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Shell has pulled out of a planned joint venture refinery with state-owned China National Petroleum Corp in China's eastern Zhejiang province, sources said this week.

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The refinery project was agreed to in principle in 2011 between the two companies and Qatar Petroleum International and was slated to be developed in the city of Taizhou in the province's east.

The joint venture partners launched a feasibility study in 2010 for a 20 million mt/year (401,600 b/d) refinery and a petrochemicals complex revolving around a 1.2 million mt/year steam cracker in Taizhou. Total investment had been pegged at $10 billion.

Sources with knowledge of the matter said this week however that Shell is pulling out of the project after little progress was made in the past two years.

"Now they will have to find new roles for the team [at Shell] that was working on the project," one source said.

A local government official in Taizhou last month said the project had not progressed because of residents' environmental concerns.

On Wednesday, the same official said there had been no progress made on the project and that it also faced difficulties over land procurement.

"It is very challenging on the ground, with a lot of mountainous terrain," another source at CNPC said.

The first source said current problems involving CNPC's management over corruption investigations also put the project in jeopardy and decreased the likelihood of it being approved by the central government.

A number of senior officials with CNPC and its listed subsidiary PetroChina are currently being investigated for alleged corruption by the central government. The net has also extended in the past month to officials at CNPC's business partners involved in engineering and procurement.

In an emailed response Wednesday, a Shell spokeswoman reiterated that the feasibility study for the Taizhou project was ongoing, similar to the company's official position last month. UNCERTAINTY OVER NEW PROJECTS

But there is now uncertainty over new refinery projects that have been announced in China, the CNPC source said, adding: "There is probably going to be less investment in new refineries going forward."

This is due to cost control, avoiding over-capacity and the increased difficulty in getting new projects off the ground, the source said.

"Many of these [projects] will probably not go ahead. Those that are well into the planning phase and that have started construction will likely be completed but the outlook for the other projects is not so positive," the source said, adding most of the expansions had already occurred and investment was now geared towards the upgrading of fuel specifications.

Over 1 million b/d of new capacity is likely to be added between 2012 and the early part of next year, analysts had previously estimated.

"The main issue here is that China is well supplied; building more capacity will lead to significant oversupply," the source added.

Morgan Stanley analyst Andy Meng believes both CNPC and rival Sinopec are likely to reduce their refining capital expenditures going forward. The two companies account for around 70% of China's total refining capacity.

"From a demand perspective, it doesn't look that strong, so there is less financial interest in building more refineries," he said.

Civic consciousness over the environmental challenges posed by large-scale refining and petrochemical projects has posed significant challenges for state companies. Widespread protests in southern Yunnan province earlier

this year stymied CNPC's plans to build a new refinery in Kunming with the possible participation by Saudi Aramco.

The Ministry of Environmental Protection in August announced it would suspend environmental approvals for new refinery projects proposed by both CNPC and Sinopec because they had failed to meet their emissions reduction targets last year.

Analysts had earlier signalled new joint venture refinery projects as most vulnerable to delays, largely due to misalignment on retail marketing objectives. Most foreign partners want fuel marketing rights, which Chinese companies are less willing to cede.

CNPC's project with Venezuelan state-owned PDVSA in Jieyang, Guangdong province, will likely go ahead as construction has already started, although its other joint venture agreement with Russia's Rosneft for a 13 million mt/year refinery in eastern Tianjin city looks less likely to be realized, the CNPC source said.

Sinopec's planned refinery involving participation from Kuwait Petroleum International in Guangdong province is moving ahead, although the Kuwaitis are no longer involved in the project, Platts reported earlier.

--Song Yen Ling,
--Edited by Wendy Wells,