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Page added on October 21, 2013
Petrodollars: The surprising lack of downstream interest from China’s oil giants
State-owned behemoths PetroChina and Sinopec had at one point seemed keen on expanding in refining and storage overseas but while upstream acquisitions have continued apace, downstream investment has dwindled this year.
PetroChina formed the PetroIneos trading and refining joint venture with European chemical and refining company Ineos in 2011, paying just over $1 billion in cash for a 50% stake in the Grangemouth refinery in Scotland and Lavera refinery in southern France.
In 2009 it paid $2.2 billion to buy Singapore Petroleum Corp., giving it a stake in the 290,000 b/d Singapore Refining Co. on Jurong Island.
In May last year there was also strong speculation that it had been eyeing Valero Energy’s shuttered refinery in Aruba, after having leased 5 million barrels of storage at St. Eustatius in the Caribbean.
At the time, analysts had said increasing its refining footprint in Europe and the Caribbean would give PetroChina a stronger trading position in the Atlantic Basin.
Expanding its presence overseas was also seen as a way to increase profitability when its refineries in China were in the red due to government price controls on gasoline and gasoil.
Nothing came of the Aruba deal and Valero later said it would convert the refinery into a refined products terminal.
A change in management in the last year as well as an ongoing corruption scandal involving former senior management officials has also shifted PetroChina’s priorities. While previously it was focused on maximizing revenue growth, it is likely to adopt a more focused strategy going forward.
“When we talk with PetroChina management, they talk about a shift in strategy which is from volume to value and from quantity to quality,” said an analyst in Hong Kong, who declined to be identified. “They are saying they want to shift their capex [capital expenditure] more towards the upstream sector, which is where they can make money, instead of just losing money in the downstream.”
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This point has been driven home by Grangemouth, which has been loss-making due to high costs as well as a significant fall in North Sea gas output, which feeds much of its petrochemical units. This month workers threatened industrial action after management proposed salary and pension cuts as part of cost-cutting efforts to remain viable. Ineos decided to shut the refinery on Wednesday in order to resolve the dispute with its workers.
Another factor is that China has undergone significant domestic refinery capacity expansions in the last few years so there is less urgency to secure oil products overseas. On the contrary, companies are now likely to reduce their refining investment to prevent the emergence of an oversupplied market domestically, said a source at PetroChina.
“The European refineries are pretty much loss making. In future there won’t be any similar investments,” he added.
Sinopec has not acquired any overseas refineries since it agreed to partner in the export-oriented Yasref refinery with Saudi Aramco in Yanbu in early 2012, after which it spent the rest of the year investing heavily in storage. The company is the dominant refiner in China and has concentrated its acquisitions mainly in the upstream in the last decade to boost production and reserves.
It broke ground at the $840 million West Point oil storage terminal in Batam, Indonesia a year ago and acquired a 50% stake in Swiss trader Mercuria’s Vesta Terminals in Europe around the same time.
These added to its 50% stake in the Fujairah oil terminal project in the UAE alongside Singapore-based trader Concord Energy.
In June this year it agreed with Korea National Oil Corp. to build a commercial storage terminal in Ulsan, South Korea.
Sinopec has said it will use the storage facilities to supplement its trading activities in Asia and the Middle East, particularly once Yasref starts operating next year.
While the companies may have scaled down their downstream investments, they continue to support projects abroad that are either funded by other Chinese state entities or linked to upstream investment.
Sinopec is reported to be involved in building a new refinery for Cambodia as part of a loan agreement provided by the Export-Import Bank of China, while PetroChina’s parent China National Petroleum Corp. has often supported refinery projects in Africa and Latin America.
–Song Yen Ling in Singapore
5 Comments on "Petrodollars: The surprising lack of downstream interest from China’s oil giants"
rockman on Mon, 21st Oct 2013 11:16 pm
Very strange article IMHO. China may not being buying into existing refineries to any great degree today. But perhaps for good reason: at my last estimate China has committed over $100 billion to building new downstream facilities. Once done some have estimated that the new Chinese refineries and JV’s will create at least a 20% excess refining capacity. So whose refineries won’t be getting their oil feedstock? Probably few if any of the new Chinese refineries: those JV’s are being done with many of the oil exporters.
An example: China and the KSA are going 50/50 on a new 600,000 bopd refinery in the KSA on the Red Sea. I think it’s a pretty good bet that the KSA makes sure the plant has all the oil it needs. That also means that refineries currently getting that 600,000 bopd won’t be getting any of that oil in the future.
Closer to home China is having conversations with México about expanding its under capacity refining infrastructure. México currently spends 25% of the revenue it get from US oil exports buying refined products back from US refineries.
China has announced plans to build the largest refinery in the history in Egypt. A country with relatively little oil production but does have 2 – 4 million bopd transit thru it from the Persian Gulf to EU buyers. Wonder where the Chinese will get the oil for that plant?
China has announced plans to build the largest refinery on the Africa continent in S Africa. Another country with little oil production but sits along a major shipping route of ME oil. I wonder where they plan to get the oil to feed it?
A lot more examples out there. Any story hinting that China isn’t currently going full bore after the downstream segment is grossly in error IMHO.
energy investor on Tue, 22nd Oct 2013 2:21 am
@Rockman,
I really do enjoy your highly informative comments.
For the last eight years I have been watching as China locks up deals and agreements – always at market prices for oil – for long term oil supply rights. Now I believe they have preferential access to some 2 million bbls per day of oil that they do not use.
