Analysis on Competitiveness of China's Refineries

China Petroleum Processing and Petrochemical TechnologyNo.4, December 2005Analysis on Competitiveness of China'sRefineriesSun Yuguo(Planning Departmen, China Petroleum and Chemical Corporalion, Beijing 100029)Abstract: The paper reviewed the refining and marketing business of both domestic and international oilcompanies, and tried to figure out the gap of domestic refining enterprises in terms of the refinery scale,processing unit configuration, stream factor and competitive edge as compared to overseas refineries. Thepaper also concluded that the net margin of domestic refineries is aboul $ 1.0/bbl lower than thal o[ theoverseas refineries, and proposed some ideas to sharpen the competitive edge of Chinesc refining industry.Keywords: China's refining industry; marketing; unit size; processing load; competitiveness1 IntroductionKorca, Singapore, Taiwan Arca and the Middle East Arca, isover 20 Mu/a. These refineries have a strong competitiveChina's petroleum refining industry, which was developededge albeit with overcapacity. According to the schedule forbased on its own technologies and resources, has made greatChina's commitments associated with its WTO entry. Chinastrides over the past 20 years and become the focus of thewill open its finished petroleum products wholesale marketworld's attention. In 2004 China consumed 300 Mt of crudeby the end of 200)5, and open its oil products rctail market byoil and boasted 171 refineries with a total petroleum process-2007, which would further intensify the competition betweening capacity of over 300 Mt, ranking the second largest oilinternational and domestic players in petroleum refining. Theconsumer and oil refiner of the world after the United States.improvement of competitiveness of domestic oil refining in-The crude processing capacity of SINOPEC and PetroChinadustry is increasingly bccorming the focus of concern.has reached 164 Mt/a and 127 Mt/a, respectively, makingthemselves the major oil refiners in the world.2 Comparison of Competitivenessbetween Overseas and DomesticThe profit murgin of petroleum refining industry is succes-Refining Enterprisessively declining with the skyrockcting intcrmational crudeprice, increasingly deteriorating crude property (increasing2.1 Profitability of petroleum refining industryspecific gravity, acid number and sulfur content) and increas-ingly stringent environmental regulations. In order to meet Petroleum refining industry is a traditional industry, which isthe needs for increase of clean transportation fuel and forstable but is not highly profitable. Over the past years alenhancing the economic benefits the global refining industrythough the dramatic fluctuation of crude oil price had influ-is further concentrated with decreasing number of relincriescnced grcatly the crude production, the impact on petroleurmand expanding petroleum processing capacity. The technicalprocessing was nol significant, and the margin of oil rcfininglevel is further improved and the load factor of processingwas basically stable. With increasing pressure of environ-units is increasing. The process unit configuration is furthermental protection the number of oil refineries in the world isadjusted with expanding hydroprocessing capacity, and the plummeting continnously in tandem with expansion of refin-momentum for integration of refining and chemical produc- ery size and improved technical level and increase in loadtion and development of refining bases are on a fast track tofactor, a中国煤化Igaulligure I).ensue on gradual maturity of oil refining industry.The avejining industry overthe pastMYHCNMHGhe rate of return onThe size of most refineries located around China, such as ininvestment was about 6%. The net profit of domestic refiner-1Market Rescarch14.02.2 Basic situation of domestic and overseas12.0oil refining enterprisesGross margin10.0兵8.06.0 tOperating costsCompared to the refining and product sales businesses of.0 tNet marginthe major overseas oil companies, China's oil refining enter-20_"Mprises have a definite competitive capability in lcrms of their1977 1980 1983 1986 1989 1992 1995 1998 2001total size and business structurc. For instance, the total oilyearprocessing capacity of 45 refineries the stakes of which wereFigure 1 Margin of major refineriesowned by ExxonMobil Corporation was 365 Mta