expected, Zhao says.

China's oil demand will hit 455 million tons while the country's total
refining capacity will surpass 400 million tons by the end of the 11th
Five-Year Plan from 2006 to 2010, according to a think-tank affiliated to
CNPC.

From now until 2010, China's average annual oil demand will grow at 6.5
percent per year. Oil demand will reach 455 million tons in 2010, Gong
Jinshuang, a senior analyst at the CNPC's economic and technology
research institute, tells China Business Weekly.

According to a national industrial deployment plan, there will be many
refineries and ethylene crackers on stream by 2010, while 18 million tons
of ethylene will be produced by 2010.

The country's refineries will run at 90 to 95 percent capacity by 2010,
Gong says. Meanwhile, ethylene output will hit 15 million tons by 2010.
China's ethylene output was 9.41 million tons last year, up 24.5 percent
year-on-year.

Equipment sector spurred

The increase in refining and ethylene capacity will spur the development
of the related equipment building and manufacturing segment.

"The growth rate for the petrochemical equipment sector has witnessed
astonishing growth momentum during recent years, as a result of fast
expansion of petrochemical production," Zhao says.

Some equipment building segments have experienced growth rates of up to
50 to 100 percent, Zhao says.

"As long as global oil prices stay high and investment keeps flowing into
the petrochemical area, then it will be no surprise to see the
petrochemical equipment manufacturing business flourish."

Directed by China's top economic planner, the National Development and
Reform Commission, the country's top two oil companies are inviting local
and international brains to build up mega ethylene crackers in three
cities, Zhao says.

"For three major ethylene projects, PetroChina and Sinopec are inviting
bidders from both local and international petrochemical equipments makers
to construct mega ethylene crackers with capacity beyond one million
tons."

The three mega-ethylene projects are located in Tianjin, Fushun of
Liaoning Province and Zhenhai of Zhejiang Province.

Co-operation of the three major projects will be based on both technology
transfer and independent research. Several major Chinese petrochemical
gear makers will be involved in these projects, and relevant negotiations
with foreign potential partners are right on track.

Among the three crackers, one will be imported, one will be jointly
manufactured and the other will be self-made based on a technology
transfer from overseas counterparts.

"Through this approach, the capability of Chinese equipment makers will
be significantly enhanced, with oil companies like Sinopec and PetroChina
trimming cost of equipment sourcing in a substantial way," Zhao says.

He declines to specify as to which project might be based on what
co-operation model, due to commercial concerns.

An anonymous CNPC source confirms that the company is seeking expansion
with its Fushun ethylene project, but did not elaborate.

(China Daily 09/24/2007 page3)

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