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China's overall energy consumption ranks second in
the world. Currently natural gas provides only 3 %
of China's primary energy demand, which is much
lower than the world average of 24% and the average
in Asia of 8.8%. There exists great potential in the
domestic natural gas market. The consumption demand
for natural gas in the power sector, chemical and
fertilizer industries, and city gas grids will grow
rapidly. The total demand for natural gas was 41.33
billion cubic meters in 2003, and by 2005 it will
hit 61 to 70 billion cubic meters. The proportion of
natural gas in the primary energy consumption will
climb to 5%. If this trend continues through 2010,
demand for gas will reach 120 billion cubic meters
and by 2020 it increases to 220 billion cubic
meters, or 10% of primary energy consumption.
The best opportunities for U.S.
participation:
China’s growing demand for energy has caused this
traditionally off-limits sector to gradually open up
to increasingly larger scale foreign participation.
Moreover, offshore industries with high technology
components are in high demand. The best
opportunities for U.S. participation are in natural
gas infrastructure development and offshore oil
exploration and production. Onshore oil projects are
far less attractive due to lack of access to
satisfactory leverage and geological data and a
greater tendency to source equipment, services and
technology domestically. Prospects are brighter in
the offshore sector, where the technical challenges
are greater and thus the value of foreign technical
services more easily recognized by Chinese
operators.
China’s major oil & gas operators’
structural reforms:
Structural reforms will be carried out in major
petroleum and petrochemical enterprises such as CNPC
(China National Petroleum Corp.), Sinopec and China
National Offshore Oil Corporation to sharpen the
industry’s competitive edge in the world market
while further opening policies will be initiated to
attract more foreign investment. Typically, Chinese
state-run project operators purchase some foreign
equipment, hire a small amount of foreign technical
service expertise and then run the operation with
local staff. Most Chinese enterprises prefer to pay
for something they can put their hands on and own
and have trouble seeing the value in foreign
technical and consulting services.
China’s huge oil and gas projects:
China now is carrying out several huge oil and gas
projects to meet its growing energy needs. Major
projects are being driven by a combination of
political, environmental and market factors. The on
going Guangdong LNG Terminal and Supply Project, The
West to East Gas Project, coal liquefaction, natural
gas exploration, The Bohai Bay exploration projects
will continue to bring, export opportunities for
foreign companies. Good opportunities exist in both
upstream and downstream engineering, project
supervision, license, and equipment, technology,
consulting, marketing and supply sectors.
Downstream Sector:
The development of China’s petrochemical industry in
the Tenth Five-year Plan period (2001-05) will focus
on increasing the production of refined oils.
Downstream infrastructure development in China
centers primarily on upgrading existing refineries
rather than building new ones, due to current
overcapacity. Another major issue in the Chinese
downstream sector is the lack of adequate refining
capacity suitable for heavier crude oil, which will
likely become a necessity as Chinese imports rise in
the mid-term. Several existing refineries are being
upgraded to handle heavier and the more sour grades
of crude oil.
China’s National Strategic Petroleum Reserve
Chinese intent to build a national strategic
petroleum reserve, but no formal announcement has
been made. To date, it is clear that China will
build a government-held reserve of crude oil like
the U.S. Strategic Petroleum Reserve (SPR) or
require refiners to maintain a minimum stock level
like in Europe, Japan and South Korea. The basic
outline of establishing China’ s strategic oil
reserves should include 1) reasonably determining
the volume of the strategic oil reserves. Efforts
should be made to increase the domestic oil reserves
to 25 million tons, the total scale of storage tanks
to 30 million cubic meters by 2010, when China’s net
volume of oil imports may reach 100 million tons; 2)
designing the distribution of reserve bases;
3)choosing the types of storage tanks in line with
the requirements of war conditions; 4)special fund
shall be established by the government; 5) the
program should be under the direct control of the
government.
OIL REFINING INDUSTRY
The oil refining industry in China faces the
challenges of coping with expanding crude oil
imports, increasing processing volume for Middle
East high-sulfur crude (sulfur content of 1% or
more) and improving the quality of oil products with
the increase in domestic demand for petroleum
products. The following report goes over oil
refining situations and trends in China as well as
Chinese oil companies’ moves to deal with the
situations.
