understanding china’s refining landscape - platts china’s refining landscape by yao li, ......

油田秋浓 (Oil Facility in Autumn), Changqing

Photography by 许兆超 (Zhaochao Xu)

Platts Asian Refining Summit 3 March 2016

Understanding China’s Refining LandscapeBy Yao Li, SIA Energy

Oil Demand

SIA Energy ◦ sia-energy.com

Chinese economy cooled to 6.9% in 2015. SIA estimates GDP growth will future slow to 6.5% in 2016.

Short Term Economic Outlook: A Chilly Start For 2016

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

GDP Growth Agriculture Growth Industrial Growth Service Growth

Source: SIA Energy

China's Quarterly GDP Growth


Industrial value-added growth slipped to 5.9% in December 2016, reflecting the ongoing process of destocking, restructuring and rein in of overcapacity.

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Feight Volume Growth Crude Steel Production Growth

Power Generation Grwth Cement Production Growth

Source: SIA Energy

Industrial Production

Power Generation Growth

The On-going Economic Transition Is Painful for Industries, Especially the Sectors with Over-capacity


China has been rebalancing its economy from industry sector driven to consumption oriented. A improving sign has been seen in 2012 as service sector overtook industry sector as the largest portion of Chinese GDP. China retail sales of consumer good recorded more than 12% growth since January 2015, thanks to robust expansion in E-commerce.

Domestic Consumption Becomes the Main Engine for Economic Growth

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3%

6%

9%

12%

15%

18%

21%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

billion R

MB

Retail Sales Growth (Y-o-Y, R-Axis)Source: China NBS

Total Retail Sales of Consumer Goods


Although GDP growth is slowing, it remains strong for the next two decades. Also as the base gets bigger, less growth is required to generate the same added value and new jobs.

Longer Term: More Slow Down, But Not That Scary

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400

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800

1,000

1,200

2005 2010 2015 2020 2025 2030

Trillio

ns o

f 2005 C

NY

China: Real GDP

Source: SIA Energy

CAGR11.2%

7.8%

6.2%

4.9%

4.0%


China’s oil product demand used to be highly correlated with GDP growth in the industrial sector, but in the past three years, private consumption has taken over as the main demand driver.

China Oil Product Demand Growth Changes Engine

-5%

0%

5%

10%

15%

20%

25%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Industrial GDP Growth LPG, Gasoline & Kerosene Demand Growth

Diesel, HFO & Other Products Demand GrowthSource: SIA Energy

China Oil Product Demand Growth Vs. Industrial GDP Growth

Source: SIA Energy


Compared to developed countries, China is still at a very early stage of the vehicle ownership growth story, leaving much potential to catch up.

However China’s vehicle ownership vs GDP per capita will have a much shallower S curve than western countries.

China’s Passenger Car Growth Story Has Just Begun

583551

530496

292

88

0

100

200

300

400

500

600

Passenger

Cars

Per

1,0

00 P

eople

Source: SIA Energy from various sources

Passenger Cars Per 1000 People (2012)

20005

201488

2020171

2030269

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100

200

300

400

500

600

Passenger

Cars

Per

1,0

00 P

eople

2005 CNY GDP Per Capita

China: Vehicle Ownership vs. GDP Per Capita

Historical

Forecast

Source: SIA Energy


Although new sedan sales have contracted in 2015, SUVs and MPVs sales are still enjoying impressive double-digit growth.

China sold 21 million new passenger cars in 2015, among which gasoline-guzzling large passenger vehicles constitutes 45%.

Recent Passenger Car Sales Show Growth Momentum in Heavier Gasoline Cars

0 5 10 15 20 25

2012

2013

2014

2015

Million units

Sedan MPV SUV Passenger Van

Source: SIA Energy

China Passenger Car Sales by Vehicle Type

-5% (y-o-y) +36% +52% -18%

Sedan56%

MPV10%

SUV29%

Passenger Van5%

Source: SIA Energy

Breakdown of New Car Sales in 2015

Total21.1 million


Alternative Fuels Still Have a Long Way to Penetrate the Passenger Car Fleet

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5%

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50

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million u

nits

Hybrid & EV

CNG

Other Passenger Car

Share of Hybrid, EV & CNG Passenger Car (R-axis)

Source: SIA Energy

China Alternative Fuel Passenger Car Ownership

Other Passenger

Car97%

CNG2%

Hybrid & EV1%

Source: SIA Energy

Breakdown of New Car Sales by Fuel in 2015

Total21.1 million

Gasoline 97%


Top congested cities in China still register strong sales for passenger cars despite car purchase restrictions are implemented. Currently there are only 8 cities in China implemented such restriction, while there are more than 300 cities without any control.

Road Congestion is Not a Constraint in Most Provinces

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400

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800

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1,800

thousand u

nits

Source: SIA Energy

China Passenger Car Incremental Growth (2014)


As Chinese GDP is increasing driven by consumption, lighter oil products (gasoline, kerosene, LPG, Lubricants) enjoy a healthier growth than the middle distillates and heavy products (diesel, HFO, asphalt) which are highly correlated to industrial GDP.