by the cndof 2004, and its throughput recorded in the annual report was319 Mt/a. According to its equity sharcs calculated on they-5.4601x-1.365◆same basis for Shell and BP, the tefining capacity of ExxonMobilR-0.8864◆◆was 268 Mt/a along with 37 thousand service stations underits control (with 13659 service stations it acrually owned andt.rented). The total petroleum refining capacity of 55 refineries,2.0 2.5 |the stakes of which were owned by Shell, was 358 MUa bythe end of 2004, and the total refining capacity owned byFigure 2 Relationship between refineryShell according to its equity shares was 216 Mt/a apart fromthe 46 thousand service stations it owned, The total oil refin-margin and ROIing capacity of 19 refineries the stakes of which were owncdies is lower than that of overseas refineries, and can (onlyby BP was 203 Mta by the end of 2004, and the total refiningreach the level of S1/bbl during its heydays.capacity owned by BP according to is cquity shares was 141Mta. The listed portioms under SINOPEC and PetroChinaThe major overseas oil cormpanies are very cautious in termsowned 26 and 27 refineries, respectively. and their stakes areof employing the investment in oil refining business. For ncarly wholly owned by the two oil majors. The refiningexample, BP has cxpressed its intention of not increasing ils capacity and number of service stations controlled by two oilrefining capacity because of global overcapacity of oil refin-majors have also reached an unprecedented scale, which haveing industry while engaging in markeling of refined petro-propelled them to the ranks of international major refininglcum products purchased from other refincrics, resuling in a companies. With lhe brisk development of China's oil refin-2.4 fold volume of marketed products as compared to its out-ing industry the petroleum refining capacity and manage-put of finished oil products.ment capability of SINOPEC and PetroChina will make greatTable 1 Petroleum refining capacity of oil companies revealed in the 2004 annual reportsExxonmobil'ShellBPSINOPECCNPCNumber of refineries55927.Processing capacity, Mt318.55215.70141.15155.20117.85Number of service stations37374460002680030063.17403| Amount of petroleum products marketed, Mt82.10372.25319.9094.5967.01Capital employed in 2004,x 10% USD272353383248Average investment over the past 5 years, x 108 USD25241316._Average ROACE over the past5 years, %13.5中国煤化工. 8.4_Note: 1) ExxonMobil in its annual report referred to 45 refineries,YHCNMHGilwascomposedof42refincries.|5China Petroleum Processing and Petrochemical TechnologyNo.4, December 2005strides in the near future.single ditillation units owned by PetroChina is 2.50 Mt/a,while the average size of single distillation units under2.3 Analysis of competitiveness between do-SINOPEC is 3.40 Mt/a. The smaller refineries in the overseasmestic and overseas refineriesare generally composed of single units, and the scale of singlcunits at overseas large refincries is large in general. The gapThe major gap of China's oil refineries industry as comparedbetween domestic and overscas proccss units is even greaterto the overseas counterparts is as follows:than that between the size of domestic and overseas refineries.For instance, the capacity of a single distillation unit at2.3.1 The size of domestic refineries and process units isExxonMobil's Baytown refinery is 13.00 Mt/a, that ofa FCCmuch smaller than that of overseas counterpartsunit: 6.30 Mta, and that of a delayed coking unit: 2.50 MU/a,whilc the sizc of a hydrocracking unit at Shell's Pernis refin-The average size of global refineries is 5.72 Mt/a, while that ofcry in Rotterdam is 2.80M/a. It is especially worth mention-domestic refineries is 3.20Mta. The weight uveragc size of ing the Trust refinery of India, which had come online in 2000.rcfincrics owned by three overseas oil majors is two times theThis Indian refinery with a processing capacity of 33.00Mt/arefinery size of two domestic listed oil companies. The aver-is capable of processing crudc contuining up l0 4.S% sulfur.age size of Shell refineries is 6.50 Mt/a, whereas that ofThe sizxe of single process units is us Folows: 16.50 MVa ofExxonMobil is 8.90 Mt/a, that of BP: 10.70 Mt/a, thal ofthe dillation unit, 9.50 Mta of the FCC unit, 3.20 Mt/a ofSINOPEC. Corp: 6.00 MU/a, and that of PetroChina: 4.36the catalytic reforming unit, 2.25 