Oil refining in China
Ed chen, a strategic planner at a international oil and gas firm was assigned with the task to look for investment opportunities in the china’s refining industry and also to see whether there was any room for foreign competition or if was a local-only-game.
Downstream constraints have always been a major factor which will ease neither quickly nor cheaply”. “
Crude oil prices have continued to increase in the period 2001-2005 and according to the” Medium term oil market report”, the IEA cited a huge mismatch between the product demand growth, refinery configuration and available crude oil quality which were the main drivers for the increasing price of the crude. The more lighter end of the refined products were provided by the more complex refineries with some additional assistance from the more simpler refinery and these were buying the lighter products at a premium from the complex refineries which were in turn meeting the higher margins for the complex for processing the more sour crude.
China refining industry
China demand for the refined products especially gasoline and diesel tripled during the period 1990-2005 i.e. to 3.6 million b/d and according to IEA estimate it will increase to 9.1 million b/d in 2011. China’s refining industry was mainly dominated by two state controlled, publicly listed integrated oil and gas company- Sinopec and PetroChina. Others refinery mainly include the wholly state owned company China petrochemical corporation and CNOOC. China has nearly 70 refineries with a total capacity of 6.9 million b/d with a further addition of 1.8 million b/d by 2011.China’s old refineries were designed to process both domestic light and heavy crude due to which its mainland desulfurization was only at 7%.
China refining regulations
China refining industry was subjected to a large number of governmental regulations. The NDRC set guidance prices for many refined products and also approved many refinery projects and foreign JV’s. The ministry set import and export quotas for crude oil and refined products. The ministry of finance and state taxation bureau set value added taxes, import tariffs and consumption tariff. The central government also set environmental discharge standards for air and water emission.
The NDRC set the prices of the crude and refined products on the basis of the weighted average of Singapore, Rotterdam and New York FOB trading price plus the transportation costs, taxes and retail margin, the government didn’t regulate the prices although the NDRC published ex-factory guidance prices for natural gases allowing the producers to charge around 10%. China government encouraged the domestic supply of refined products. Tax rebates on gasoline and naphtha was suspended and refined oil product export quotas were cut by 25% by 2006. Chinas 2001 accession to the world trade organization helped to open its downstream market to the foreign players resulting in the import and export of the products and this resulted in the elimination of the import tariffs on crude oil and tariffs on the refined products was also significantly reduced. EURO II and EURO III standard were established by 2005 and 2008 respectively. A progressive “windfall tax” was also introduced on crude costing more than $40 per barrel from 2006.
China’s Major Refiner’s
Sinopec:Sinopec was china’s largest refinery and 4th largest in the world with a refining capacity of 3.2 million b/d. Its main refined products included diesel, gasoline, LPG, fuel oil, kerosene and lubricants. It is china’s 2nd largest producer of crude oil and sold most of its refined through its marketing and distribution channels. Sinopec refining margin was $1.32 per barrel and its cash operating cost was $1.91 per barrel. Its refining capital expenditure was RMB 14.1 billion in 2005and was expected to increase to 14.6 in 2006. Management invested mainly in the upgradation of the refining units, capacity, and...
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