Light Products Lead China’s Oil Demand Growth

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b/

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Other products HFO Diesel Kerosene Gasoline LPG

Source: SIA Energy

China Oil Product Demand

Source: SIA Energy

Refining Capacity


China Refinery Map

Chinese Refineries


China Refining Capacity Stands at ~17 mmb/d

China refining capacity stands at 16.9 mmb/d by the end of 2015. Sinopec remainsChina’s largest refiner but its share has shrunk to 34%, from 39% five years ago.Except for NOCs, independent refiners also played a significant role in the capacityaddition in the past five years.

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-500

0

500

1,000

1,500

2010

2011

2012

2013

2014

2015

2016F

2017F

2018F

2019F

2020F

2021F

2022F

2023F

2024F

2025F

2026F

2027F

2028F

2029F

2030F

mb/d

Sinopec CNPC CNOOC Sinochem Other

Source: SIA Energy

China Refining Capacity Additions by Operator 2010-2030

Sinopec34%

CNPC23%

ChemChina5%

CNOOC5%

Yanchang2%

Sinochem1%

Independent30%

Source: SIA Energy

China Refining Capacity by Operator (2015)

16.9 mmb/d


Most Greenfield Refineries are Facing Delays; Expansions Will Lead New Capacity Building in the Next Three Years

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2016 2017 2018mb/d

Eastern Coastal Mid Yellow River

Northeast Northern Coastal

Northwest Southern Coastal

Southwest

Source: SIA Energy

China Regional Refining Capacity Addition (2016-2018)

China’s New Refining Capacity


In order to meet growing oil product demand, it is expected to see significant refining capacity additions by 2030, led by NOC Majors as well as independent refineries.

China Refining Capacity Additions 2016-2030

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5

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25

2008

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2016F

2017F

2018F

2019F

2020F

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2022F

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2024F

2025F

2026F

2027F

2028F

2029F

2030F

mm

b/d

Sinopec CNPC CNOOC ChemChina Sinochem Other Crude Oil Demand

Source: SIA Energy

China Refining Capacity By Operator

22

17

Impact of Rising Independent Refiners


How China’s Crude Import Regime Has Evolved

Prior to 1993

China National Chemicals Import & Export Corp. (中国化工进出口总公司), predecessor of

Sinochem, was the sole authorized crude importer in China

1993-2001

More state-authorized traders were created to share the crude import right with Sinochem: • China Oil (中联

油), a JV

between Sinochem & CNPC

• Unipec (中联化),

a JV between Sinochem & Sinopec

• Zhuhai Zhenrong (珠海振戎)

2002-2014

Co-existence of • a dominant state

trading system consisting of five state traders (CNOOCJoined the crew) with no quota restriction

• a non-state trading system with marginal quota, designed to superficially meet WTO requirements while preserving NOC monopoly

From 2015 onward

Qualified independent refineries are allowed to import and process imported crude oil upon approval by the NDRC and Ministry of Commerce (MOFCOM)


Up to date, 12 independent refiners have been granted right to process imported crude oil with an annual total quota of 1.03 mmb/d. Another eight have filed for application, pending for NDRC approval. These 20 refineries hold 1.65 mmb/d quota to process imported crude. Independent refineries processed more than 600 mb/d imported crude in December 2015, contributing to China’s crude import spike in the 4Q2015 (8.8% increase y-o-y). The independents are expected to boost China crude runs in the next three years.

Non-state Crude Import Reshapes Refining LandscapeIndependents crude runs are ramping up rapidly

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Source: SIA Energy

Imported Crude Processing Quota by Company

Dongming

36.5%

Panjin

22.9%

Hongrun

14.7%

Lijin

3.4%

Kenli

4.9%

Yatong

14.8%

Baota

0.4%

Huifeng

1.1%Luqing

1.3%

Source: SIA Energy

Independents Crude Imports (2H2015)

~54.8 mmb


12 Independent Refineries Were Granted Quota and License to Process Imported Crude, Totaling 1 mmb/d


In Spite of the Limited Opening, Crude Import License and Marketing Rights Are Still Under Tight Control

Legalized access to imported crude and thefurther shut-down of small CDU units willboost the utilization rate for China’s teapotrefineries. However, there are still regulatoryconstraints in the crude import system thatwill continue to prevent independents to forman integrated value chain.

Qualified teapot refineries have access to import crude

More selected private players to receive non-state import license

Non-state importers could freely sell crude to non-state refineries

No license or quota restriction for crude imports

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100%

2008 2009 2010 2011 2012 2013 2014

Sinopec CNPC CNOOC

Other National

Source: SIA Energy

China Refinery Utilization Rate By Operator


In 2016, SIA estimates the 21 major independents will import 1.67 mmb/d crude, nearly five times of the 2015 level.