Present State Of Oil Refining
The crude processing capacity in China was 304
million tons/year as of the end of 2003, and the
volume of crude processed that year was
approximately 243 million tons. Of China’s total,
the processing capacity for Sinopec Corp. and
PetroChina was 142.3 and 111.05 million tons/year,
respectively, with volume processed 116.26 and 91.2
million tons/year, respectively. Their refining
capacities increased 7.5% and 0.2%, respectively
from the previous year and the volume of processed
crude also increased 10.7% and 9%, respectively,
compared with the previous year. Likewise, their
capacity utilization rates increased 3% to 81.7% for
Sinopec and 8.8% to 82.1%.
The two major oil companies processed 29.162
million tons of high-sulfur crude imported from the
Middle East in 2003, or 14.1% of the two companies’
combined total volume of processed crude (207.46
million tons). In 2003, the amount of high-sulfur
crude processed by Sinopec Corp. accounted for 23.77
million tons, up 18% from a year earlier, out of its
total crude processing volume of 116.26 million
tons.
PetroChina produced 80.35 million tons of
flagship petroleum products, such as gasoline,
diesel fuel, kerosene, lube oil, base oil, fuel oil
and LPG in 2003, up 2.9% from 2002. Of the total,
the production of gasoline, diesel fuel, and
kerosene rose, respectively, by 9% to 19.38 million
tons, 11.7% to 34.41 million tons, and 0.7% to 2.96
million tons. Sinopec Corp.’s production of
petroleum products during the same year jumped 10.9%
from the previous year to 106.74 million tons,
largely surpassing PetroChina. Its production of
gasoline, diesel fuel, and kerosene amounted,
respectively, to 19.38 million tons, up 10.8%, 41.67
million tons, up 10.4% and 2.96 million tons, up 5%.
Breakdown Of Oil Refineries By Type In China
These two major oil companies in China have
three main types of oil refineries.
Major oil refineries of the low-sulfur crude
processing type
Oil refineries affiliated with PetroChina, such
as Dushanzi Petrochemical refinery, Lanzhou
Petrochemical, Dalian Petrochemical, Jinzhou
Petrochemical, Fushun Petrochemical and Daqing
Petrochemical process crude with low sulfur content
produced from oil fields mainly in such inland
regions as northeastern and northwestern China. Most
of the refineries owned by PetroChina are those of
the type to process low-sulfur crude. Also, oil
refineries affiliated with Sinopec Corp., such as
Yanshan Petrochemical and Tianjin Petrochemical are
of the same type to process low-sulfur content
crude. Sulfur content of the gasoline produced at
refineries of this type is usually 200 ppm or lower.
Major oil refineries for processing medium-sulfur
crude
Most of the refineries of this type belong to
Sinopec Corp. These refineries are capable of
producing gasoline equivalent to Euro II class
(sulfur content: 500 ppm) and diesel (sulfur
content: 500 ppm). This type can also be divided
into two subtypes.
A. Domestic crude processing type
Luoyang Petrochemical in Henan Province,
Changling Petrochemical Refinery in Hunan Province
and others are processing crude from domestic oil
fields other than Daqing.
B. Imported crude processing type
Jiujiang Petrochemical, Wuhan Petrochemical,
Jingmen Petrochemical Oil Refinery and Shanghai
Gaoqiao Oil Refinery, located along the Yangtze
River, import and process crude with relatively low
sulfur content (medium- to low-sulfur) in view of
their locations in coastal areas and access to
Yangtze River transportation.
Major oil refineries of the high-sulfur crude
processing type
Strong points of oil refineries of this type
are their high refining capabilities and their being
equipped with hydrogenation refining facilities (desulfurization
facilities) and hydrocracking facilities. All but
PetroChina’s Dalian West Pacific Petrochemical
Co.refinery belong to Sinopec Corp. They include
Zhenhai Petrochemical Oil Refinery in Zhejiang
Province, Qilu Petrochemical Oil Refinery in
Shandong Province, Jinling Petrochemical Oil
Refinery in Jiangsu Province, Yangzi Petrochemical
Oil Refinery in Jiangsu Province, Maoming
Petrochemical in Guangdong Province and Guangzhou
Petrochemical in Guangdong Province. Oil refineries
of this type can process high-sulfur crude from the
Middle East and produce gasoline with the quality
standard equivalent to Euro III Standard (sulfur
content: 150 ppm) and diesel with the standard equal
to Euro II Standard (sulfur content: 500 ppm).
