IHS Global Insight Perspective | |
Significance | The refinery expansion and reconfiguration plans have been prompted by the recent completion of the third section of the Sino-Kazakhstan oil pipeline and the launch of construction on the East Siberia Pacific Ocean (ESPO) pipeline spur, due for completion by late 2010. |
Implications | The refinery plans support broader efforts by China's (NOCs) to reconfigure domestic refineries to process a wider range of crude grades to boost output of light fuels. This is in view of new crude streams coming into the domestic market following the signing of a number of oil-for-loans deals. |
Outlook | The investments in the Dushanzi, Liaoyang, and Tianjin refineries coupled with the finalisation of long-term crude oil supply agreements suggest that Kazakhstan and Russia will grow in importance as major crude oil suppliers to China's north-eastern and north-western regions. |
Refinery Reorientation
PetroChina is moving to reconfigure and upgrade some of its domestic refineries in order to process growing crude oil imports from Russia and Kazakhstan. According to the China Oil and Gas Monitor, crude oil imports from the former Soviet region accounted for little more than 5% of total oil consumption and 11% of total imports in 2008, a relatively small amount when compared to the huge quantities of crude oil China ships from the Middle East. However, the former Soviet region is now growing in importance as a crude oil supplier as imports through the Sino-Kazakhstan oil pipeline and through the East Siberia Pacific Ocean (ESPO) pipeline spur currently under construction are due to increase over the coming years, building on the 260,000 b/d of oil currently imports via rail from Russia.
In view of the increase in crude oil supplies from Russia and Kazakhstan China's NOCs are now undertaking plans to expand and upgrade a number of refining facilities. The Dushanzi refinery, situated in Xinjiang province in the north-west of China, is one such project undergoing transformation. Since 2005 PetroChina has been undertaking an expansion of the refinery to increase its processing capacity from 100,000 b/d to 200,000 b/d, which despite previous delays is now expected to begin trial operations this month with a view to starting commercial operations later this year. PetroChina aims to make the Dushanzi refinery 90% dependent on crude oil imports from the Sino-Kazakhstan pipeline, running from Atasu in western Kazakhstan to Alashankou in Xinjiang province. The completion of the third and final Kumkol-to-Kenkiyak section of the Sino-Kazakhstan oil pipeline has paved the way for a significant increase in oil imports from Kazakhstan to Dushanzi. PetroChina is now planning to mothball the existing 120,000-b/d crude oil distillation unit at Dushanzi (which mainly treats crude oil from Xinjiang) and the Dushanzi plant is now being reconfigured to support greater imports of Kazakhstan crude oil, which is lighter than crude from Xinjiang but contains higher levels of sulphur. The Dushanzi expansion programme consists of construction of 20 processing units and 12 petrochemical processing units, which will also enable the facility to produce 1.2 million t/y of ethylene. This will ensure a more diverse range of products to supply local markets in line with the government's strategy of promoting development in China's far-western regions. Emerson Process Management, one of the contractors for the project, is also investing in digital control systems and control valves at the plant. These measures are designed to improve plant efficiency, which will maximise the utilisation of imports.
China is also expanding and reconfiguring its Liaoyang refinery, located in Liaoning province in north-east China, in order to process crude oil imports from Russia. The Liaoyang facility is currently supplied by a mixture of Venezuelan and Russian oil, although the increase in Russian oil imports once the ESPO pipeline spur is completed will eventually make the facility 100% dependent on Russian oil. Russian officials cited by the say that the ESPO's main source of throughput will be light sweet crude from fields in East Siberia, although these fields remain relatively underdeveloped, so initial supplies are likely to consist of medium sour Urals blend, Russia's main export grade according to the China Oil and Gas Monitor. The prospect of growing oil imports from Russia has prompted PetroChina to increase the capacity of the Liaoyang refinery by around 11% to 200,000 b/d, by adding a new refining unit by the end of 2010. In expectation of processing greater supplies of sour crude from Russia Liaoyang will also add a hydro-cracking unit with a capacity of 1 million t/y and a sulphur removing and recovering unit of 30,000 t/y, as well as a number of oil storage tanks (see China: 16 July 2009: PetroChina Prepares Liaoyang Refinery for Russian Oil).
