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Fuel Surplus to Grow as China Refiners Add 1 Million Barells per Day
By Jim Bai
Reuters
Monday, February 23, 2009
BEIJING - China's state-owned refiners
will add nearly 1 million barrels per day of new capacity by
year-end, expanding far faster than anaemic oil demand and
potentially driving a final stake through the independent
refining industry.
Faced with bulging inventories and a collapse in domestic
demand growth, refiners Sinopec and PetroChina are clamouring
for relief on export curbs in order to step up output
from new plants that were planned years ago, when consumption
was growing by leaps and bounds.
But even that option may become increasingly unattractive
as global demand contracts and major expansion projects
in India and elsewhere flood the market with lower-cost
fuel.
Underscoring the industry's changing perspective, on Friday
Japan's top refiner Nippon Oil Corp and PetroChina's
parent CNPC put the brakes on a refining joint venture that
would have given the Chinese firm nearly half of a refinery
in Osaka, saying the venture would be delayed until June or
later.
PetroChina, Sinopec and newcomer CNOOC are set to add
at least 990,000 barrels per day (bpd) of refining capacity
by the end of 2009, a Reuters survey found. Several of
those plants were delayed from last year, at least in part
because companies were hoping for a quick turnaround in
demand.
Because many of those facilities will start up slowly later in
the year, they will contribute only around 174,000 bpd of
new fuel if averaged across the year -- over three times
more than the expected 56,000 bpd or 0.7 percent demand
growth projected by the International Energy Agency (IEA),
the lowest in 20 years.
Refiners have a clear choice -- cut back production or
dump the excess on global markets.
"With current economic indicators pointing to limited oil
demand growth, refiners' operation rates will not be as high
as usual," said an analyst with the Economics and Development
Research Institute under Sinopec.
While top Chinese refineries are increasing production
rates this month for the first time since October to 84 percent
of their capacity, they are still running well below their
norm over the past five years as demand boomed.
Two dozen of China's biggest refineries are planning to
process 80,000 bpd more crude this year, according to
forecasts from industry and company sources, although
that estimate could yet be downgraded if demand continues
to disappoint.
MOUNTING EXCESS
Despite Beijing's desire to grow capacity at the same pace
as demand -- ensuring its self-sufficient without building
overcapacity that would add to its trade balance -- the industry
now faces a sizeable surplus that may take years to
absorb.
The capacity increase would amount to a rise of nearly 15
percent from their total at the end of last year, after a much
slower expansion rate of 7 percent in 2008 when many
slowed construction on worsening refining margins and
other reasons.
Small and old plants are expected to take the brunt in operation
cuts as they are either less efficient or unable to
process the cheap, lower-grade oil that accounts for a
growing share of China's crude throughput, analysts and
researchers said.
Even so, the major firms are angling for export relief.
"Oil firms are lobbying for more favourable policies for fuel
exports including more quotas as they do not want to reduce
operation levels significantly," said an analyst at
Sinopec who did not want to be named as he is not authorised
to speak to the media.
They'll need it if they hope to profit in a global market
where margins are being crushed by collapsing demand,
new refineries in places like India and Vietnam and the approach
of the second quarter, typically the weakest period
for demand.
"Both the cold winter in Europe and the maintenance season
in the United States are almost over, the export window
is closing," said Sonia Song, an analyst with Merrill
Lynch based in Singapore. "They will lose money if they sell
at international prices. And demand in other part of Asia is
falling faster than in China."
STAMP OUT THE SMALL
The prospect would boost Beijing's determination to
tighten its industry policies to phase out small refineries
and replace them with bigger and greener ones, after frequent
fuel shortages in past years foreclosed any ambitious
push for the plan.
China set a target to expand crude capacity to 440 million
tonnes by 2011, or 8.8 million tonnes per day, saying the
economic downturn provided an opportunity for cheaper
expansion.
Beijing has already shown its willingness to support the
ailing sector, urging in a stimulus plan on Thursday to
speed up major refining and ethylene-cracking projects
under construction and close down smaller and outdated
operators.
For the moment at least, some of those plants are eking by,
though at a much lower operation rates than state-owned
ones, thanks to healthy domestic margins that have been
supported by Beijing's reluctance to cut domestic fuel
prices quickly. That may end soon as pump rates are adjusted
to curb margins.
"Utilisation rates of top Chinese refineries are still high
compared with those in Japan and South Korea, as Chinese
refining margins are in a significantly positive range," said
Song. "But the premium in fuel product prices over regional
rates would not be sustained for a long time," she said.
Ultimately, those hit hardest by the downturn and new,
expanded production capacity will be China's independent
refineries, known as teapots, many of which have only recently
resumed operations after shutting last year when
crude surged.
But the swing suppliers were facing a grim future given
China's push for bigger and greener refineries.
"They are facing more and more pressure, not from oil majors'
expansion, but from the government's industry policy,"
said Liu Youcheng, an analyst with Hongyuan Securities
in Beijing. "Almost none of them is able to afford a
modern oil complex."
SOURCE:Reuters
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