Mta of the coking unit (withMt/a. The total capacity of these 10-Mta refineries ownedfour coking units comprising a total coking capacity ofby three overseas oil majors accounts for 55% of their total 9.00Mt/a), 250 kt/a of a sulfur recovery unit (with 3 SRU com-refining capacity, while that of domestic tWo oil companiesprising a Lotal capacily of 750kt/a). and its distillatemakes up 33% of their total refining capacity.hydrolrcating unit, hydrogen plant and associated facilitiesalso boast a significant size. According to the estimate of theMoreover, the size of domestic refineries is mostly comprisedTrust refinery, its investment can be less by 50% as com-of some serial process units. For example, the average size ofpared to smaller refineries of equivalent capacity.Table 2 Breakdown of refinery size of oilThe unit size is also a landmark indicator on the rate of returmcompanies in 2004%of investment, technical level and energy and material con-kbbl/day ExxonMobil ShellBPT SINOPEC I CNPC ]sumption of the refinery.<501.993.107.8913.2850- -1006.4218.55 8.84 .325917.732.3.2 The depth of heavy oil processing is higher at| 0--1514.322191 8.7734.87domestic refineries as compared to overseas refineries150- 20019.0712.00 | 125320.697.81200- -2509.1815.74 11.1519.4126.30The deep processing capacity of domestic refining enterprises|250- 40026.3116.55| 2731accounts for over 50% of total ditillation capacity, while that|>400227212.15 31.40of overseas counterparts makes up 35% of total distillationTable 3 Structure of deep processing units of oil companies in 2004ItemExxonMobilShellBPSINOPECCNPCRefinery scale, Mt/a8.8965110.695974.36Heavy oil conversion capacity, %39.0325.23中国煤化工_51.67Hydrocarcking, %4.988.603.86MHCNMHGPCC,%23.7316.77JJ36.15Puel oil yield, %8.920.15.45.16Market Researchcapacity on an average despite difcrent degrees of depprop eabance the economic benefits.cessing in various regions. The breakdown of deep procss.ing units has shown that the share of FCC capacily is higher,2.3.3“Load rate" of domestic refining units is too lowwhile the ratio of hydrocracking capacity is lower at domesticrefineries.China has been experiencing overcapacity in petroleum refin-ing industry for a long timc. According to BP's encrgy statis-Although the crude slate procssed at different oil compa-tical data, the load rate of China' s refining industry reachednies varies in density, the fuel oil yield at China's relineries is88% in 1998, but it declined with rapid expansion of petro-lower in terms of the output of fuel oil versus crude processed.leum processing capacity and dropped to 66% in 1998. ()verIn addition, the nel refined oil products cxports comprisedthe recent years with the implementation of the state policy2.42 ML, which accounted for 0.89% of total crude through-on macroeconormic readjustment the load ratc 0f China's pe-put in 2004, while the net 「ucl oil imports reachedtroleum refining industry increased quickly and reached 90%28.81Mt, which made up 10.56% of total crude throughput.(corrcted alier revising BP's energy statistical data usingthe actual throughput of domestic refineries) in 2003.The supply of commodity heavy oil has cvolved from a situ-ation of small cxports before reform in pctroleum circulationThe information including BP's energy statistical data gener-system in 1994 to a situation of significant imports, indicatinglly provides the crude amount processed over the past yearto a gap between product slale and the market demand. Itis and the oil proessing capacity by the yearend, and the "loaodnecessary to emphasizc that the refinery should adjust itsrate" calculated on this basis is obviously a simple and ap-production planning in compliance with market demand. Theproximate calculation method, which could reflect but cannotheavy oil conversion capacity of the US refineries owned by represent the real load rate of process units without takingExxonMobil and BP is over 67%, whereas that of refinerics ininto account such factors as increase (or decrcase) in capac-other regions is relatively lower. The load ratc o[ processity and ouluge or turnaround of units. Hence it is necessaryunits at domestic refineries is not high, and these refineriesto correctly identify the scrvice factor and load ratc o[ pro-are completely capable of manufacturing fuel oil. If fuel oilcess units. The three overseas oil majors