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

Highlights

Additional 440,000 b/d capacity to come online in 2021

Overseas markets to offer outlet on slowdown in domestic demand

New energy initiatives to dent oil products demand

Singapore — Chinese refineries will likely have to lower utilization rate in 2021 amid growing refining capacity and limited oil product outlets overseas, Han Bing, marketing director at PetroChina's sales division said at an industry event in Shanghai.

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Despite the lull in demand due to the global coronavirus pandemic, China's refining capacity continues to rise, Han said at the 9th China International Oil and Gas Trade Congress on Nov. 9.

Many investments were made earlier and cannot be culled although demand for some oil products will peak sooner than expected, market sources said separately and away from the conference.

The country is expected to add 440,000 b/d or 22 million mt/year of new capacity, set to be in commercial operation in 2021, in addition to the 260,000 b/d expected to come online in 2020, S&P Global Platts data showed.

"However, China's oil product demand in 2021 would only recover to the level in 2019 while demand in the overseas [markets] would remain lower than that in 2019 due to the ongoing pandemic," Han said.

"The additional product supplies would have nowhere to go, refineries have to cut utilization rate as a result," she added.

PetroChina foresees China's apparent domestic oil product demand to fall 4.7% year on year to 322 million mt in 2020, with demand for gasoline likely to fall 2.4%, gasoil consumption expected to drop by 1.1%, and that of jet fuel to slump 28.9% on the year, according to Han.

In addition to COVID-19, China's oil product demand has also been dampened significantly by weather vagaries such as summer floods and typhoons, Han said. "This has impacted our operations quite severely," she said.

Reflecting this, PetroChina's gasoil stocks have been at historically high levels in recent months.

As a result, PetroChina has cut its average utilization rate to 72% in September and October from 76% in August, Platts data showed.

Sharp capacity rise by 2025

Han said she expects refinery capacity to grow further in the next five years, with China forecast to add 135 million mt/year (2.7 million b/d) new refining capacity to hit 1 billion mt/year by 2025, accounting for 51% of the total capacity in Asia Pacific by then.

Meanwhile, about 50% of the new Chinese capacity will come from the independent sector, she said, adding that this in turn will lead to more intense competition in the domestic market as it comes at a time when China is set to open its market for oil and gas exploration and production further and reduce policy barriers.

"We project China to have over 100 million mt of oil product surplus in 2025, which would only go to international markets as domestic demand growth slows down and will peak soon in around 2025," Han said.

China's total oil product demand increase is estimated at only 20 million mt in 2021-2025, according to Han.

Moreover, Beijing has released a plan for new energy vehicles, which includes battery-electric, plug-in hybrid, and hydrogen fuel-cell vehicles.

Under the plan, the country aims to have the new energy cars account for 25% of new car sales in 2025.

New energy cars production itself is expected to hit over 20 million units in 2025, Han said. As a result, they would annually replace 30 million mt of gasoline and gasoil consumption in those five years, while natural gas would replace 42 million mt of the oil product consumption during the period, she said.

Meanwhile, petroleum consumption is expected to account for 17.4% of China's energy mix in 2035 and 15.2% in 2025 from 19% in 2019, she added.

PetroChina is China's top integrated giant and produced 4.43 million b/d of oil equivalent of oil and gas in January-September, according to its latest Q3 results briefing.