Processing of high-sulfur Middle East crude oil is
expected to increase further with the further
expansion of this type of facilities.
3. Approaches To Oil Refining Business By China’s
Two Major Oil Companies.
Expansion of Facilities and Handling Imported Crude
PetroChina and Sinopec Corp. have been
expanding facilities to cope with the fast rising
crude import and increasing demand for petroleum and
petrochemical products, and they are achieving a
transformation to large-scale modern oil refineries,
integrated with their petrochemical divisions.
Through promoting this facilities expansion process,
these oil companies aim at achieving economies of
scale by handling imported crude, particularly high
sulfur content crude from the Middle East,
optimization of oil products and improving quality
of their products, raising product yields, and
lowering costs for refining and production. As
specific steps to achieve the goals, they are
implementing such measures as shutting down small
refineries that are economically inferior in terms
of meeting environmental requirements, enhancing
topper capacity at major refineries, to meet
ethylene demand by creating refinery-petrochemical
complexes, and introducing additional facilities to
produce lower-sulfur fuel oils.
With the widening gap in the domestic oil
supply and demand in China, the country’s dependency
on overseas imported crude has been increasing.
China’s crude imports in 2003 totaled 91.13 million
tons, a 71% jump from the previous year, and in
2004, crude imports again rose sharply by 34% to
122.72 million tons from 2003. To cope with the fast
rising crude imports, plans to expand refining
capacity are also underway. Under the 10th five-year
economic plan, the Chinese government already laid
out plans to beef up the country’s oil refining
capacity to 270 million tons a year during 2005. It
also plans to increase the refining capacity for
rising imported high-sulfur crude to 75 million tons
by 2005.
Against this backdrop, PetroChina and Sinopec
Corp. have been aggressively tackling with
increasing their refining capacities. In 2005, plans
are to expand the two companies’ refining capacities
to about 118 million tons and 160 million-170
million tons, respectively. Sinopec Corp. is
expanding the refining capacities at its Zhenhai and
Maoming refineries in eastern China to 20 million
tons each, and also trying to increase processing
capacities for high-sulfur crude at Shanghai Gaoqiao,
Jinling, Yangzi and Fujian petrochemicals to meet
the need to process more imported high-sulfur crude.
Thanks to those efforts, Sinopec Corp.’s
refining and production costs have been decreasing.
In 2003, its refining cost declined from 136 yuan/ton
in 2002 to 132 yuan/ton. As a result of the above
mentioned expansion of facilities, Sinopec Corp. is
expected to maintain its high-sulfur crude refining
capacity at 60 million tons and over as of 2005.
Expansion of refining capacity by PetroChina is
relatively small, compared with Sinopec Corp. It
plans to increase its refining capacity to some 118
million tons. Most of the company’s refineries,
except its Dalian Petrochemical, are located in
inland areas close to oil fields and have processed
domestically produced low-sulfur crude. At Dalian
Petrochemical, the only exception, it plans to
increase the refining capacity from the current 7.1
million tons to 20 million tons by 2005. In addition
to processing Dalian crude, the refinery aims to
more high-sulfur crude oil, and an additional
capacity of at least 5 million tons out of the all
increased capacity will be used to process
high-sulfur crude. Also, the refining capacity at
Dalian West Pacific Petro-chemical (a joint venture
refining company with French TOTAL) is planned to be
expanded to 10 million tons from the current 8
million tons; and that of Lanzhou Petrochemical in
western China is to be increased also to 10 million
tons from the current 7 million tons. At present,
PetroChina is aggressively building up its major
refineries’ capacities, while closing down gradually
smaller refineries (their combined refining
capacities: 16 million tons), with low production
efficiency and inferior economies of scale.
These two major oil companies are trying to
expand and improve their facilities for
hydrocracking and hydrogenation refining. Currently,
the two companies’ facilities have a very high ratio
of fluid catalytic cracking (FCC) capacity compared
the atmospheric distillation capacity. On the other
hand, they have low ratios of catalytic reforming,
hydrocracking and hydrogenation refining
capacities.