The oil-for-loans deal and accompanying ESPO pipeline spur agreement have also paved the way for PetroChina and Rosneft to reinvigorate plans for expansion of a joint-venture (JV) oil refinery in China's major industrial centre of Tianjin. PetroChina plans to raise the capacity of the JV refinery by 50% to 15 million t/y, or 300,000 b/d, 5 million tonnes more than was initially planned, to accommodate the increase in oil imports from Russia (see China: 27 May 2009: Rosneft to Raise Capacity of Chinese JV Refinery with CNPC by 50%). PetroChina also wants to expand the ESPO pipeline spur from Daqing to Tianjin in order to ensure feedstock supplies for the new refinery, which will meet demand for oil products in Binhai, which is a rapidly expanding financial, economic, and high-technology zone in the Bohai area. PetroChina and Rosneft were due to carry out a feasibility study on the project by June 2009 and hope to secure approval from China's National Development and Reform Commission (NDRC) by the end of this year.
The increase in oil imports from Russia has also led PetroChina to undertake a significant increase in oil storage capacity. PetroChina is investing in boosting oil storage capacity at the Daqing field in order to prepare for greater imports of Russian crude via the ESPO, which will terminate in Daqing. PetroChina has already installed two tanks for offloading Russian oil and eight more are planned for completion by the end of 2010, boosting Daqing's crude oil storage capacity by nearly 10 million barrels (see China: 27 April 2009: PetroChina Plans Major Storage Boost at Daqing Following Oil-for-Loans Deal with Russia). In April 2008 PetroChina also announced that it planned to build 20 crude oil tanks and 20 oil products tanks in Tianjin. The crude oil tanks were due to have a combined capacity of 2 million cm, or 12.58 million barrels, and the oil product tanks will have a combined capacity of 1 mmcm, which could help ensure supply security for the Tianjin facility.
Outlook and Implications
The refinery expansion and reconfiguration plans reflect a growing shift within China's refining sector towards upgrading domestic facilities to process a greater range of crude oil grades. To date most of China's refineries are relatively basic and many facilities rely upon light and sweet crude oil, either from domestic fields or imported from the Middle East. However, the increasing difficulty of obtaining light and sweet crude grades, coupled with their relative expense compared with more sour grades has prompted China to invest more broadly in upgrading its refineries. Light sweet crudes are not able to yield as much petrol or other light fuels when processed in simple refining facilities. China needs more of these types of fuels given the increase in demand for gasoline (petrol), following the automobile sector stimulus plan. In addition, the host of oil import agreements China has finalised with countries ranging from Russia to Brazil over the past six months or so means China will soon have to process a wider variety of crude streams.
Crude oil imports from Russia and Kazakhstan will grow in importance as sources of crude oil to the north-east and north-west of China over the next decade or so. The investments in the Tianjin and Liaoyang refineries coupled with the expected gradual depletion of output at China's largest crude oil fields in the north-east suggest that Russia will grow in importance as a supplier to its refineries in the region, especially as the costs of importing crude oil from Russia via pipeline are likely to be less than importing supplies via tanker from the Middle East. While Russia no doubt continues to worry about becoming a resource depot to feed China's modernisation drive, the invitation to Rosneft to participate in the Tianjin refinery project suggests China is willing to give Russian oil companies at least some opportunities in the high-potential Chinese market.
Oil imports from the Sino-Kazakhstan pipeline are also likely to become the crucial crude oil supply source for the north-west region, although back-up supplies will come from additional discoveries in Xinjiang. Aside from supplying the Dushanzi facility the Sino-Kazakhstan pipeline is also slated to provide 101,000 b/d to the Urumqi refinery in Xinjiang and 200,000 b/d to the Lanzhou refinery in Gansu, although only after the pipeline's throughput capacity is expanded to 400,000b/d by around 2020. These plans suggest China's energy partnerships with Kazakhstan and Russia will continue to grow as China continues its ongoing modernisation efforts with a view to propelling domestic modernisation and its drive to be a major global power.