Energy & Resources

A highly refined dream

Liu Deshu finally gets his refinery. But the stakes are high

A highly refined dream

Robert the Bruce was on the point of giving up, when he famously saw a spider spinning a web. No matter how many times the web unravelled, the spider took up its work again, until it succeeded.

Liu Deshu probably appreciates the analogy. He has been unsuccessfully pursuing his goal for 10 years, and in spite of rebuffs and setbacks, has stuck to his task. His dream – albeit a bit more prosaic than the Scottish independence Bruce fought for – is to build an oil refinery.

Liu is the president of Sinochem Group, and his dream is finally becoming a reality. This month a senior official with the Quanzhou municipal government announced: “Sinochem’s project has started. After the project is completed and put into operation, it will become a large-scale petrochemical production base with a processing capacity of 12 million tonnes.”

Quanzhou’s 421km coastline faces Taiwan, and thanks to deep water ports has long been favoured as a location for refineries – ever since Sinopec built one there in 1989.

Sinochem has a long and storied history. Initially known as the China Chemicals Import and Export Corporation, its original mandate was the import and export of fertilisers and chemical products. Prior to 1993 it also had a monopoly on the import and export of crude oil products, which made it the country’s biggest foreign exchange earner.

In more recent times, Liu realised that the old import-export gig wasn’t going to cut it. Taking GE as his model, he decided to turn the group into an industrial company. “GE’s success benefited from the rapid development of the automotive industry in the US,” Liu told the 21CN Business Herald. “Our group will pin its hopes on the Chinese oil industry.”

Sinochem already had the access to crude oil imports. All it needed was permission to build an oil refinery.

This was slow in coming. Liu began looking for sites almost a decade ago. A planned facility in Jinan was vetoed by the government in 2003. There was an unsuccessful bid for a bankrupt refinery in South Korea. A plan to build in Zhoushan was also blocked by the authorities.

When Sinochem approached the government about the Quanzhou project it initially wanted to build a refinery with a capacity of 4 million tonnes per annum.

However, the National Development and Reform Commission – which is intent on consolidating the industry into bigger, more efficient facilities – would only give its permission if the scale was increased to 12 million tonnes per year.

This is a bit of a stretch for Sinochem’s Liu, but having had his dream turned down on so many other occasions, what other option did he have but to agree? The project was upgraded, with the total construction cost estimated at Rmb20 billion ($2.9 billion).

There are definite risks to the strategy. China’s refining industry is dominated by Sinopec and CNPC, which also control petrol stations across the country. There are a further 99 smaller, independent refineries, with an average capacity of less than a million tonnes. With the current state of the economy, they are operating at only 20% capacity.

However, this is only part of the story – the low capacity levels are a result of government policy as local refineries are being pushed into consolidation, and are being denied crude oil. Unlike Sinochem they don’t have access to offshore crude oil supplies.

Sinochem’s problem will be distribution. Once its project goes into operation, it will need to generate sales of at least 700,000 tonnes of oil product a month. As a newcomer it will have to build up sales channels, and target the wholesale market – i.e. industrial users.

On the positive side, the government likes its industries to be dominated by three players (telecoms is a good example). Beijing wants to create competition, but not too much.

So, Sinochem could end up as the third player in China’s refining troika. That, perhaps, could be what Liu is aiming for.

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