Impact on Crude DemandCrude imports by independent refiners will increase dramatically in 2016

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CDU Capacity Imported Crude Quota 2016 Estimated Crude

Import

2015 Crude Import

mb

/d

Tier 1 Independents Tier 2 Independents Tier 3 IndependentsSource: SIA Energy

Independent Refiners Capacity and Import Crude Demand


Impact on Fuel Oil DemandImports will disappear, domestic output will shift users

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Domestic crude Imported crude Domestic fuel oil Imported fuel oil and bitumen blend

Source: SIA Energy

Shandong Independent Refineries Feedstock Processed in 2014-2015

Most of imported fuel oil will be displaced by imported crude going forward; much of the domestic fuel oil output will go to teapot refineries who have not obtained access to imported crudes.


Impact on Product ExportsNOCs will have to dump oil products in the International Markets

Growing independent refineries withimported crude quota will ramp up theirutilization as they are more cost-competitive, more responsive to marketthan NOCs’ refineries.

To fight against intensive competition fromindependents, NOCs are expected toincrease oil product export in the nextthree years to balance their domestic oilproduct output & sales imbalance.

▫ Sinopec and CNPC had applied record-highvolume of gasoline, kerosene and dieselexport quota in the 1Q2016 due to weakeningdomestic oil product sales.

In December 2015, China MOFCOM(Ministry of Commerce) and China Customannounced an unexpected oil productexport quota of 447 mb/d for the firstquarter of 2016, achieving an y-o-ygrowth of 116%.

The hike in oil product export quotaindicates NOC’s overstocking of gasolineand diesel due to the squeezed of marketshare by independents.

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2010 2012 2014 1Q2016

Quota

mb/d

Gasoline Kerosene Diesel

Source: SIA Energy

China Major Oil Product Exports & 1Q2016 Quota


Independents Together Match Sinopec’s CDU Capacity

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6

Sinopec CNPC Tier-2 NOCs

(Norinco

SinochemCNOOC)

Independents

(Tier-4

Tier-3Tier-2Tier-1)

mm

b/

d

Source: SIA Energy

China Refining Capacity in 2016


Major Refining Players

Refinery Complexity

Planning and Hedging Ability

Logistical Handling

FinancialCredibility

Domestic Marketing

Oil Product Export

Sinopec

CNPC

CNOOC

Sinochem

Norinco/Zhenhua

ChemChina

Dongming

Panjin North Asphalt Fuel

Kenli

Baota

Chambroad

Yanchang

Hongrun andother 6

10 Players

But Most of Them Are Inexperienced in Trading

Sophisticated/Strong Position

Upgrading Position Nascent PositionWeakness/

Desire to EnterOpportunity for

Foreign Cooperation

Tier-1 Independents

Tier-2 Independents

Tier-3 Independents

Tier-2 NOCs

Tier-1 NOCs

Crude Storage


China’s SPRs

s


China’s CPRs

s


Implied Crude Filling Rates Takes Into Account SPR & CPR Capacity Ramp Up and VLCC Port Capacity Constraint

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CPR Stock SPR Stock

SPR Capacity Total Capacity (SPR and CPR)

Source: SIA Energy

China's SPR and CPR Stock vs Capacity

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SPR CPR

Source: SIA Energy

China’s SPR & CPR Quarterly Crude Filling Rate Forecast

Crude Imports


Incremental crude demand in China will be 860 mb/d in 2016 driven by: 1) gasoline-led domestic product demand; 2) commissioning of new refineries and reconfigured refineries; 3) windfall profit for the refining sector and increased overall utilization after government introduced a price floor; 4) local government GDP driver and job pressure pushing for higher utilization and product exports; 5) new import license to independents expected to be fully executed; 6) higher NOCs product exports driven by product structure and squeezed domestic market; and 7) continued SPR & CPR filling. Given the fact that domestic production will decline this year, China’s crude import growth will be more than 900 mb/d for 2016.

Summary: China Incremental Crude Demand (2016F)

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330 860

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Oil Product

Demand

Oil Product

Imports

Oil Product

Exports

SPR & CPR Filling Total Incremental

Demand

mb/d

Source: SIA Energy

Incremental Crude Demand (2016F)


ME sour crude market share in 2016 will be squeezed by ESPO (via Kozmino), Southeast Asian crudes as the latter are more attractive to the emerging independents for their low sulfur content and geographic proximity. Venezuela’s share will also shrink because lighter crudes are more desirable in general to yield gasoline so China Oil will likely push the oil-for-loan locked Venezuelan crude to N America. Crudes from Africa, Oman, Iraq will grow in 2016 not only for their desired quality but also as oil from these countries are frequently handled by oil traders, targeting the independents. With sanctions lifted, imports from Iran will climb in 2016 yet will not increase at its full tilt due to de-sulfurization capacity constraint at CNPC & independent refineries.

China’s Imported Crude Slate Will Be Lighter and Sweeter in 2016

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2015 2016Source: SIA Energy

Imported Crude Source Forecast for 2016

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Yao Li (李遥), CEO [email protected] Seng Yick Tee (池昇嶫), Director of Oil Market Analysis [email protected]

understanding china’s refining landscape - platts china’s refining landscape by yao li, ......

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