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Oil market stars risk being dimmed by giant version 2.0 in China
[SINGAPORE] China's independent refiners burst onto the international oil market scene only a couple of years ago and lifted the nation past the US as the world's No 1 crude buyer. Now, a new generation of firms building some of the globe's biggest plants are threatening to eclipse them.
The original set of private processors, known as teapots, is clustered in the eastern Shandong province, and operate relatively small refineries that pump out fuels such as gasoline and diesel.
By contrast, the budding giants supported by the regional governments in Zhejiang and Liaoning will focus on making petrochemicals - the building blocks of everything from sportswear to soda cans and Star Wars figures.
At last week's Asia Pacific Petroleum Conference in Singapore, one of the industry's largest gatherings, traders and company executives were speculating about how the upcoming Chinese mega refineries would shake up oil markets worldwide just as the smaller plants did. Saudi Arabia, Opec's largest producer, broke with tradition to sell a test cargo to one of the teapots, and the world's top oil traders such as Trafigura Group have also sought to supply the companies. The refiners bought US crude as well.
Still, it's not been all smooth sailing for the Shandong firms. They have been plagued by infrastructure issues, have come under the scrutiny of China's taxman, have been denied fuel export licenses and are facing increased competition from the nation's state-owned behemoths. And with the first of the new plants expected to come online in 2018, they are turning wary.
"Independent refiners in Shandong think of themselves as wolves, alongside tigers that are the national oil companies," said Zhang Liucheng, vice-president of Dongming Petrochemical Group, one of the largest teapot refiners.
"But with the emergence of other bigger independents that will soon bring new capacity online, they will become the wolves, while the tigers remain, and we will be the sheep in their presence."
Zhoushan Island One of the version 2.0 plants is a US$24 billion refinery on Zhoushan island in Zhejiang province, expected to refine 20 million metric tons a year, or about 400,000 barrel per day, when it's completed in 2018.
The facility's operator, Rongsheng Petrochemical Co, plans to double its capacity by 2020, a move that would make it bigger than energy giant Royal Dutch Shell Plc's Singapore refinery, the company's largest, as well as Exxon Mobil Corp's Baytown refinery in Texas. It would also rival plants run by India's Reliance Industries Ltd and South Korea's SK Innovation Co.
At full capacity, the mega-complex will be able to produce 10.4 million tons a year of aromatics including paraxylene and 2.8 million tons of ethylene. Gasoline produced at the refinery will be marketed at pump stations operated by Rongsheng's unit, Zhejiang Petroleum Co.
Hengli Group, another Chinese petrochemical giant, is planning a facility that aims to process 20 million tons in the northern Chinese city of Dalian in Liaoning province. The plan is supported by the country's economic planner, according to a statement posted on the company's official website earlier this month.
While crude imports by teapots in Shandong have been plagued by shipping and logistical challenges because of shallow ports and the lack of pipeline infrastructure that has led to vessel pile-ups, the newcomers have the advantage of access to deep-water ports. That would benefit them by reducing freight costs as they can ship cargoes on larger vessels.
"The market is closely watching Rongsheng and Hengli as they're able to accommodate larger vessels, which means it could be more viable to supply long-haul crudes in addition to regional barrels," said Nevyn Nah, a Singapore-based analyst at industry consultant Energy Aspects Ltd.
"The units come at a time when other refineries like Saudi Arabia's Jazan, Malaysia's Rapid and Brunei's Hengyi are expected to be completed, adding to the list of new refinery builds that we'll see in 2019."
Rongsheng plans to import crude feedstock via purpose-built wharfs capable of receiving vessels that are of the very large crude carrier class or larger, while Hengli's terminal will be able to handle VLCCs.
The ability to receive bigger tankers will add to the ease and affordability of purchasing oil from farther-away sources such as the Middle East, Europe or the Americas.
Some Shandong units have struggled to do the same due to ports that can accommodate only smaller ships. Dongming is planning to build a bigger receiving terminal at Lanshan port.
To better combat state-owned giants and the upcoming private rivals, some of the Shandong processors are teaming up for a US$5 billion joint venture with the support of their province's government, according to Dongming's Mr Zhang. They'll also seek a fuel export license that's proved elusive in 2017, he said in an interview during the Appec conference, held by S&P Global Platts.
While the group will have an initial registered capital of 33.19 billion yuan (S$6.79 billion), the JV aims to gather more private refiners, aiming for total registered capital of 90 billion yuan, according to Mr Zhang. It will eventually integrate about 100 million tons a year, or about 2 million barrels a day, of processing capacity.