differcntiate theseproduction is not economically bencficial, the overseas relfin-factors very clearly, but there is no precise statistical data onerics would run in red. This issue might be emanated from thethese items al domestic refineries, which could affect the es-managerment mode and oil product pricing mechanism. Thetimated uilization of refinery capacity.two Chinese oil majors should keep a lid on the crude through-put of their refineries. Therefore, in order l0 increase the eCo-As regards the service factor, all three overseas oil majorsnomic bencfits, the domestic refineries along with increasingrun refineries at a scervice factor over 95%. The five-year aver-the light ditillate yield through deep processing should im-age service factor of Shell's refineries is 97%, while the ser-port a definite amount of crude to increase the lhroughput 1o vice fuctor of BP's rfineries stands at 95.6% on an averagi,Table 4 Service factor and load rate of distlilation unit of oil companies in 2004%ItemExxonMobilShellBPSINOPEC"CNPCDService factor99.3795.2595.40n. a.Load rate by the end of period90.2496.5992.3583.0287.90I Load rate in the middle of period95.7889.8089.5588.48| Statistical load rate90.0092.0093.00USA95.0089.00中国煤化工Europe96.00YHCNMHGSoutheast Asia and other73.00Note: 1) The numbers are calculated according to their nameplate capacities17China Petroleum Processing and Petrochemical TechnologyNo.4, December 200520 rand ExxonMobil runs refinerics at a service factor over 99%2004 SINOPECfor many years. The domestic relfineries can basically per-色102003 SINOPECform turmarounds every lwo years, and their service factor80一can also reach over 95%, which means that the yearly on-50 t:2004 CNPC2002 SINOPECslrcam time is 8400 hours. If domestic refincries can perform0十turmarounds every three years, their service factor can be20over97%.As regards the load rate, all three overseas oil majors runrcfinerics al a load rate of over 90%. However, the load rale isFigure 3Comparison of load rate betweensignificantly influenced by the regional market. Generallymajor refining and chemical unitsspeaking, the load rate of Eurupean and American refineriescan reach over 95%, and cvcn as high as 9%9 in some years. undergo overhaul in 2004, but their nameplate capacity loadThe load rate of Singaporean refineries is low for many years rate should be over 103% if the service factor was 95%. Thisand fluctuates around 70%.means that there is still room for further increasing the loadrate of domestic ditilation units.How much lower is the load ralce o[ China's refineries? Thepreliminary analysis shows thal if the impact of crude supply Not only lhe load rate of ditillation units is very low, otherand market factor on refinery load in not taken into major secondary processing units that can affet the dcgrceconsideration, the load rate of Chinese refineries bascd on of deep processing and product quality such as FCC.nameplate capacity (expressed as annual amount of crude hydrocracking, delayed coking, hydrotreating and hydrogenprocessed/mid-year capacity) can be incrcased by 10- -20 units have low load ralc versus their nameplate capacity, in-percentage points. The rcason is as fllows: The nameplate dicating l0 the absence of overall or partial imcompatibility orcapacity of China's refineries are designed according l0) anbottleneck ises related with the capacity of domcstic crudeannual operating time of 8000 hrs, while the capacity of over- disillation units or secondary oil pocssing units.seas refineries is calculated based on daily throughput. Un-der the same service factor the actual distllation capacity ofComparcd 10 petroleum refining units, the nameplate loadadomestic refinery is by 5% higher than its nameplate capacity.rate of domestic chemical units is relatively high For example,In addition, the reserve operating fexibility of China's petro- the load rate of steam crackers is over 108%, and that of thechemical units is over 10% (without taking into account such downstream units including the synthetic resin units such asfactors as the technical progress and artificial reserve the load rate of PP unit at the refinery is also over 106%.capacity). If the calculation is conducted bascd on the above- Hence it is possible t(o take full advantage of the broad geo-mentioned normal and maximum capacity and a95% load rate, graphical