As China’s usage grows I can see them taking a more dominant role in exercising all their rights and entitlements to offtake…not just from the Saudis, Venezuelans or Russians either.
About a year or so ago, Sinopec started promoting corporate branding for oil sales in New Zealand (via TV ads). Then abruptly stopped. I think this may have been the point that they realised that while they may have access to a lot more oil, they will need it for themselves.
Many OECD countries (like ours) seem blissfully unaware of what could happen when the Chinese controlled refineries in diverse geographical locations, begin to take the oil that presently goes to our refineries and into our cars and trucks.
BillT on Tue, 22nd Oct 2013 2:47 am
As I said before, the Chinese are playing 3D chess and the West is playing checkers…
rockman on Tue, 22nd Oct 2013 11:53 am
EI – Regardless of how one classifies the current form of the Chinese govt they have a huge advantage over most countries and especially the US. Though not completely monolithic they are close enough to present a fairly singular face in international trade. The US govt does not a national oil company. It doesn’t even have any loose organizational capacity in that regard. But despite what some oil patch talking heads may lecture our govt doesn’t really hold an adversarial position against the oil industry IMHO. Regardless, for political reasons it can’t make any overt moves in the international arena to lend any meaningful support to the industry. And this is where China has the huge edge: sovereign support backing up international trade deals.
I don’t know what the answer might be. But I have no doubt that almost none of the corporations on the planet will be able to effective compete with the Chinese energy machine in the future. The clever ones will figure a way to support Chinese efforts. And despite some foolish blustering the US won’t be able to counter Chinese moves on a military level IMHO. I think the best we can hope for is to keep China as dependent as possible on a health US economy. Thus I gave birth to the MADOR concept long ago: Mutually Assured Distribution Of Resources. What is critical for the future of the US economy won’t be how much energy resources are produced on the planet but how much we have access to. If we’re lucky the US and China will monopolize those resources to the detriment of the other global economies. At least as long as China prefers a healthy US economy more than the commodities we consume.
Which will obviously be much easier once we make Alberta the 51st state. LOL.
Bill – LOL. In fact one might characterize it as 4d chess given the long term planning aspect of their current strategy.
bobinget on Tue, 22nd Oct 2013 1:56 pm
Data show China passing US as biggest oil importer
Data show China passing US as biggest oil importer
Joe McDonald, The Associated Press
Thursday, October 10, 2013 – 01:57
BEIJING, China – China has achieved another world-beating status its leaders don’t want: Biggest oil importer.
China passed the United States in September as the world’s biggest net oil importer, driven by faster economic growth and strong auto sales, according to U.S. government data released this week.
Chinese oil consumption outstripped production by 6.3 million barrels per day, which indicates the country had to import that much to fill the gap, the Energy Information Administration said this week.
“China’s steady growth in oil demand has led it to become the world’s largest net oil importer, exceeding the United States in September 2013,'” the agency said in a report. “EIA forecasts this trend to continue through 2014.”
China’s economic boom has raised incomes and increased its global influence. But it also has spurred demand for imported oil and gas, which communist leaders see as a strategic weakness.
Rising auto ownership has left China’s cities choking on smog and added to pressure on Beijing from its own public to curb pollution and from other nations to rein in surging greenhouse gas emissions.
The United States, with a population about one-third the size of China’s, still consumes far more oil per person than China does.
In September, Americans used 18.6 million barrels per day of oil and other liquid fossil fuels, while China used 10.9 million, according to the EIA’s Short-Term Energy Outlook. U.S. production was 12.5 million barrels per day, while that of China was 4.6 million.
China’s economy, the world’s second-largest, is cooling but still is forecast to grow by nearly 8 per cent this year, well above forecasts for the U.S.
The Chinese auto market, the biggest by number of vehicles sold, also is cooling but sales still rose by 11 per cent in August.
Beijing is encouraging development of wind and solar power and use of autos powered by batteries or natural gas. But gasoline is expected to remain the country’s main vehicle fuel in coming decades.
The government has launched initiatives to improve China’s energy intensity, or the energy consumed for each unit of economic output. It has reported progress but still is far behind developed economies.
Until the late 1990s, China supplied its oil needs from domestic sources including the vast Daqing field in the northeast. But the economic boom outstripped its production capacity while output from existing sources is forecast to decline.
That has forced China to rely more heavily on imports, especially from Saudi Arabia and Iran. Communist leaders see that as a strategic weakness because of possible instability in the Gulf and Iran’s political isolation.
EIA noted that China’s domestic oil production was hampered over the past two months by summer flooding.
State-owned oil companies and their foreign partners are spending heavily to look for new oil sources in China and to develop alternatives such as methane from coal beds. But they have yet to find new deposits that match the size of Daqing.
Abroad, Chinese state-owned oil companies have invested billions of dollars to develop oil and gas sources in Iraq, Central Asia and Africa. Some of that is meant for export to China but much of it is sold in other markets.
At the same time, U.S. import demand has weakened as hydraulic fracturing and other technologies open up new domestic sources of supply.
American demand for oil and other liquid fuels rose by about 110,000 barrels per day, or just 0.6 per cent, in the first nine months of this year, due partly to improved engine efficiency, the EIA said. It said consumption is forecast to fall by 0.4 per cent next year.
Overall, the United States still should be the biggest oil consumer next year at about 18.7 million barrels per day, down from its peak of 20.8 million in 2005, according to the EIA. It said China’s consumption next should be about 11 million barrels per day.
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U.S. Energy Information Administration: http://www.eia.gov