IHS Global Insight Perspective | |
Significance | The launch of the project is a victory for ExxonMobil in its attempt to gain a strategic foothold in China's downstream sector to reap the benefits of the huge growth potential in fuels and petrochemicals; ExxonMobil is also hoping to step up oil product and petrochemical exports to China through expanding its huge refining base in Singapore. |
Implications | The refinery launch is expected to contribute to a 30% increase in Sinopec's crude oil imports from Saudi Arabia next year. It also reflects the strategy of Gulf Arab states to secure markets for their crude oil supplies in the East. |
Outlook | The Fujian refinery suggests that ExxonMobil may have an edge over international rivals, as BP and Shell's efforts to invest in China's refining and petrochemical sector are still at the preliminary stages. |
Fujian Dreams Become Reality
At a ceremony in the city of Quanzhou, Fujian province, ExxonMobil and partners Sinopec and Saudi Aramco have celebrated the beginning of full operations at China's first integrated refining and petrochemical complex with foreign participation. ExxonMobil invested more than US$4.5 billion in the complex, which tripled the capacity of an existing refinery to 240,000 b/d and added a new petrochemical complex that includes an 800,000-t/y ethylene steam cracker, an 800,000-t/y polyethylene unit, a 400,000-t/y polypropylene unit, and a 700,000-t/y paraxylene unit. The complex also features a 250-MW cogeneration facility, which will meet the majority of the site's power demands through use of waste energy, which will lower operating costs and greenhouse gas emissions. The complex is jointly owned by the Fujian Petrochemical Company Limited (50%), ExxonMobil China Petroleum and Petrochemical Company Limited (25%), and Saudi Aramco Sino Company Limited (25%). The Fujian Petrochemical Company Limited is a 50:50 joint venture (JV) between Sinopec and the Fujian government.
ExxonMobil first entered into the agreement with Sinopec to study joint refining opportunities in 1995, and was joined by Saudi Aramco in 1996. The project was conceived during the brief window in the 1990s when the Chinese government opened up the sector to foreign investors to attract capital and expertise. For ExxonMobil, this was a golden opportunity to gain a foothold in the Chinese market, where the company believed that population growth, growth in car ownership, and a rapidly expanding economy would create the right conditions for an increase in fuel and petrochemical demand. The project has been a long time in the making, partially due to its huge scale and complexity, although PC Tan, ExxonMobil's lead country manager has admitted that project partners have also had their "ups and downs" over the years. ExxonMobil was keen, however, to see the project through, particularly as it hoped to build a relationship with Sinopec that would enable the company to expand its access to the Chinese market in future years. ExxonMobil's value as a partner came from its experience in designing and implementing huge integrated projects. The supermajor played an important role in designing complex refining facilities where refining streams can be used as feedstock for petrochemical products, while by-products from petrochemical operations can be returned to the refinery for conversion into high-value products such as motor fuels. ExxonMobil's project management skills and its experience in setting safety, reliability, and efficiency standards for the facility in line with international standards were also important. For ExxonMobil, launch of the Fujian facility is a pillar in its strategy of expanding its downstream operations in the Asia-Pacific region. The company forecasts demand for liquid products to grow in Asia by 55% between 2005 and 2030 and believes that around 60% of the growth in the region will come from China. In view of stagnant demand in the West following the global economic slowdown, the Asian market has taken on a new prominence and is now widely thought of as the next refining gold rush.
Changing Gulf Connections
In comments to the media, Sinopec president Wang Tianpu earlier this week said that his company saw its crude imports from Saudi Arabia rising by about 30% next year, to 50 million tonnes (about 1 million b/d). The imports would mainly be processed by the new 12- and 10-million t/y refineries in Fujian and Qingdao, Xinhua reported, although it also quoted Tianpu as saying that crude imports from Iran were estimated by the company to remain largely flat during next year, at around 20 million tonnes (roughly equivalent to 400,000 b/d) during the year.
News of the increase comes as reports of a U.S. drive to get China—Iran’s most important crude oil customer—to buy more of its requirements from the spare capacity now existing in Saudi Arabia, the United Arab Emirates (UAE), Kuwait, and Qatar as OPEC has scaled back its production quotas over the past year and it is likely going to fuel speculation that China’s choice is an effect of this combined marketing and diplomacy effort (see World: 22 October 2009: Limited Progress Achieved in Iran's Nuclear Talks).