distribution of refineries, large market share andthe ratio betwecn the crude throughput and the ditllation intcgration of refining business with marketing of domesticnameplatc capacity should be 99.75% and 109.73%, which oil companies, in order to relatively stabilize lhe crudeare higher by 9.75- - 19.73 percentage points as comparcd to resources, product slate and increase uninteruptedly the loadthe actual current level of 90%.rate of oil refining units through enhanced managementefforts.According to relevant stistical information, one third of dis-illation units under SINOPEC had their nameplate capacity2.3.4 Low marketing turnover of domestic oil companiesload excccding 99% (with the throughput of these disilation中国煤化工-SINOPEC andunits accounting for 48% of total ditillation throughpul of TheSINOPEC) and their nameplate capacity load rate was overPetroCl:OYHC NM H Grcinge teir ownre.108% on an average. These istilation unils maybe did not fined products along with purchase of insignificant oilMarket RcsearchTable 5 Relationship between the production and sales volume of oil companies in 2004ItemExxonMobil'Shell2)SINOPEC)CNPC|Crude processing capacity. kbbl/d_57.1341.6726.0725.9420.86Product output, kbbl/d.58.2742.3326.6117.2713.74|Sales volume, kbbl/d82.1074.4563.9818.1414.32|Oil product salesoulput1.762.401.051.04Notes: I) The production of refimed products are estimated;2) Data from the 2003 annual reports;3) Adopted from output and sales volume of refined products of domestic oil companies in 2004.products, which is resultcd from the specific market condi-With respect to the difference in unit sizc the investment intions inside China. However, the overseas three major oil China's process units will be 20% more, if the scale of singlecompanics have a large refined products turnover, which isoil refining units at overseas relineries is calculated as twice1.73 times their production on an average, whercas the re-the size of domestic oil processing units. Linder the condi-fined product sales turnover of BP is 2.4 imcs its refined tions of a retum on investment employed (ROIE) equating L0products output.6%, an increase in investment has resulted in a 2.5 percent-age points reduction of ROIF, which is equal to a net de-In 2004 Korca, Singapore and Taiwan Area saw a surplus of crease of $0.3/bbl. Difference in size of process units hasrefined oil products totaling 43.60 Mt, while the Middlc Eastactually led to a gap in product yield, energy consumptionhad a surplus oil products output of[ 42.00 Mt. Currentlyand material consumption of process units.thanks to the specific situation of domestic refined productmarket, this surplus has nol had impact on Chinese market.With respect to the difference in load ratce of process unitsWith the fully opening up of domestic oil products markctbased on a 95% service factor and ; 95% load rate of processand alignment of Chinese market with international one, thisunits at three major (iverscas oil companies the return onsurplus portion of refined products inevitably will be ear-investment can rise by lwo percentage points and the profitmarked for Chinese market. Hence. the two major Chinese oilcan increasce by S$0.2- 0.3/bb at domestic refineries, if theircompanies engaging in refined products marketing businessnameplate capacity can be increased by 15 pcrcentage pointsshould import timely a definite amount of refined products to from the original nameplate capacity of 105%.meet the needs of domestic market. Furthermore. expansionof the lrade volume of oil products by domestic oil majors isWith respect to the dilference in technical level the smalleralso dictated by the needs for impruving (he market responsescale and lower load rate of process units inevitably wouldand safeguarding from market risks.result in a surge in energy and material consumption at do-mestic refineries. In addition, the advanccd information tech-23.5 Quantitative analysis on gap in competitivenessnology is commonly applied in the overseas to realize a long-between domestic and overseas oil companiescycle, stable, controllable and near- thrcshold operation in abid to better improve the utilization rate of the units. reduceIn recent years the net profit of domestic oil refining enter-the energy consurmption, increase the yield of target prod-prises is merely equal to $ 0.4/bbl, and they can only harvestucts