Chinese refineries and reserves

Thomas Sheltra takes a look at the state of China’s refineries as they struggle to feed the country’s growing demand for energy.

As China imports more oil, demand has slowed as the country’s refineries become saturated with supply. While much of the country’s downstream development shows signs of promise, it suffers from similar problems as its upstream and midstream sectors do. This article looks at the short-term and long-term issues with China’s refineries through problems associated with availability of supply, affordability of supply and environmental issues associated with the country’s energy security goals through oil.

China currently has 119 operational refineries. Of these, 70 have a capacity of 100 000 bpd or less, 29 can produce 100 000 – 200 000 bpd, 18 can produce between 200 000 and 400 000 bpd and only two can refine more than 400 000 bpd. However, China’s refineries are not evenly distributed across the country. Historically refining capacity has been at the point of production, which leaves many areas of China without adequate supply. Additionally, not all crude is the same, and not all Chinese refineries can distill every type of crude, which is imported from multiple sources. This leaves China open to potential availability shortages, most of which are in the regions of China that are underdeveloped and desperately need fuel.

One of China’s worst kept secrets is its small sized or ‘teapot’ refineries. These refineries usually produce less than 100 000 bpd, and as China’s large refineries hit a saturation point, new refineries are delayed and international investments in Chinese refineries cool down, these teapot refineries serve as a crucial grey market for underdeveloped regions of China. Officially, the NDRC in 2011 that it would shut down and restructure local refineries that produced significantly less than 100 000 bpd. However, as of late 2013, teapot refineries are still operating in some provinces. These refineries however are much slower and less efficient than larger refineries. They do however; sell petroleum products to farmers, fishermen and local industry factories, which increases emissions, especially from less regulated industrial factories.

Two refineries I will highlight are the Pengzhou and Kunming refineries, which are tied to two of Chinas transnational pipelines, and serve as crucial choke points for underdeveloped provinces. The Pengzhou refinery, which is close to where the Sichuan earthquake occurred, has had full operations postponed several times. Recently however, PetroChina announced that the refinery would be fully operational by April 2014. The Pengzhou refinery will supply crude from the Kazakhstan pipeline, giving remote areas of China greater availability.

Additionally, the Kunming refinery, connected to the Myanmar oil pipeline has had similar delays, mostly from protests centered around the refinery’s proximity to the city centre and an unreleased environmental impact assessment (EIA). What does this mean? Places outside of the major city centres, and especially provinces like Yunnan that have little infrastructure, must rely on local and volatile refineries for fuel. The Myanmar pipeline and refinery in Kunming is seen as a method of producing energy for such under developed provinces for additional refinery capacity, and potential growth in oil supplies without reduced availability.

Chinese NOCs, such as Sinopec and CNPC/PetroChina, which are the main companies invested in refineries, suffer financially from the NDRC playing with their profit margins, by routinely raising or lowering prices based on current demand.

Based on China’s pricing scheme to keep prices artificially low, Chinese refineries operate in the red. This has forced some refineries to export their petroleum products to make greater financial gain, which does little to quench China’s demand and little to stabilise long-term availability. Until China prices petroleum based on an international open market system (which it has pledged to do several times) operating a refinery is a losing proposition, for both NOCs and international investors who seek to gain a foothold in the Chinese market.

CNPC/PetroChina and Sinopec were both punished in late 2013 for a lack of sufficient oversight in regulating emission targets. The punishments include not being able to build new refineries, or being allowed to upgrade and expand current ones. Both NOCs have since pledged environmentally friendly programmes, but this is indicative of China and its NOCs forcing economic growth through energy plans, and not taking potential environmental disasters into account.

One disaster was the November pipeline explosion in Qingdao, which not only killed at least 60 people, but also caused unknown environmental degradation, from oil spilling into public water drains, etc.. The explosion also caused huge availability problems for refineries that rely on oil supplied by the pipeline. Problems associated with availability also cause affordability problems for refineries that already have tight profit margins.

Ironically, and unfortunately, the environmental issues associated with the tragic pipeline explosion are the same ones people protested against at the Kunming refinery. The proximity of the refinery to the Kunming city centre, caused PetroChina to eventually release the EIA. However, EIA laws, and China’s policies of economic growth over environmental degradation, highlight that environmental concern is more hindsight.

While China continues to import more oil, its need for economic growth limits the regulation of NOCs and small, local refineries, which are incredibly inefficient and lead to greater environmental degradation, which decreases China’s energy security. As long as China pursues its energy security through imports of oil, the country can at least upgrade its refinery capacity, increase its efficiency goals and develop a greater system of accountability and transparency towards its EIA process for NOCs to follow. Until then, China’s refineries lack the capability to be profitable, and will lead to more environmental disasters.

The author can be reached via: thomassheltra@vermontlaw.edu

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Adapted by David Bizley

Read the article online at: https://www.oilfieldtechnology.com/special-reports/20022014/chinese_refineries_and_reserves/