In the case of PetroChina, the ratio of its FCC
capacity compared to atmospheric distillation
capacity is high at 46%, while that of catalytic
reforming capacity is only 7.7%. At Sinopec Corp.,
too, the FCC capacity ratio to the atmospheric
distillation capacity is 41%, while the catalytic
reforming capacity is 8.2%.
The reason for this unbalance is that major
types of domestically produced crude, such as Dalian
crude, are low-sulfur-content, heavy crude oil. In
other words, the crude contains much heavy
distillate, a material for FCC, and much less
naphtha, a material for catalytic reforming.
Refineries in China were originally designed and
built to process domestically produced crude with
such characteristics.
For the two major oil companies, it is
essential and urgent that they increase the ratios
of hydrocracking and hydrogenation refining
facilities to produce high quality middle distillate
and deal with the increasing processing of Middle
East crude. The ratio of hydrocracking capacity to
the atmospheric distillation at Chinese oil
companies is 2.7% on the average, much lower than
the international average of 5.6%. Also, the ratios
of hydrogenation refining capacity for PetroChina
and Sinopec Corp. are 23% and 32%, respectively,
much lower than the world average of 49.2%. Both
companies are now trying to expand refining
capacities, according to the types of refineries
based on the differences of sulfur contents of the
crude they process. And they are also working to
increase hydrocracking and hydrogenation refining
facilities. Furthermore, they are aiming to raise
the ratios of catalytic reforming and alkylation
facilities, which are manufacturing facilities for
high-quality, high-octane gasoline components.
Refineries affiliated with PetroChina are, as
previously noted, mostly refineries designed for
processing low-sulfur crude. Actions can be seen
there in actively increasing refining capacities and
expanding facilities. For example, the Dalian
Petrochemical refinery, which has been processing
Dalian crude and low-sulfur Indonesian and
Malaysian crude similar in quality to Dalian crude,
has begun also processing Russian crude (Siberia
Light’s sulfur content: 0.6 to 0.7%) with higher
sulfur content than Dalian crude (sulfur content:
0.1%). Plans are for it to also process imported
crude from the Middle East in the near future. To
meet the need for this change, Dalian Petrochemical
signed a contract with Shell in April 2003 to
introduce refining technology. The latest Shell
process and technologies are employed in seven
refining plants, including those for catalytic
cracking, catalytic reforming, hydrocracking and
hydrogenation refining, attached to the 10 million
ton topper scheduled to be completed in 2005.
Also, Sinopec Corp. Yangzi Petrochemical
refinery, which has been processing both
domestically produced and imported low- to
medium-sulfur crude from the start, is rapidly
expanding processing of high-sulfur crude to cope
with increases in imports of high-sulfur crude from
Saudi Arabia and other Middle East producers. This
refinery spent some $200 to introduce UOP’s Unibon
method technology for the 1.0 million-ton/year
hydrocracking facilities and 1.2 million-tons/year
diesel hydrogenation refining unit and completed
those new facilities.
Improving the quality of oil products and meeting
environmental requirements
The oil companies in China have been stepping
up their efforts to introduce latest facilities to
improve the quality of their petroleum products and
to meet environmental requirements in addition to
expanding their production facilities aggressively
to cope with the rapid increases of oil demand and
rises of crude imports.
A. The present state of and future plans for quality
standards for gasoline and diesel fuel in China
a. Gasoline
Following the strengthening of environmental
regulations in China, sale of leaded gasoline was
banned from the second half of 1999 in the three
largest city areas of Beijing, Shanghai and
Guangzhou and in other coast cities. From January
2000, the Chinese government prohibited the oil
companies from producing leaded gasoline. In July
the same year, sale of leaded gasoline was banned
throughout the country. Also, in the same month,
the government introduced new gasoline quality
standards (GB17930-1999) to the areas around the
three largest cities. Those standards were also
applied to the rest of the country beginning in
2003. According to the quality standards, unleaded
gasoline is divided into three grades by Research
Octane Numbers: RON90, RON93 and RON95.
The sulfur content was also cut to 0.1 wt % or
lower from the previous 0.15 wt %, and the benzene
content is limited to 2.5 vol %, and olefin and
aromatics contents 35 vol % each. The sulfur
content regulation was further tightened to 0.08 wt
% beginning on January 1, 2003.
b. Diesel fuel
The government introduced new quality standards
(GB252-2000) for diesel fuel throughout the country.
