Spotlight: More refinery consolidation, market-oriented reforms among implications of China’s 14th FYP for the oil sector

This Spotlight from S&P Global Platts Analytics was first published November 3.

China has finalized high level targets for its 14th Five Year Plan, which will set the country's economic, social blueprint for 2021-2025.

Under the 14th FYP, China's oil sector is likely to see more refinery consolidation, increased market oriented reforms, stricter emission standards, greater investments in green projects.

China's growing middle income population to drive plastic use, car penetration, which could offset reduction in oil intensity as China focuses on domestic consumption and moves away from exports.

The fifth plenum of the Chinese Communist Party 19th Central Committee concluded on Oct. 29. The meeting was important because the 14th Five Year Plan was discussed at the highest level. Once finalized, the 14th FYP will be the country's economic and social blueprint for 2021 to 2025. The detailed, final plan consisting of specific goals and mandatory targets will be decided and released during the annual session of the National People's Congress in March 2021.

However, the communique issued after the aforementioned CCP Central Committee plenum did give a summary of high level goals, areas for improvement and guidance for the final 14th FYP. Some of those relevant to the energy sector include plans to:

-modernize and upgrade its industrial base,

-further align factors of production with market forces,

-allocate use of energy resources appropriately and efficiently,

-reduce emissions of major pollutants, improve the ecological environment and...

-increase rural incomes.

It is worth noting that numerical targets for economic growth was not set or disclosed, unlike in previous FYPs and this was widely expected. Also, many of the proposals discussed did not deviate from previous plans and we believe the near-to-medium term outlook for the energy sector, particularly oil, remains intact.

This means we will continue to see more refinery consolidation, market oriented reforms (oil product and city-gate gas pricing), stricter emission standards and an increase in alternative or new energy investments. Within the oil sector, we have already seen growing efforts, especially over the past year to shut small, simple refineries, particularly in Shandong, and fix those errant (tax evasion) among the independent players.

Related story: China to cut refinery run rate in 2021 amid capacity growth, tepid demand

The start up of larger integrated refineries and chemical plants in the coming years, part of efforts to upgrade the country's industrial base, will increasingly put smaller refineries, including those owned by the National Oil Companies, under significant pressure, unless they upgrade.

The recent spin-off of state-owned companies' pipeline assets into a separate entity called PipeChina, the largest reform in China's energy sector over the past two decades, will help to prevent duplicate investments in pipelines and ensure more equitable distribution and use of resources, particularly for gas.

Meanwhile, curbing pollution is ongoing and has already led to stricter operating rules for many factory and plant owners. After all, China has vowed for its carbon dioxide emissions to peak before 2030 and has plans to achieve carbon neutrality by 2060, according to President Xi's address to the United Nations General Assembly in Sepetember 2020.

Several environmental goals have also been enacted over the past few years. In fact, some refineries located in populated areas have already closed. There has also been persistent growth in investments in renewable energy as well as development of electric vehicles (EVs), hydrogen fuel cells and hydrogen production in general.

PetroChina, for instance, recently highlighted that it will spend Yuan 10 billion ($1.5 billion) each year over the next five years on green, low carbon energy projects that include solar, wind, geothermal, natural gas power generation and hydrogen, with the aim for the company to achieve near-zero emissions by 2050. Sinopec also has plans to allocate resources within the hydrogen production chain, while CNOOC recently started its first offshore wind power project in September.

On the other hand, the growing middle income population will be supportive of consumer-related sectors that will lead to additional plastic use and increase demand for personal vehicles. This could offset a reduction in oil intensity as the country moves away from an export oriented economy to one that focuses on domestic consumption, part of its ‘dual circulation' strategy.