12 May, 2016
Zhejiang Petrochemical is reportedly planning to build a US$15 billion petrochemical complex near Shanghai, becoming a torch carrier for the government’s drive to see more private companies investing in energy infrastructure.
The privately held firm has awarded three firms – two of which are China Huanqiu Contracting and Engineering and Sinopec’s Luoyang Petrochemical Engineering – contracts to design the plant, which will be the first major energy installation to be built by a non-state investor.
The complex will include a 400,000 barrel per day refinery and a 1.4 million tonne per year ethylene plant. It will be built on Dayushan Island, which lies off eastern China close to the ports of Shanghai and Ningbo.
The project was inspired by Premier Li Keqiang’s visit in 2014 to Zhoushan City, where the complex will be located, and resulted in a call by Beijing for a pilot “mixed ownership” project led by private companies, according to an unnamed industry source close to textiles-focused conglomerate Rongsheng Holding, which owns 51% of Zhejiang Petrochemical.
Rongsheng is already China’s biggest privately run producer of PTA, a synthetic fibre made from petroleum. It has long been keen to expand into oil refining to secure the feedstocks it requires better.
It has teamed up with local companies, including a state-owned chemical producer, to build the Dayushan complex, which still requires final sign-off by Beijing and has yet to achieve environmental clearance.
Zhejiang Petrochemical’s mega-complex is expected to enter operations around 2020. It has not provided details on how it will be funded.
The plant could see Zhejiang competing head-on with state-run companies, such as Sinopec, which dominate China’s energy landscape. This appears to be part of Beijing’s plan.
Implications
The development of the complex represents a further step by China’s government towards liberalising its energy market as it works to allow market forces to exert ever greater sway on petrochemical projects, products and prices.
Although encouraging a private company to build a major refinery complex appears, from the outside, to be a long-
overdue baby step, the impact in China could be huge.
Beijing’s decision in 2015, for example, to allow more than 20 independent teapot refineries to import crude oil for the first time has revolutionised China’s refinery sector as well as having huge repercussions on global crude markets.
The teapots have imported crude in even bigger quantities than expected, helping put a floor under crude prices during the recent market rout, and in barely a year have helped China export record volumes of oil products.
This is partly because they have been under pressure to offload the domestic glut of oil products that went hand in hand with buying and using more crude – a phenomenon that has not been without its challenges for China.
As China Petroleum and Chemical Industry Federation’s chairman, Li Shousheng, said “The entry of private firms into the refining business was a fruit of the sector reform, but the capacity surplus is a reality to face.”
Still, the teapots have proved that independents can compete with China’s state-owned heavyweights, and they are fast expanding their market share, helped by their more flexible business model and lower operating costs.
Some even have their sights on overseas markets, with Henyuan Petrochemical and Guangdong Zhenrong, for example, investing in refinery assets in Malaysia and Myanmar respectively.
Long road
Still, China has a long way to go before it can produce enough oil products to meet all its needs. It currently relies on imports to meet around 40% of its oil product needs and faces shortages of certain chemical products.
“That is China’s industry dilemma: surplus in fuel capacity, but short in petrochemicals,” vice chairman for Asia at consultancy FGE, Wu Kang, told Reuters.
Zhejiang Petrochemicals hopes to be able to help plug that gap, and carve out a niche for itself in doing so. If the teapot refiners can take China’s state-owned energy majors on, there is no reason why public-private partnerships on an even bigger scale should not succeed.
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Tim Mills, Associate Director, NewsBase Ltd