As Tianpu observes, however, there is business logic behind Saudi Arabia growing its market share in China, as Saudi Aramco is a partner in the Fujian project and is eyeing investments in the Qingdao facility. In addition, planned downstream investment from Kuwait’s state-owned Kuwait Petroleum Corporation (KPC) in Sinopec’s plans for a refinery in the southern Guangdong province looks likely to enforce the growth of the Gulf states’ crude market share in China, as opposed to Iran, which lacks the financial means to cement its Chinese market share through stakes in downstream facilities (see China: 28 September 2009: Sinopec Pushes Forward with Mega Refining, Petrochemical Projects in China). That of course does not mean that Iranian crude will not be bought, but it places Iran in a situation where its crude is not the “crude of choice” and might become bought more on a spot, or short-term basis as demand fluctuates, while the Arab states’ crudes will provide the basic feedstock to earmarked mega-refineries, refineries under secure contracts with somewhat less price and volume fluctuation.
Outlook and Implications
The strategy of growing and securing their market shares in China through undertaking large-scale downstream investments is moving Gulf Arab states ahead of Iran, through a thoroughly commercial process. U.S. political attempts to undermine Iran’s standing with China through attempts to get it to buy more crude from Gulf states such as Saudi Arabia, Kuwait, Qatar, and the U.A.E.—at a time when these states have spare capacity—might then look like they are succeeding, although the political reasoning behind the push—flawed in several ways—probably has little to do with the commercial processes themselves, which have been ongoing for several years now. The Gulf Arab OPEC producers will not raise their production to price Iran out of the market as that would be detrimental to their own state budgets and domestic long-term interests.
Nevertheless, commercial investment processes, based on oil producers’ recognition several years ago that Asian markets would be the fastest growing crude markets for some time to come, are working against Iran anyway, as its sanctions-hit economy, which also suffers from having to pay sky-high bills for its domestic fuel and electricity subsidy programmes, means that it lacks the financial muscle to undertake downstream investment in key markets such as China and hence is unable to cement a stable long-term energy relationship with that key market. An overly-politicised strategy of trying to pursue downstream projects in politically allied countries such as Syria is doing little to improve its long-term position, making Iran the loser at this time of mutual investments and long-term relationship building.
For ExxonMobil, the full operation of the Fujian complex supports its strategy of increasing its presence in the fuel and petrochemicals markets in China and the broader Asia-Pacific region. The Fujian refinery is fully integrated with the Sinopec SenMei (Fujian) Petroleum Company Limited in which ExxonMobil holds a 22.5% stake. The joint venture (JV) manages and operates around 750 fuel retail stations and a network of terminals in Fujian province, which will help ExxonMobil to grow its fuel sales on the mainland, building on its existing presence in Hong Kong. ExxonMobil is also bolstering its fuel and petrochemical sales to China through expanding its downstream facilities in the strategic energy hub of Singapore, where the company operates the Singapore chemical plant (SCP) and the 605,000-b/d Singapore refinery on two sites. When expansion operations are completed in 2011, Singapore will be ExxonMobil's largest manufacturing complex, attesting to the importance of the Asian market to the company. The growing range of refined products and petrochemicals that ExxonMobil will be able to produce from the huge complexes in Fujian and Singapore will help it to capture market share in China and the broader region in anticipation of further expansions in Asian oil and chemical markets over the next decade. Although Sherman Glass, head of ExxonMobil's global refining unit declined to comment on whether the refinery had a deal in place to ensure profits, margins will be helped by operational efficiency at the refinery from the synergy in feedstock, liberalised pricing in China's petrochemical markets, and the government's introduction of a new fuel pricing mechanism, which guarantees refiners significant margins up to US$80/b and at least no loss-profit margins on sales of gasoline (petrol) and diesel up to US$130/b.
However, the fuel price mechanism has led to significant competition for ExxonMobil, with BP and Shell also looking with renewed interest at investing in new refining and petrochemical ventures in China's market. Competition for influence in the Chinese market is growing in intensity, particularly as Sinopec and CNPC/PetroChina are starting to use foreign partners to help realise aggressive expansion in domestic capacity as they battle each other for market share.
However, ExxonMobil may have an edge over its international rivals as the Fujian project is starting full operations now, whereas BP and Shell's efforts to invest in the refining and petrochemical sector are at the preliminary stages (see China: 29 September 2009: BP Considers Joining Giant Zhanjiang Refinery Project in China). The WEPEC refinery in which Total has a stake is largely export-orientated. Indeed, ExxonMobil's gamble on the Fujian refinery investment in the 1990s, over a decade later looks set to start paying off as China's economy begins to emerge from the global economic crisis.