and achieve the debottlenecking of refineries. Hora net profit of less than SI .0/bbl during the heydays. Analy-examplc, the Gaqiao refinery under SINOPFC has garmered asis reveals that the nct profit of overseas refining enterpriscsmarket niche after adoption of the advanced controlis generally $ 1.0>bbl higher than that of dometic refincricstechnl中国煤化工India under the assis-becausc of major gaps in the scale, load rate and tcchnicaltance|YHC N M H Gcreased its dilaionlevel of process units.capacity by 20% alter having boosted the capacity of (lwo19China Petroleum Processing and Petrochemical TechnologyNo.4, December 2005disilation units to 660 kbblday from 540 kbblday. Shell's (2) Chalk up the nameplate capacity and load rate of the oilrefineries in France and Germany have increascd their profits refining units by 10%- 15% through adoption of manage-by $0.2-- 0.7/bbl through Pacscting.ment means and appropriate measures. If the total nameplatecapacity of domestic refineries is taken as 300 Mu/a, theseRecently, an overseas consulting company has made analy- measures can result in an increasc of refining capacity bysis on the competitive edge of three domestic refineries with over 30- 40 Mt/a, which not only can deter he investment ina higher performancc level in 2002 and identificd thcir gap t() domestic refineries, but can also sharpen the competitive edgebe around SI .0/bbl as compared to the advanced level of of existing refineries. The outcome should be apparent, evenrefineries in the Asia Pacific region, including a gap of if the widely separated refinery locations, non-bulanccd d心-$0.5/bbl caused by such intrinsic factors as the unit size and velopment of refineries, and non-optimized allocation of re-design level, and another gap of $0.5/bbl that could be elimi- finery resources would hinder the realization of the abovenated through enhanced management.3 Conclusions(3) The grassroots refineries should be large and advancedto match the technical progress ol inernational level. TheIt is not supposed to simply compare and figure out the gap grassroots refining units besidcs making usc ol such advan-between domestic and foreign refineries by referring to the lages as good market conditions and convenient transporta-process unit size of Korca, thc light ditillatlea yicld in USA tion should be hinged upon the existing refineries to bringand the proccssing cost of Singaporean refineries. Such ideal into full play the optimized regional resources, the advantagerefineries do not exist in the reality, but it is the direction. of refining/chemical integration, and invigorating o[ existingwhich we should stick to.assets through resource sharing to reduce the investmentand enhancc the compctitiveness. In compliance with theIn comparison with the overscas counterparls, our gap in trend for market development of China' 's refined oil products,unil size, load rate and technical level has resulted in an oil the size and technical level of process units at grassroots orprocessing margin of lower than $1.0/bbl. In order to further revamped refineries should be identified as in the ranks of theenhance the competitive edge of China's oil refining enter- world's forerunners in order to target at the prescnt scalc andprises to confront the market competition following China's levcl of the three overseas oil majors. The capacity expansionentry to WTO and stimulatc the devclopmcnt of China's re- and revamp should be carried out in an orderly manner tofining industry, it is recommended to:avoid repeated retrofitting, and the scale and technical levelof refineries should be improved through a phased imple-(1) Improve the performance of oil refining enterprises by mentation according to thcir overall planning.means of the advanced information technology. The level ofcontrol at refineries can be improved by adoption ol planning (4) The domestic petroleum refining companies can make useopimization and advanced control lechnology. The service of the overseas surplus refining capacity to properly importfactor and load rate of process units can be improved via some oil products in an attempt to increase the refined prod-optinized operation to pick up the yield of target products ucts trading volume, enhance the market response ability,and enhance the economic benefits.avoid market risks and incrcasc the cconomic benefits.中国煤化工MYHCNMHG20