Chinese oil exports in offing as refiners ramp up output
China's fuel production growth set to outpace demand by 2017, international agency says
China's oil refiners are expanding so fast that the International Energy Agency says they might boost exports to find new buyers amid the slowest growth in domestic demand since the peak of the financial crisis.
The world's second-biggest oil user will probably add more than 2.9 million barrels a day to its crude-processing capacity by 2017, against a predicted increase of 2.1 million barrels a day in consumption of refined fuels, according to the Paris-based agency. Demand will rise by 190,000 barrels a day this year, the smallest gain since at least 2009, the agency's data shows.
After developing its oil industry to fuel an economy that has tripled in five years, China faces the weakest growth since 1999. The IEA and C1 Energy, a Shanghai-based energy consultant, say the nation may become a powerhouse in fuel exports as domestic supplies exceed demand, potentially squeezing crack spreads, or the profit from processing crude. That contrasts with analysts at JBC Energy and CLSA, who say refineries will idle output until consumption recovers.
"China will become a big oil-product exporter around 2014 to 2015 as a result of its refining-capacity expansion," C1 analyst Liao Kaishun said. "This will increase supplies in the regional market then and pressure product cracks."
The premium of diesel in Singapore to Dubai crude, a benchmark grade for Asia, has averaged US$17.38 a barrel so far this year, according to data from PVM Oil Associates, a London-based broker. That compares with US$18.59 in the same period last year. The spread of naphtha to Brent crude has averaged US$98.11 a tonne this year from US$112.50 in 2011.
China Petroleum & Chemical, or Sinopec, the country's biggest refiner, completed a catalytic-cracking unit last month at its Jinling plant in Jiangsu province with an annual capacity of 3.5 million tonnes of crude. PetroChina, the second-biggest, increased the capacity of the nation's oldest refinery at Fushun in Liaoning province to 11.5 million tonnes a year, it said in August. The company also started a six million tonne-a-year crude-distillation unit at its Daqing refinery in Heilongjiang this month.
Capacity has risen and utilisation has fallen as the economy has weakened. Gross domestic product slowed for a seventh quarter to 7.4 per cent in the three months ended September, government data showed yesterday. The International Monetary Fund estimates growth this year at 7.8 per cent, which would be the weakest pace in 13 years.
China's apparent oil demand, or domestic production plus net imports, slid 0.4 per cent in August from a year earlier to nine million barrels a day, the lowest level since September last year, according to data from the customs bureau and the National Bureau of Statistics.
The nation's major refineries had a utilisation rate of 83.5 per cent of capacity as of last week, according to Oilchem.net an industry website. The level will be 82.6 per cent next year, according to JBC, a Vienna-based consultant. That would be the lowest since 2009, data from BP's Statistical Review of World Energy show.
"The chances China will overbuild are still pretty high," the IEA said in its Medium-Term Oil Market Report last week, which forecast the nation might have a surplus of 1.2 million barrels a day of refined products in 2017 if utilisation rates do not drop. "China could become a major regional and global product exporter."
That is unlikely to happen because Chinese crude processors cannot compete with regional rivals, according to JBC. While the nation's biggest oil companies reported losses from fuel production in the first half of this year amid government controls on retail prices, India's Reliance Industries said on Monday that it earned US$9.50 a barrel in the three months to September 30, the most in a year.
Reliance, controlled by billionaire Mukesh Ambani, operates the world's biggest oil-refining complex at Jamnagar in the western state of Gujarat with a capacity of 1.24 million barrels of crude a day. SK Innovation, South Korea's biggest processor by value, said in July that its margins would widen as Europe's debt crisis eased.
"There is a mismatch building up between Chinese refining capacity expansions and domestic demand growth," said David Wech, a managing director at JBC. "However, we don't think that China will become a major product exporter as refining economics do not support such a move. We see utilisation rates falling further to around 79 per cent around 2014 to 2017 before recovering in the longer term."