According to the new standards’ specifications, the
sulfur content was set at 0.2 wt % or less from the
previous 0.5 wt % to 1 wt %, with the cetane number
at 40 to 45 or higher. The standards are set to
become stricter on July 1, 2005, with the sulfur
content limited to 0.05wt percent or lower and the
cetane number required at 49 or higher.
c. Plans to introduce quality standards
China plans to introduce quality standards
equivalent to the EUII Standard for gasoline and
diesel fuel on the nationwide basis in 2004 to 2005,
and the EUIII Standard to the three largest city
areas of Beijing, Shanghai and Guangzhou, as well as
other major cities during 2005. The gasoline and
diesel standards equal to the EUIII are planned to
be extended to the rest of the country in 2008, when
the three largest city areas and other major cities
will have EUIV standards.
B. Approaches by PetroChina and Sinopec Corp
The two major oil companies in China have made
efforts to improve the structure of refining
capabilities and expand facilities to cope with the
tightening of the quality standards, as mentioned
above. At the same time, their refineries are
characterized as
having a high ratio of gasoline obtained by FCC process making up
their overall gasoline components and high sulfur
and olefin content in diesel fuel. Some of the major
steps are as follows.
The first such step is to improve and expand
capacities of processing facilities, such as
catalytic reforming and hydrocracking, with the aim
of expanding their production capacity for quality
gasoline and diesel gas oil. The second such step is
to expand the hydrogenation refining capacities, and
the third one is to introduce MGD— technology
related to the FCC process—to improve the FCC
facilities and catalyst technologies.
During the period from 1999 to 2003, Sinopec
Corp. expanded reforming facilities’ capacity by
2.25 million tons/year, hydrocracking capacity by
4.8 million tons/year and hydrogenation refining and
processing capacity by 21 million tons. It also
modified and improved 21 units of FCC facilities.
Sinopec Corp.’s Maoming Petrochemical refinery
will expand its annual processing capacity from the
current 13.5 million tons to 18.8 million tons. At
the same time, it will introduce facilities for
hydrogenation refining of 2 million tons of diesel
fuel annually, as well as 1.5 million-ton
hydrocracking and 30,000-ton desulfurization
facilities. That will allow the refinery to handle
more high-sulfur Middle East crude and better
process high-sulfur crude, thereby meeting the Euro
III standards and producing “cleaner” gasoline and
diesel gas oil.
PetroChina has also aggressively promoted
introduction and expansion of facilities. For
example, its affiliate, Jinxi Petrochemical,
introduced UOP’s ultralow-pressure process and
other technologies to produce gasoline conforming to
the 2003 new standards (olefin content: 35% or
lower) and completed a 600,000-ton/year continuous
catalyst regenerator (CCR) with an investment of 420
million yuan.
In 2003, PetroChina also spent 450 million yuan
to build a hydrocracking facility with capacity to
produce 600,000 tons a year at its Dushanzi
Petrochemical, with completion expected by the end
of 2004. With the completion of the new facilities,
Dushanzi refinery will become capable of processing
high-sulfur, high-metal crude, and thereby become
possible to produce clean gasoline, diesel fuel,
high quality jet fuel, lube and base oil. It is
expected to be able to handle processing of
high-sulfur Kazakhstan crude. Also, PetroChina’s
Dalian Petrochemical has been constructing gas
desulfurizing facilities with an annual processing capacity of
100,000 tons and 30 million-ton/year sulfur
recovering facilities to cope with new quality
standards for fuel oils. Those facilities are
scheduled to be completed by the end of 2005.
Conclusion
China’s oil consumption in 2004 increased 14.2%
over the previous year to approximately 314 million
tons. Subsequently, crude imports totaled 122.72
million tons, a sharp 35% increase over those for
2003. In 2005, the country’s oil consumption will
rise to 320 million tons, with crude imports of more
than 140 million tons. Thus, crude imports,
particularly imports of crude with high sulfur
content, have been further increasing to cope with
the fast rise in domestic energy demand. To meet the
expected need to process more high-sulfur crude and
to satisfy new quality standards for oil products
to be introduced in the future, the two Chinese oil
giants PetroChina and Sinopec Corp., are expected to
take on expansion of refining capacities and
building up of secondary facilities through
aggressive introduction of advanced technologies.
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