A more refined solution

Taxis line up to get their tanks filled in Chongqing

More cars. More petrol. More refineries. And more petrol stations. The logic seems clear enough, and the announcement 10 days ago that China’s first Sino-foreign integrated refining complex was open for business reinforces it.

With the Chinese auto market going great guns, there is plenty of scope for the $4.5 billion plant in the city of Quanzhou in Fujian province to prove a great success.

The complex is a joint venture between Sinopec, Exxon Mobil and Saudi national oil company Aramco. It is expected to generate Rmb60 billion ($8.8 billion) a year in sales of fuel, plastics and various other chemicals – all refined from “sour” (or high-sulphur) Arabian crude.

The foreign partners’ involvement reflects their increasing focus on a downstream presence (in refining and retailing) in Asia’s faster-growing markets.

That provides a contrast to recent activity among China’s oil companies, who have been seeking to secure a stronger foothold in the upstream activities of exploration and production.

The deal was in negotiation for 12 years, during which time Chinese oil consumption doubled.

But this month’s annual outlook from the International Energy Agency underlines why Exxon and Aramco were prepared to stick at it. The IEA says consumption of oil in developed economies will fall over the next 20 years (thanks to improved energy efficiency, and the growth of bio-fuels and renewable power). But Chinese demand is forecast to pick up annually at 3.5% – hence the international interest in getting more of a foot in the door in China’s growing market.

In a side deal to the refining tie-up, the JV is also planning up to 750 petrol stations in Fujian – all at a time (as the Wall Street Journal points out) that Exxon is selling its company-owned gas stations back in the US. The Texas-based firm is also playing catch up with BP, Shell and Total, who have all established fuel-marketing JVs in different mainland provinces.

Why are the Chinese oil heavyweights still interested in allying with the foreign firms? At the refinery level, they are obeying NDRC directives to boost refining capacity quickly on their home turf. The planners have been pushing for new JVs (foreign firms must have “advanced technology” or “raw material supply capacity”) for a while, and more new investment is expected to support a series of coastal refinery bases with annual capacities of 20-30 million tonnes.

Beijing – knowing that demand for gasoline, diesel and chemical products like ethylene will only increase – is already concerned about over-reliance on foreign imports. It is also frustrated at its inability to influence commodity prices more generally (it thinks it should be getting much more negotiating bang for its buck) so the push for partners has a tactical edge, as a way of locking into relationships with upstream producers.

Lin Boqiang, head of the Centre of China Energy Economics Research at Xiamen University agrees, telling Xinhua, the state news agency, that the Quanzhou project is an example of “bringing in oil companies from oil-rich regions”. Compared to buying foreign oil assets, the strategy is a lot less risky, Lin thinks.

Although the long-term rewards for foreign players like Exxon may look enticing, they are also entering a market in which fuel prices are subject to government diktat. Sales of gasoline and diesel are set by an NDRC formula, which retailers are then permitted to adjust by a maximum of 8%.

But wholesale prices have been on the up this year, says Bloomberg, allowing Sinopec to end four years of refining losses. The Quanzhou refinery’s integrated offering (chemicals like ethylene, too) will also mean that it is not dependent purely on fuel sales.

Analysts also expect price controls to be further relaxed over time. Sherman Glass, head of Exxon’s global refining operations, says he is comfortable enough with the situation, telling the Wall Street Journal that he prefers to focus on “a very good set of fundamentals”.

That seems to indicate that he is ready to hunker down and wait for more profitable opportunities.

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